Hedge Funds Look for Hard Hats in a Year of Collapsing Mergers

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Pfizer’s failed merger with Allergan was one of several recently shut down by regulators’ concerns. Credit Michael Nagle/Bloomberg

While last year set a record for the amount of money spent on corporate mergers — $4.7 trillion — this year is so far setting a very different record: the dollar amount of deals that have come undone.

Since the beginning of January, $400 billion worth of corporate mergers have been withdrawn in the United States, almost three times the previous record for the same period, set in 2007, according to Dealogic, which analyzes such data.

On Tuesday, the retailers Staples and Office Depot called off their $6.3 billion deal. The collapse came about a week after the dismantling of the proposed $35 billion merger of the oil services companies Halliburton and Baker Hughes, and one month after the death of the drug giant Pfizer’s proposed $152 billion merger with Allergan — all canceled because regulators raised concerns.

Broken deals have whipsawed hedge funds that focus on merger arbitrage, a type of trading that places bets on the likelihood that deals will be completed. As one “arb,” as traders in merger arbitrage are known, described the current mood of the industry: Every day is like showing up unsure of whether to wear a helmet or a diaper.

“You’re definitely seeing a hangover from the M.&A. party from 2015,” said Aly El Hamamsy, a partner in Cadwalader, Wickersham & Taft’s mergers-and-acquisitions group, which occasionally advises arbs. “Things will stay interesting for a few months at least.”

Anxiety is higher than many arbs say they have experienced in years. Merger arbitrage was the worst-performing investment strategy in April other than macro funds, which bet on the direction of global economic trends, according to Hedge Fund Research. The merger arbitrage index, which is compiled by HFR, declined 0.75 percent during the month.

The fallout follows a boom year in mergers and acquisitions, during which companies felt emboldened to make aggressive — albeit risky — moves to grow. Deals have been collapsing because regulators are raising antitrust concerns, as in the cases of Staples and Office Depot and Halliburton and Baker Hughes, or because regulators are clamping down on deals that move American companies abroad to cut their tax bills, as was the case with Pfizer and Allergan.

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