Growth Trader Monthly M&A Wrap Up: March 2023

Welcome to the first edition of Growth Trader’s M&A wrap up. The plan with this publication is to give a briefing of the significant events that occurred in M&A in the public markets over the last month, go over the most attractive opportunities in merger arbitrage, and generally talk about anything of interest to merger arbitrage.

The State of Merger Arbitrage: March 2023

Merger arbitrage spreads are some of the widest they’ve been under normal circumstances in a long time. All of this is a result of the Biden Administration’s aggressive stance against mergers, it’s their way of reducing the power of big business.

This is a significant departure from recent presidential administrations under Clinton, Bush Jr, Obama, and Trump, who mostly left their antitrust departments to pursue cases based on interpretations of case law and their own discretion.

In this case, the Biden Administration is taking a far more activist role in mergers, not only using the DOJ as a tool, but also government agencies like the Federal Trade Commission, Department of Transportation, and so on.

As as result, almost every big deal is getting significant interest from regulators and in most cases, regulator make it their stated goal to kill the deal entirely instead of getting concessions. So it’s very difficult to price out the risk of a deal getting killed because you can’t really base your analysis off existing case law, it’s far more random.

So to compensate for this randomness, deal spreads have widened across the board and have remained this way for a long time.

While this might not be exciting to traditional merger arb funds who are used to picking up meager 5% deal spreads on sure things, it’s one of the most exciting times to be a speculative merger arb trader, as you can structure some asymmetric trades.

Most Active Deals This Month

Microsoft’s (MSFT) Acquisition of Activision-Blizzard (ATVI)

Microsoft’s acquisition of Activision is the most significant deal in merger-land today. With Microsoft already a behemoth in gaming with their Xbox platform, owning Activision poses a series threat to Sony and to a lesser extent, Nintendo.

Unsurprisingly, this deal has seen huge antitrust activity, not just from the US, but the UK and EU as well. Regulators are trying to get Microsoft to divest of Call of Duty which seems like an extremely unrealistic demand from regulators, which shows how much regulators are playing hardball with M&A in today’s climate.

Activision’s operations have improved considerably as of late, leading to trader speculation that Activision might seek to force Microsoft to raise its bid by dragging its feet.

Deal Details

• Target: Activision-Blizzard (ATVI)
• Acquirer: Microsoft (MSFT)
• Deal Type: Acquisition
• Deal Announcement Date: January 18, 2022
• Deal Price: $95.00 (cash)
• Deal Value: $68.7 billion
• Regulatory Problems: Yes
• Estimated Deal Close Date: Q4 2023

Microsoft and Activision-Blizzard News: March Timeline

• March 2: EU regulators not expected to demand Microsoft divest of certain Activision assets
• March 8: Microsoft proposing package of licensing remedies to guarantee parity between Xbox and PlayStation versions of Call of Duty
• March 10: Activision accuses Sony CEO of refusing Call of Duty licensing deal to sabotage the merger
• March 14: Microsoft signs long-term Call of Duty licensing deals with Nintendo and Nvidia.
• March 17: Microsoft offers remedies to gain EU antitrust approval
• March 22: Microsoft says 10 years is sufficient for Sony to develop alternatives to Call of Duty
• March 24: UK CMA narrows scope of concern in deal, drops PS5 concerns
• March 28: Merger receives Japan approval
• March 28: Group of 11 US Congress members urging Biden Administration to investigate Sony for sabotaging deal

JetBlue’s (JBLU) Acquisition of Spirit Airlines (SAVE)

JetBlue is looking to buy Spirit Airlines, an ultra-low cost carrier which operates some similar routes to the airline. JetBlue aims to halt operations and instead absorb the airline’s fleet of aircraft, routes, and other assets into the larger JetBlue entity. The goal here is so that JetBlue can compete with the major airlines like American, United, and Delta.

Regulators take issue with this acquisition because, in their eyes, it reduces competition in the lower cost market for lower income people. Because Spirit will simply become a part of JetBlue, you’d assume that its equivalent flights will increase prices post-merger. JetBlue plans to remove seats and add some amenities to Spirit’s aircraft to make them match JetBlue’s fleet. There’s also worries that JetBlue will stop operating the less profitable and popular routes that Spirit currently operates.

The DOJ is currently suing to halt the deal.

Deal Details:

• Target: Spirit Airlines, Inc. (SAVE)
• Acquirer: JetBlue Airways (JBLU)
• Deal Type: Acquisition
• Deal Announcement Date: April 5, 2022
• Deal Price: $31.00 (cash)
• Deal Value: $7.6 billion
• Regulatory Problems: Yes
• Estimated Deal Close Date: Q2 2024

JetBlue and Spirit News: March Timeline

• March 7: US Department of Justice sues to block JetBlue/Spirit deal on antitrust grounds
• March 21: Judge sets October trial for DOJ lawsuit
• March 24: US Department of Transportation denies JetBlue exemption request to operate under common ownership, cites DOJ lawsuit
• March 31: California, Maryland, New Jersey, and North Carolina sign onto the DOJ lawsuit

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