Deals are booming, but antitrust checks have traders worried

The merger targets Activision Blizzard Inc., Spirit Airlines Inc. and Zynga Inc. are trading well below their agreed-upon acquisition prices, a sign that investors are more worried than usual that deals could collapse.

His concern stems from a growing belief that global regulators are gearing up to challenge more deals based on antitrust. Their fears were realized earlier this week, when the arm of Nvidia Corp and SoftBank Group Corp scrapped a $40 billion deal that was challenged by regulators.

Investor confidence was lost after the Federal Trade Commission sued in December to block the merger that the semiconductor giant would combine. But the panic has since spread to other blockbuster combinations, including the biggest deal of 2022 to date: Microsoft Corp. Activision’s $75 billion deal. Shares of the videogame maker are trading at about $82, which is about 17% less than Microsoft’s $95-a-share offer. Merger targets trade at very low spreads of 5% or less.

“It’s not wildly far from the 50/50 implication that the deal gets done,” said Steve Schlemmer, chief executive of Churchill Capital USA, a research and brokerage firm. “It’s too little for a deal that seemed fine a few years ago.”

The wide spread reflects a new set of expectations for how regulators view major mergers. The deal would marry Microsoft’s gaming systems with a leading manufacturer of games played on those systems. It’s the kind of acquisition that has rarely raised eyebrows in the past, when regulators were more concerned about the deal’s impact on market share. Tech deals, in particular, are in the crosshairs of regulators.

Merger-arbitrage traders seek out what is considered safe money: they buy shares after deals are announced, hoping to capture eventual upside when the transaction closes. The delays associated with antitrust challenges hinder their ability to make quick returns, and hedging strategies add to their costs.

Greg Basuk, CEO of AXS Investments, said the uncertainty has prompted his merger fund to change its business strategy.

“To deal with antitrust issues, we will be involved in the latter versus tolerating market volatility,” Mr Basuk wrote in an email.

Change Healthcare Inc. Key sale to UnitedHealth Group Inc. is among those facing antitrust investigations. Its stock is trading around 26 per cent below the offer price.

Investors are looking at another videogame deal: Take-Two Interactive Software Inc.’s $11 billion cash-and-stock deal for FarmVille maker Zynga. Zynga is trading about 7% below the deal’s per-share price.

Spirit Airlines is trading about 7% below its per-share price in Frontier Group Holdings Inc.’s $2.9 billion cash-and-stock deal announced earlier this week. Arena Pharmaceuticals Inc. is short on cash by approximately $6.7 billion. Pfizer Inc. in December agreed to pay for a maker of a treatment for inflammatory bowel diseases. Terminix Global Holdings Inc., the termite killer, is trading approximately 10% below the price Rentokil Initial plc will pay to shareholders who elect to cash and stock in the deal.

Still, wide spreads can spell opportunity, said Salvatore Bruno, chief investment officer at IndexIQ, which runs an exchange-traded fund that focuses on mergers. Last month, Advanced Micro Devices Inc. said that it has acquired Xilinx Inc. Approval from China to complete its purchase of Rs. Xilinx had traded at 40% below its agreed price.

According to industry data provider HFR, the merged-arbitrage fund outperformed a broader index of hedge funds in 2021 for the first time since 2018. This trend continued in January as well.

And companies are still making deals. M&A volumes slowed slightly from December last month but remained in line with January 2021 levels.

This story has been published without modification to the text from a wire agency feed