FOCS - Top Merger Stocks Held By Fund Managers Mid-Q2 2023
2023-05-30 10:30:49 ET
Summary
- Merger arbitrage in mid-2023 faces regulatory hurdles, with agencies attempting to block deals across industries; however, around 70 public companies have been bought out this year.
- The top 10 M&A stocks held by funds include Horizon Therapeutics, Activision Blizzard, Aerojet Rocketdyne Holdings, and VMware, with many deals facing potential blocks from regulatory agencies.
- Despite the challenges, market opinion and hedge funds believe that most of the top mergers will not be blocked, signaling strong conviction in the deals' ultimate closure.
Where are we in terms of merger arbitrage in mid 2023? Regulatory agencies all over the world are attempting to block deals in every industry. The game plan seems to be, sue to stop a wide variety of deals, hoping to get a couple of wins and then take a victory lap. But in the midst of the FTC, DOJ, CMA and China hurdles we have seen approximately 70 public companies being bought out so far this year. And since the risk free rate of return is above 5%, many of the recent deals sport an IRR of between 8%-13%. Are acquirers buying now being more cautious in their due diligence when making a deal? Likely.
Each quarter I compile the top 10 stocks held in the funds that specialize in M&A stocks and share it with our Seeking Alpha community.
My rules:
- I only count a stock if it is at least 1% of the fund's portfolio.
- I only include stocks that are still actively trading.
- I only choose funds where the majority of positions are merger-related.
Horizon Therapeutics ( HZNP ) is once again this quarter's number one stock. 30 of the 32 funds I track owned HZNP as of March 31. Amgen ( AMGN ) is in the process of acquiring Horizon for $116.50 in cash. But on May 16, the FTC filed suit to block the $28B purchase.
The FTC's challenge to a pharmaceutical merger sends a clear signal to the market: The FTC won't hesitate to challenge mergers that enable pharmaceutical conglomerates to entrench their monopolies at the expense of consumers and fair competition- FTC Bureau of Competition Director Holly Vedova.
The suit surprised much of Wall Street including merger arbitrage desks and analysts. It wasn't about drug overlap but about the potential bundling of drugs.
The FTC’s complaint impacts patients and is rooted in a theory about potential future 'bundled' contracts with payors and not competitive overlap concerns. Horizon does not and has no plans to bundle any of its rare disease medicines-Horizon
The trial is set for September 11 . But Horizon says the deal can close late in the third quarter or early in the fourth quarter if the FTC's request for a preliminary injunction is denied by the federal court.
To be fair the news to block the deal came out after the end of Q1 so there is no definitive way to know how many of the 30 funds still hold Horizon shares.
For the fourth consecutive quarter, Activision Blizzard ( ATVI ) is in the top two. It is in 18 of the 32 funds. Microsoft ( MSFT ) is trying to buy Activision for $68.7 billion which is $95 per share in cash. This deal is also attempting to be blocked by the UK and the FTC. The U.K.'s Competition and Markets Authority or CMA proposed to stop the merger on April 26. Surprisingly, the CMA didn't have an issue with competition in terms of consumer choices when it comes to videogames. Instead, the CMA used cloud-based gaming as its main reason for not allowing the merger. Microsoft has between 60% and 70% of the cloud-gaming market.
Microsoft has appealed the decision. History says the odds of an overturn in the UK are pretty high against. Meanwhile the FTC's trial is scheduled to start in August.
Top 10 Merger Arb Stocks Held By Funds
| 1) Horizon Therapeutics |
| Held by 30 funds |
| 30% IRR |
| 2) Activision Blizzard |
| Held by 18 funds |
| 78% IRR |
| 3) Aerojet Rocketdyne Holdings ( AJRD ) |
| Held by 17 funds |
| 15% IRR |
| 4) VMware ( VMW ) |
| Held by 16 funds |
| 66% IRR |
| 5) National Instruments Corporation ( NATI ) |
| Held by 13 funds |
| 8% IRR |
| 5) Univar Solutions ( UNVR ) |
| Held by 13 funds |
| 21% IRR |
| 7) Tower Semiconductor ( TSEM ) |
| Held by 12 funds |
| unknown closing date |
| 8) Focus Financial Partners ( FOCS ) |
| Held by 10 funds |
| 9% IRR |
| 9) Seagen ( SGEN ) |
| Held by 9 funds |
| 26% IRR |
| 10) PNM Resources ( PNM ) |
| Held by 9 funds |
| unknown closing date |
When a fund makes an M&A stock its topholding, it signals strong conviction that the deal will ultimately close. Six funds had Horizon as its top pick as of the end of the 4th quarter.
Top Positions Among The 30 Funds
| Horizon Therapeutics |
| Top Position in 9 Funds |
| Activision Blizzard |
| Top Position in 6 Funds |
| VMware |
| Top Position in 3 Funds |
Some arb funds oversize the positions that they have great conviction in. As of the end of Q1, there were four positions of 20% or more in a single stock.
Oversized Holdings
| Horizon Therapeutics |
| 68% of a Fund |
| PNM Resources |
| 28% of a fund |
| National Instruments Corporation |
| 22% of a Fund |
| Activision Blizzard |
| 20% of a Fund |
Conclusion
I can't remember a time when six or seven of the top 10 were in danger of not closing. But that is the case today. Market opinion and these hedge funds believe that most of the above mergers will not be blocked. Time will tell.
For further details see:
Top Merger Stocks Held By Fund Managers, Mid-Q2 2023