Philippe Ferreira

Philippe Ferreira

Director, Senior Cross-Asset Strategist

Lyxor Asset Management


AT&T Ruling Reinforces Our Views On Merger Arbitrage

18 Jun 2018

Investment Partners

Last week, a court ruling gave the much-awaited green light to the vertical integration between AT&T and Time Warner. The transaction, which was eventually valued at USD 107bn, was announced in late 2016 but was challenged by the Department of Justice to keep content separate from distribution.

The unequivocal decision (the Justice Department won’t appeal the court ruling) has implications that go far beyond the deal itself. It translated into a significant spread tightening for several deals such as CVS vs. Aetna and Cigna vs. Express Scripts. Meanwhile, the day after the above-mentioned court ruling, Comcast made an offer for Fox assets on top of Disney’s, setting the stage for a bidding war. It should also lead to additional M&A activity as the case contributes to clarify the rules on vertical mergers.

Eventually, the decision could lead to a rethink of anti-trust laws. The impact of the court decision was positive for merger arbitrage funds last week. The effect was nonetheless undermined by the Qualcomm vs. NXP spread widening, related to an escalation of the trade dispute between the U.S. and China. The deal requires approval from the Ministry of Commerce of China and thus bears a political risk component.

Overall, this important milestone reinforces our strong convictions on merger arbitrage. The strategy has performed below our expectations in H1 on the back of exogeneous headwinds (trade wars and the DOJ attempt to block the AT&T vs. Time Warner deal impacting the pricing of vertical deals). With one hurdle cleared, the case for being overweight on the strategy is even stronger. From a structural perspective, the appeal of the strategy in the current market cycle lies on its low correlation with equities and the low volatility of its returns. At present, the valuation of traditional asset classes is rich and the removal of monetary accommodation may translate into higher volatility in asset prices.


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