A New Era for Merger-Arbitrage Investors
As the calendar flips to 2025, merger-arbitrage investors are breathing a sigh of relief, anticipating a revival of the battered strategy under the incoming administration of President-elect Donald Trump. After a year marred by deal delays and busts, investors are betting on a pro-business approach that will pave the way for more big-ticket mergers and acquisitions.
A Year of Setbacks
The Federal Trade Commission’s aggressive trustbusting agenda, led by chief Lina Khan, dealt a series of major setbacks to investors in 2024. Transactions such as Tapestry Inc.’s handbag deal with Capri Holdings Ltd. and Kroger Co.’s takeover of Albertsons Cos. crumbled, resulting in painful losses for funds wagering on their closure. As a result, the merger-arbitrage strategy has gained a mere 3.3% this year through November, the worst performance among over 30 hedge-fund styles tracked by Bloomberg.
A Brighter Outlook Ahead
However, the consensus is that the outlook is about to improve for an M&A market that saw activity recover in 2024 as the Federal Reserve lowered interest rates. The hope is that Trump’s pro-business stance and the prospect of new leadership at the FTC and the Justice Department will lead to more deal flow and a higher success rate for proposed mergers.
Deal Flow on the Rise
There’s already been a flurry of deals since the November election, including the announcement that the Nordstrom family is joining forces with a Mexico retailer to take its namesake department store private. The value of US transactions announced is up 11% this year, rebounding from last year’s decade-low. While regulators have boosted their scrutiny of mergers, investors are optimistic that the new administration will lead to a more favorable environment for deal-making.
Outcome Predictability to Rise
According to Evren Ergin, head of special situations advisory at UBS Securities, outcome predictability is likely to rise going forward, but investors may want to wait to see a few test cases before regaining confidence. Another possible shift could be in deal spreads, which may become less bipolar as the market adjusts to the new administration’s approach to antitrust enforcement.
A Word of Caution
While the market shouldn’t expect a complete reversal on antitrust enforcement, the populist streak seen in Trump’s picks for this area means that aggressive scrutiny of big tech and certain other industries is still likely. The level of scrutiny applied may be erratic depending on Trump’s view of deals, which risks surprising markets.
Navigating Regulatory Headwinds
Some funds managed to navigate through the recent regulatory headwinds, including Paul Glazer of Glazer Capital, whose $2 billion fund rose 7.9% this year through Dec. 19. “There have been a lot of potholes and a lot of problematic deals that caused stress — fortunately we missed most of them,” he said.
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