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Microsoft-Activision takeover emboldens merger traders to boost rally bets

The traders that wager on these deals, known as merger arbitrageurs, aren't confident that every announced acquisition will happen, but are growing more hopeful about many

Microsoft outlook outage

By Yiqin Shen

Traders who bet on corporate mergers and acquisitions are boosting their wagers on a slew of proposed deals, after successful trades on transactions like Microsoft Corp.’s purchase of Activision Blizzard Inc. have left them with more money to invest. 
Microsoft’s $69 billion purchase of the game developer, which closed on Friday, plus Amgen Inc.’s $28 billion acquisition of drugmaker Horizon Therapeutics Plc earlier this month have also left investors with more confidence that companies can overcome the objections of the Federal Trade Commission to many corporate combinations. 

The traders that wager on these deals, known as merger arbitrageurs, aren’t confident that every announced acquisition will happen, but are growing more hopeful about many.  

Take Seagen Inc, the biotech firm that said in March it had agreed to sell itself to Pfizer Inc for $43 billion. Its share price has risen more than 4% since September 21 to $215, compared with the $229 cash offer, getting an extra boost in the last few months from Amgen’s success. That leaves the gap between the two prices near its narrowest level yet. Another boon for merger arb traders was Seagen’s reporting positive results from a late-stage cancer drug candidate, supporting the company’s stock price even if the acquisition doesn’t go through.  


As traders plow more money into deals, they got a reminder on Tuesday of the potential risks. VMware Inc. which is going through regulatory reviews for its $69 billion takeover by Broadcom Inc., saw its shares fall as much as 12.1% after a report said Chinese regulators, one of the last remaining hurdles to the deal closing, could take longer to approve the transaction than previously expected. A spokesperson for VMware said the company continues to expect the deal to close on Oct. 30. 

The difference between VMware’s share price and the value of Broadcom’s cash-and-stock offer, or the spread for deal, gapped out to more than $16 on Tuesday morning, from around $6 as of Monday’s close. Bill Gross, who has grown vocal about merger arbitrage strategy, said on Friday that the stock might have benefited from the cash freed up by the Activision purchase.

$74 billion in cash freed up with Activision purchase by Microsoft. Very bullish assuming most of it goes back in the market.

VMW might be a good substitute for some of it.

— Bill Gross (@real_bill_gross) October 13, 2023
Arbs are also looking at pending transactions further down the line, especially those likely to wrap up next year. Shale oil maker Pioneer Natural Resources Co, software developer Splunk Inc. and biotechnology supplier Abcam Plc are among their popular picks, according to an informal Bloomberg news survey of five specialists.

Between the Microsoft and Amgen transactions, and recent gains on Seagen shares, the second half of the year is generating strong returns for the merger arbitrage strategy, said Aaron Glick at TD Cowen. These gains come amid relatively light acquisition volume this year, giving arbs fairly limited situations to trade in, Glick said. Year-to-date value of deals announced in North America have fallen about 22% to $810 billion from a year ago, data compiled by Bloomberg show.

Here’s a breakdown of other deals that are capturing traders’ attention:

Exxon Mobil Corp. this month agreed to buy Pioneer Natural Resources Co. for $59.5 billion, the oil major’s largest takeover in more than two decades. While the deal is expected to close in the first half of 2024, a key question is whether it will face lengthy antitrust scrutiny. The Biden administration had toughened its review of oil and gas industry deals and asked FTC to investigate high gas prices. But the gap between Pioneer shares and the price Exxon’s paying, known as the spread excluding dividends, is just about $7 as of Monday’s close. That amounts to a difference of 2.7%, signaling investor optimism that the deal will be completed.   

Cisco Systems Inc. in September said it plans to buy Splunk in a deal valued at about $28 billion. It represents the networking giant’s biggest acquisition yet and a massive push into software and artificial intelligence-powered data analysis. Cisco CEO believed the transaction would close within nine to 12 months. Splunk’s shares were at $148.25 at Monday’s close, about 5.6% below the cash offer of $157, a relatively narrow spread implying that investors see a high probability of the transaction closing.

Danaher Corp. said it’s buying Abcam, a maker of laboratory products including immune proteins used in drug discovery, for $5.7 billion in August. The deal is expected to close in mid-2024. One wrinkle is the company’s founder, Jonathan Milner, who’s been trying to persuade investors to reject the bid. He owns about a 6.2% stake. But top Abcam holder HBK Capital, which has amassed a 7.5% stake, has voiced support. Abcam’s shares rose 1.55% to close at $22.96 on Monday, about 4.3% below the $24 offer.

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First Published: Oct 17 2023 | 10:23 PM IST

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