Microsoft-Activision deal gives merger speculators a new favorite

The Microsoft logo is seen on a smartphone affixed to the Activision Blizzard logo shown in this illustration taken January 18, 2022. REUTERS/Dado Ruvic/Illustration

Hedge funds, which profit from speculating on precarious acquisitions, received a gift this week when Microsoft Corp agreed to buy “call of duty” maker Activision Blizzard for $68.7 billion in cash. The transaction requires antitrust laws.

Approved in the United States and other major jurisdictions, including the European Union and China. It comes at a time when the administration of President Joe Biden is taking a closer look at big mergers, blaming some of them for driving up prices to consumers that are fueling inflation.

Activision shares ended trading at $82.15 on Wednesday, well below the $95 per share trading price, reflecting concerns that regulators could reject a combination that would create the third-largest gaming company, after Tencent and Sony Group Corp (6758.T).

This infers a 57% chance of the deal closing, based on Activision’s closing stock price of $65.39 before the deal was announced.

The wide spread gives investors willing to bet on whether the deal will go through the opportunity to earn double-digit returns. At a time when so-called merger arbitrage strategies have tracked the returns of the broader stock market, it’s an attractive but also risky proposition.

Last year, merger arbitrage funds returned nearly 10% according to data from Hedge Fund Research, beating returns recorded in 2020, 2019 and 2018, but lagging behind the S&P 500 stock market’s 27% gain in 2021 .

For some investors, Aon’s (AON.N) acquisition of Willis Towers Watson (WTY.F) fell through for $30 billion as the US Department of Justice sued to block the deal and hurt yields.

Now they are looking to make a comeback, hoping this deal will also force competitors to make deals of their own.

“The positive outlook for event-driven and merger arbitrage-oriented companies in 2022 has accelerated with the deal between Microsoft and Activision,” said Ken Heinz, president of Hedge Fund Research Inc.

Microsoft and Activision were given until June 2023 to complete the transaction, giving hedge funds months to gauge how regulators will react when Microsoft bundles its Xbox platform with popular Activision games like World of Warcraft and Diablo.

Investors may get clues about the Biden administration’s stance soon, as the Federal Trade Commission is expected to weigh in on the planned $4.4 billion acquisition of Aerojet Rocketdyne (AJRD.N) from defense contractor Lockheed Martin ( LMT.N) and the Department of Justice will decide on medical care. insurer UnitedHealth’s (UNH.N) $13 billion bid for health analytics and technology provider Change Healthcare (CHNG.O).

Coverage finds like Millennium, Tiesemann Consulting and Pentwater Capital spend a portion of their merger bets, and many have held Microsoft and Activision for some time. The mutual funds The Merger Fund managed by Westchester Capital Management and The Arbitrage Funds managed by Water Island Capital offer similar strategies.

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