A federal judge’s ruling Tuesday that
Microsoft
can close on its $75 billion acquisition of
Activision Blizzard
is providing a lift to the stocks of takeover targets, which had been chilled by the Biden administration’s war on corporate mergers.
The administration’s anti-M&A efforts have been led by Federal Trade Commission Chair Lina Khan, who some critics argue has been eager to block deals regardless of the merits of the transactions or concessions offered. That climate might have made corporate executives less willing to pursue transactions, which are down 60% this year, according to Bloomberg.
The decision by Judge Jacqueline Corley, who turned down the Federal Trade Commission’s request for a preliminary injunction to block Microsoft’s (ticker: MSFT) $75 billion deal to acquire Activision Blizzard (ATVI), could change all that. Arbitragers, who typically bet that deals will close, say that it could chasten the Biden administration and make it less willing to oppose corporate mergers.
“We have a very activist FTC (Federal Trade Commission) with an unseasoned chair that brings cases that aren’t necessarily good ones,” says Roy Behren, a co-manager of the Merger fund. “This is a reality check for the FTC. They have to follow the laws.”
The Biden antitrust team’s aggressive approach to mergers—based on the argument that they would chill competition and harm consumers—has made life difficult for those who place bets on the closing of such deals. The
Merger Fund
(MERFX) is down about 1% this year as are other arb funds, including the
IQ Merger Arbitrage
ETF (MNA). Barron’s wrote favorably on the prospects for the arb market a month ago arguing that potential returns looked appealing as arbitrage spreads widened with greater regulatory risk.
Now, the prospects of deals closing look far better. Shares of Activision Blizzard are up 11.2% Tuesday to $91.95 on hopes that Microsoft will be able to proceed with the merger deal at $95 a share. Wall Street now is putting 80% to 90% odds of the deal closing, perhaps as early as next week. The odds had been closer to 25% when Activision traded in the low 70s in early 2023.
Activision stock now is trading at its highest level since the transaction was unveiled in January 2022 and is considerably above its low of $71 in February when the outlook for the merger looks bleak. The arbitrage spread on the deal is now just over $3 share, or 3%.
“The merger agreement expires on July 18; with the FTC cleared and the CMA (British antitrust regulators) now willing to reconsider MSFT’s proposals, all signs point to closure,” writes Macquarie analyst Sarah Hindlian-Bowler.
One winner from the judge’s decision Tuesday is
Berkshire Hathaway
(BRK.A, BRK.B), which is one of Activision’s largest shareholders with 49 million shares (based on March 31 data), a 6% stake.
Berkshire CEO Warren Buffett, 92, has been investing in arbitrage situations for over 60 years and saw an opportunity in Activision last year when the stock was trading in the high 70s. His view was that the risk/reward looked attractive.
He addressed the Activision holding at the Berkshire annual meeting last year, saying “We don’t know what the Justice Department will do. We don’t know what…30 other jurisdictions” will do. “One thing we do know is Microsoft has the money. So that takes that one risk out of it.” Berkshire has cut its Activision stake from a high of 68 million shares in June 2022.
Wall Street is banking that Microsoft may be able to work out a deal with British antitrust authorities, who have opposed the deal, or work around the U.K. situation and close anyhow.
Merger Fund’s Behren also notes that the ruling is making investors “more comfortable about other deals.” The other big target of a large merger deal,
VMware
(VMW), is up 6.1% to $152.87 Tuesday.
Broadcom
(AVGO) reached an agreement with VMware to buy the software company in a cash and stock deal in May 2022 for $61 billion but the deal is worth closer to $77 billion now with the sharp rise in Broadcom stock.
VMware still trades at a roughly 15% discount to the current value of the Broadcom offer of around $181 (assuming VMW holders get $71.25 a share in cash plus 0.126 Broadcom share for each VMware share). Broadcom is down 0.3% to $875 Tuesday but is up over 40% since the deal was unveiled last May.
Shares of
Horizon Therapeutics
(HZNP), which has agreed to be bought by
Amgen
(AMGN), rose 0.9% Tuesday to $103.56 but still trade more than 10% below the takeover price of $116.50 a share. Horizon traded above $110 before the FTC moved to block the merger in May.
Seagen
(SGEN), which is the subject of a $43 billion takeover offer from
Pfizer
(PFE), gained 1.7% to $195.48 Tuesday and trades at a 15% discount to the Pfizer cash offer of $229 per Seagen share.
There will be a lot more gains where those came from if the mergers are finally allowed to go ahead.
Write to Andrew Bary at [email protected]
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