The Trump administration’s permissive stance on dealmaking has created a “complexity premium” for merger arbitrage investors betting they can navigate clashing US federal and state rules as well as overseas regulation.
Deals facing antitrust, national security or political scrutiny have offered investors a premium of about 60 per cent compared to simpler transactions over the past five years, up from 25 per cent in the previous five-year period, according to new research by hedge fund Davidson Kempner.
The widening spread has pushed potential returns 2.5 percentage points higher since 2021 — which can be worth hundreds of millions of dollars in extra profits for savvy investors who bet correctly on blockbuster deals.
“You have this interesting paradox where the US regulatory environment from an antitrust standpoint has become more favourable, and that’s driving this boom in megadeals, at the same time global regulatory complexity has increased,” said Suzanne Gibbons, head of research at Davidson Kempner, which has more than $38bn of assets under management.
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As transactions valued at more than $10bn comprise a greater share of deals than they have historically, a “complexity premium” had emerged for traders who can predict whether and when controversial deals will close, Gibbons said.
Merger arbitrage funds typically purchase shares of a company after a deal is struck when the target’s stock is trading below the offer price to account for the risk that a deal is blocked or delayed.
For example, hedge fund Pentwater Capital earned a large windfall betting that Nippon Steel’s $15bn acquisition of US Steel would be completed.
The fund, which held nearly a tenth of US Steel, according to security filings, benefited from a volatile share price that at one point fell nearly 40 per cent below the deal price during a lengthy review by both the Biden and Trump administrations.
High-profile deals that currently await approval include the $55bn leveraged buyout of video game maker Electronic Arts and Paramount’s $111bn takeover of Warner Bros Discovery. Whether they are completed depends on decisions from authorities including the European Commission and US state attorneys-general.
“If EA closes and Warner Brothers closes, yes, it will be a fantastic year” for the strategy, said a portfolio manager at an arbitrage-focused hedge fund.
While deal closure rates have been relatively high in the past 18 months, according to Felix Lo, a portfolio manager at Trium Capital, deals face more approvals than ever.
“It used to be mostly antitrust and maybe some national interest, but now there’s politics, now there’s consideration of industrial policy,” Lo said. “There’s definitely a lot more complexity in the world, and that’s great for the strategy.”
And the US president’s outsized interest in certain deals introduces heightened uncertainty.
US President Donald Trump suggested in December he would be personally involved in reviewing the takeover of Warner Bros before saying the process would be left to the justice department. Billionaire Oracle founder Larry Ellison, an ally of the president, is the father of Paramount chief executive David Ellison and helped finance the takeover.
“A lot of people in our space rely heavily on lawyers and contacts, whether in Brussels or DC,” said Matthew Osowiecki, co-chief investment officer at Water Island Capital. “We felt like with the change of administrations that wasn’t working anymore . . . Trump would swoop in at the last minute and approve the deal.”
As the Trump administration relaxes antitrust enforcement some Democratic state attorneys-general have attempted to block deals, creating more uncertainty around the approval process. A group of states led by California is reviewing the Paramount-Warner Bros deal and could still sue to attempt to stop it.
But much of the new regulatory scrutiny has come from non-US regulators, particularly with deals involving foreign investment in companies that have connections to national security or critical industries.
“You have to have a view on the process in Brazil, in the European Union, in different countries in Europe, in China . . . Twenty years ago it would’ve been the US and Europe,” said Michael Chiaramonte, partner at Davidson Kempner.
The proportion of megadeals expecting to face foreign investment review increased from 11 per cent between 2005 and 2020 to 40 per cent over the past five years, according to Davidson Kempner’s research.
Osowiecki said that rather than relying so heavily on navigating the global web of regulators that must approve deals, the primary factor his fund looks at was “buyer commitment”, or whether acquirers are willing to make remedies and wait out long approval processes.
Getting past multiple regulators in different jurisdictions can require politicking, especially as jurisdictions such as the EU are concerned about how mergers might affect workers and consumers.
Microsoft closed its $75bn acquisition of Activision Blizzard after 21 months — and only after revising the deal to win the approval of the UK competition regulator. Many investors and analysts had believed the deal would not be completed.
But Osowiecki said Activision was “hitting the cover off the ball” throughout the process, and Microsoft knew it was getting a “steal” on the deal.
“We knew their buyer commitment was there,” he said. “We knew they had strings to pull in regards to offering up remedies and they could get the deal over the line.”
Additional reporting by Antoine Gara in New York
