Concentrated Merger Arbitrage Funds – Q2 2024 Update

This is our fourth update about new merger arbitrage related positions at funds that tend to have concentrated positions in their portfolio. You can find our first update here and our Q1 2024 update here.

There are currently 86 active M&A situations in the U.S. ranging from highly risks deals like the $14.9 billion acquisition of United States Steel (X) by Nippon Steel that is trading at a spread (potential profit) of more than 42% to the acquisition of Terran Orbital (LLAP) by Lockheed Martin (LMT) in a $450 million deal, which is trading at a negative spread of over 13%. Three of these 86 deals were announced just this morning.

The concentrated funds I like to track prefer to pick and choose among those situations and tend to concentrate more than 50% of their portfolio in their top 10 positions. To reiterate what we wrote about 13F filings in our first  article:

“Investment firms with over $100 million in assets are required to file form 13F with the SEC within 45 days after the end of each quarter. This filing provides a small window into the fund manager’s portfolio and is a great source for new investment ideas. You also end up with information that is potentially stale and as many investors have come to find out, you can’t just follow someone else into an idea without doing your own deep due diligence. The Gurus section of InsideArbitrage includes curated lists of professional investors and fund managers categorized based on their investment style.

We are currently tracking 49 event-driven funds of various sizes. There are firms with just 3 positions in their 13F portfolio and others with thousands of positions. This does not mean the former has their entire portfolio is just 3 positions as they may have exposure to other positions, including private companies, which  don’t have to be reported on the 13F form.”

I am going to focus on some of the new additions across the seven funds I am tracking. Once again the common theme appears to be that these funds are participating in pre-deal or rumored deal situations and are increasingly using options to either protect downside or juice returns on the upside.

• The $6.4 billion acquisition of HashiCorp (HCP) by IBM (IBM) for $35 per share in cash was a new position for all seven funds. The spread at one point after announcement was almost 8%. It is currently just a little over 3% as the companies await  FTC approval. The FTC asked the companies for more information (referred to as a “second request”) and the U.K.’s regulatory body (CMA) has also indicated that they plan to initiate a Phase I review of the merger. Expected closing by the end of 2024.
• The $5.6 billion acquisition of PowerSchool (PWSC) by Bain Capital for $22.80 per share in cash was a new position for six of the seven funds. At first glance their attraction to this deal does not make sense considering the spread on the deal rarely exceeded 2% after it was announced. However this was a pre-deal situation where the rumor of the deal came out almost a month before the acquisition was confirmed, providing a nice return even after the rumor surfaced.
• The $7.2 billion acquisition of Stericycle (SRCL) by Waste Management (WM) for $62.00 per share in cash was a new position for five funds. This was once again a situation where the rumor came out a little more than a week before the deal was confirmed. The current spread on the deal is 5.62% or 15.55% annualized if the deal closes by year end.
• HubSpot (HUBS) was a new position for four funds. There was speculation in April that Google was considering making an offer for this marketing software pioneer. On July 1o, Bloomberg reported that Google had shelved plans to acquire Hubspot. The stock dropped sharply, highlighting the risk inherent in participating in pre-deal situations.
• The $6.9 billion acquisition of Squarespace (SQSP) by private equity firm Permira for $44.00 per share in cash was a new position for four funds. Expected closing by year end. Interestingly the spread on this deal is negative as Squarespace is trading above the acquisition price. White knight with a higher offer forthcoming?
• The $3 billion acquisition of Perficient (PRFT) by EQT AB for $76 per share in cash was a new position for four funds. Current spread is a little above 1%. Expected closing by year end.
• The $1.16 billion acquisition of Silk Road Medical, Inc. (SILK) by Boston Scientific Corporation (BSX) for $27.50 per share in cash was a new position for four funds. Current spread is tiny at 1.48%. Expected closing by year end.

There were several other new positions but three funds or less started those positions or the deal had already closed by the time the 13-F filings were released.

It is worth mentioning that the other pre-deal or rumored situations these funds were participating in include Paramount Global (PARA), Nordstrom (JWN), Macy’s (M), International Paper (IP) and Vista Outdoor (VSTO).

Two funds purchased call options on Capri (CPRI) and one of them also added put options. It was interesting to see Seth Klarman’s Baupost Group start a small position in Tapri’s (TPR) embattled acquisition of Capri for $57 per share in cash.

One fund started a position in our favorite spin-off situation Liongate Studios (LION), which we covered in our August 2024 Special Situations newsletter. 

After reviewing these portfolios and their new additions I am inclined to take a closer look at Stericycle (SRCL) and Matterport (MTTR), which with its massive nearly 28% spread was a new position for three funds.

Disclaimer: Among active merger arbitrage related situations, I currently hold long positions in Capri (CPRI) and First Financial Northwest (FFNW). Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.