Hedge funds looking to take advantage of M&A pick-up

A major move in the currency markets looks to offer a wealth of trading opportunities once again for a group of hedge fund managers.

So-called merger arbitrage funds, which bet on the likelihood that corporate mergers and acquisitions will be completed, have seen fewer deals this year as global economic uncertainty and rising interest rates weigh on deals. increase.

But the yen and euro could change all that as the dollar continues to rise against the pound. With dollar-based companies and funds able to raise foreign companies at much lower prices than before, “Everything in England is on sale”, as one US private equity executive said this week. Merger Arb smells of opportunity.

“British companies are significantly cheaper than they were a few weeks ago,” said Pierre Di Maria, event-driven head of Chain Capital in London. “We expect his M&A recovery in the UK to be driven by a weaker pound.”

Although priced in GBP, the high dollar share of revenue makes FTSE companies a natural target. Some managers, such as Kite Lake’s Jamie Sherman, believe the market is misvaluing such stocks.

Felix Lo, a former Millennium trader who now runs a merger arbitration fund at Thorium Capital, created a screening tool to monitor the impact of these currency movements on cross-border trading. He expects U.S. companies to thrive.

“Both the price paid and the target value can change significantly in a very short period of time,” says Lo. “CEOs around the world are generally cautious in this environment, but US CEOs are the most bullish and eager to trade,” he added.

The economic recovery is welcomed by Merger Arb, which has found its opportunities limited by the deteriorating economic outlook.Global deal volume after record M&A last year was down U.S. sales volume fell 40% in the first nine months of the year, while it fell 34% year-over-year, according to Refinitiv.

Deal activity has also been overshadowed by concerns that the Justice Department and Federal Trade Commission will take a tougher approach to takeovers. Jonathan Cantor, head of the Justice Department’s antitrust division, said: Said FTC Chairman Lina Khan Said Regulators should be “skeptical” when private equity firms attempt to acquire businesses sold by companies in mergers.

Managers such as Kite Lake’s Sherman have argued that such regulatory risks are “more irony than bite”, yet uncertainty around the deal has increased.

Reflecting that uncertainty, the average annual deal spread (difference between deal price and share price) rose to 17.6% from 8.1% at the beginning of the year, according to UBS Special Situations data that takes into account deals. With spreads from zero to 50 percent.

The change in circumstances is reflected in the performance numbers of some funds. While some funds, such as Trium and Kite Lake’s KL Special Opportunities, are up in double digits, the merged Arbs as a whole posted a staggering 0.7% average over the first nine months of the year, according to datagroup HFR. showing an increase.

This is a world away from the so-called “arb-ageddon” of March 2020. In March 2020, deal his spreads exploded during the coronavirus pandemic, and merger arbitrage his funds lost an average of nearly 10% in his month. However, it is still a significant slowdown from last year’s strong 10.6% rise.

But while the increase in cross-border M&A is welcome, there are of course hurdles. The financial turmoil in the UK may make US boards still wary of committing to a deal.

In addition, UK companies often seek sufficient dollar income to meet the cost of dollar-denominated debt. Cheyne’s di Maria said these companies could be in a “sensitive” situation. But if the acquirer is a private equity that can replace dollar-denominated debt with local currency notes, he believes this is an “easily solvable” problem.

While we wait for M&A to turn around in places like the UK, there are at least some deals that can be done. Chief among these is Elon Musk’s unusual takeover bid for Twitter, which has been a lucrative deal for many managers.

The whim of the deal, which is now back after Musk made a U-turn this month and offered to go ahead with the originally agreed $44 billion price, has provided plenty of media entertainment, but a trade-in to Arves and It also gave them the opportunity to trade out.

Having done their homework in Delaware law, many are quietly convinced that Musk will eventually be forced to go through with the deal, even if both parties tweet each other in the meantime. This should be enough to keep arbs busy.

laurence.fletcher@ft.com