Microsoft takes merger arbs for a ride

One thing to start: The biggest US banks spent more than $1bn on severance costs during the first six months of 2023, underscoring the steep price of unwinding Wall Street’s overexpansion during the coronavirus pandemic.

In today’s newsletter: 

• Merger arbs’ Microsoft drama

• Michael Moritz splits with Sequoia Capital

• Blackstone’s first trillion

Merger arbs’ emotional rollercoaster

Merger arbitrage traders finally caught a break on Wednesday after Microsoft and Activision Blizzard agreed to push back the deadline for their $75bn tie-up until mid-October.

Such funds, which place high-stakes bets in the time between when a deal is first rumoured and when it’s due to complete, have understandably felt the pressure of the ongoing antitrust battle over the gaming mega-deal.

The transaction — which has perhaps brought a sense of déjà vu from last year’s nail-biter at Twitter — will keep the original $95 a share, all-cash purchase price agreed by Microsoft and the Call of Duty developer. The parties also agreed to raise the termination fee from $3bn to $3.5bn starting on August 29, and to $4.5bn come September 15.

Even with the extra time, merger arbs still aren’t thrilled.

At 99 cents per share, the special dividend authorised by Activision’s board as a way to quell Activision investors’ nerves over the delays and uncertainty — which equates to a payout of about $789mn — fell short of their expectations. 

A number of traders told DD they were hoping for something between $3 and $5 a share.

The deal’s revival has emboldened some arbitrageurs who walked away from the table to place new bets.

Felix Lo, who manages a $300mn fund betting on deals for London-based manager Trium Capital, sold his shares in Activision Blizzard in February when the takeover looked dicey. He then bought options after a San Francisco court denied a request from US regulators to block the deal earlier this month.

DD wonders if Warren Buffett, whose Berkshire Hathaway trimmed its bet on Activision Blizzard late last year as antitrust scrutiny heated up and sold down his stake again more recently before it surged, has had enough of the merger arb game.

The stunning loss for the Federal Trade Commission and the subsequent lifeline handed down by the UK’s Competition and Markets Authority has given merger arbs some relief in an otherwise difficult year.

The trade, which is considered a good diversifier for investors because it is uncorrelated to the market, has been affected by regulatory roadblocks and a dealmaking slowdown, DD’s Ivan Levingston and Ortenca Aliaj and the FT’s Costas Mourselas report. 

Shares in merger arb funds managed by firms such as Kite Lake and Alpine have declined this year by roughly 6-8 per cent.

Meanwhile, the S&P 500 posted a total return of 17 per cent in the first half of this year and the US Federal Reserve funds rate, a proxy for risk-free returns for investors, is 5.25 per cent.

“This is the craziest environment I think anyone has ever gone through,” said one merger arbitrage specialist. “It’s not just hostile to deals but it’s particularly unpredictable.”

The smaller pool of deals means that the ones that have folded, such as TD Bank’s scrapped acquisition of First Horizon in May and regulatory intervention that has held up Amgen’s $28.3bn deal to acquire Horizon Therapeutics, have been especially painful.

For those willing to take the risk, however, there’s a chance to stand out from the pack.

“When regulators take a tough stance on mergers which previously would not have been blocked, more trading skill is required. Hurdles create opportunities when markets overpredict that a deal is already dead,” said Trium’s Lo.

Sequoia Capital parts ways with a Silicon Valley veteran

For someone who confessed to being “poor at math and couldn’t tell a voltage regulator from an amplifier”, Michael Moritz has carved out a fairly successful career as a tech investor.

His early bets on Google, Yahoo and PayPal made the Welsh former journalist a billionaire and positioned his company Sequoia as the world’s pre-eminent venture capital firm.

On Wednesday, Sequoia told its limited partners that Moritz was stepping down after a career spanning four decades. 

His departure, coupled with the firm’s decision to carve off its highly successful China arm last month, marks the end of a long and successful chapter. The question being asked by many in Silicon Valley: what comes next?

“It’s been a long time coming, but it comes at a bad time . . . The firm is going through a lot of change: the split with China, losing [head of Sequoia China] Neil Shen,” one investor who has worked closely with Moritz and Sequoia told DD’s George Hammond.

“They [Sequoia] have to go back and ask themselves ‘what do we want to be?’,” he added.

Roelof Botha, Sequoia’s current leader, played down the operational significance of the exit, noting Moritz “relinquished day-to-day management of Sequoia more than a decade ago”.

Moritz will now focus on running Sequoia Heritage, a separate legal entity founded in 2010 to manage the wealth of “the greater Sequoia community”. That includes hundreds of millions of dollars on behalf of Moritz himself and other investors including long-serving Sequoia partner Doug Leone, Stripe’s co-founder John Collison and the family foundation of former Google chief executive Eric Schmidt.

But for Sequoia, moving on may not be so straightforward.

Blackstone’s trillion-dollar moment 

Blackstone Group is set to burnish its status as the world’s largest private equity firm with its second-quarter results on Thursday, which may show it has crossed $1tn in assets under management, a new milestone for the industry. 

The symbolic marker underscores the epic growth of private markets as investment firms such as Blackstone, Apollo Global and KKR weave unlisted investments ever deeper into the fabric of mainstream financial markets.

Founded in 1985 by Stephen Schwarzman and Pete Peterson as a financial start-up with minimal capital, Blackstone has grown into one of the world’s largest financial institutions, with a $130bn market capitalisation that is larger than Goldman Sachs. 

Its sprawling portfolio of hundreds of companies generates about $200bn in annual revenues and its influence has expanded beyond corporate buyouts into credit-based investments, real estate, the managing of assets for large insurers, hedge funds, and other private strategies like so-called “secondary” buyouts. 

DD’s Antoine Gara reports that what should be a moment of celebration for the 38-year-old buyout firm has come at a time of major tests for chief executive Schwarzman and his heir apparent Jonathan Gray. 

It faces a challenge unlike anything since the financial crisis from heavy redemptions from its $68bn property fund, which has put top executives like Gray on the defensive. The pressures are a symptom of amassing hundreds of billions of dollars in assets during an era of rock-bottom interest rates. 

Blackstone ultimately thrived in the wake of the 2008 tumult, growing more than tenfold. Schwarzman has told employees Blackstone has navigated market upheaval and always comes out ahead.

Gray, meanwhile, has ended weekly meetings by repeating his favourite maxim: “Stay calm, stay positive and never give up.”

Job moves 

• Warburg Pincus has named Jeffrey Perlman as the private equity firm’s next president. Perlman replaces former US Treasury secretary Timothy Geithner, who will become chair. 

• Tesla chair Robyn Denholm has joined the board of Harrison.ai, an Australian healthcare start-up backed by Hong Kong billionaire Li Ka-shing’s Horizon Ventures.

• Houlihan Lokey has named Jonathan Jameson as a managing director in its private funds group, based in New York. He joins from GCA Advisors, which was acquired by Houlihan in 2021.

Smart reads

Winner’s curse Czech billionaire Daniel Křetínský has beat out rivals with a proposal to bail out debt-laden French supermarket Casino. But a victory could be financially draining, the Financial Times reports.

Limited resources Recent global antitrust setbacks show that legislative change is needed if trustbusters want to reverse decades of lax merger rules, the FT’s Helen Thomas writes.

Macquarie’s money machine Joyce Moullakis and Chris Wright chronicle Macquarie’s rise from small Australian merchant bank to global behemoth in their book The Millionaires’ Factory. Read the FT’s review.

News round-up

New US antitrust guidance puts private equity and tech deals in focus (FT)

Goldman Sachs profits hit by trading slowdown and retail banking retreat (FT)

Lars Windhorst hit with €150mn freezing order (FT)

Asda owners rapped by MPs over reluctance to open up on fuel prices and jobs (FT)

Fed fines Deutsche Bank $186mn over failure to fix control flaws (FT) 

US banks under pressure as corporate depositors demand higher rates (FT)

Macquarie takes further control of Britain’s gas network (FT) 

Gucci parent Kering taps defence advisers as activist Bluebell circles (Bloomberg)

Clifford Chance rules out merger as revenues top £2bn for first time (FT)