Last month, arbitrage portfolio managers flocked to a San Francisco courtroom, eagerly awaiting any clues that could shed light on the outcome of the proposed Microsoft-Activision merger. The trial, which unfolded over five days, carried immense significance for these investors who specialize in betting on the success or failure of mergers and acquisitions.

The Microsoft-Activision Trial: A Key Event for the Arbitrage Community

Bloomberg reported that representatives from top investment firms, along with specialized brokers, traveled from New York and Chicago to witness the trial firsthand. Their aim was to decipher subtle signals from the judge or key witnesses that could indicate whether the US Federal Trade Commission (FTC) would succeed in temporarily blocking Microsoft’s $69 billion takeover of Activision Blizzard.

This regulatory challenge posed a significant risk to the merger, making it a key event for the arbitrage community.

The merger arbitrageurs, numbering about a dozen, secured prime spots in the courtroom and even paid line sitters to maintain their places. Many others followed the proceedings via a Zoom audio feed, eager to grasp any developments that could impact their investment strategies.

For these arbitrageurs, monitoring legal proceedings associated with mergers is an integral part of their job. However, this trial held heightened importance due to the involvement of FTC Chair Lina Khan, known for her aggressive stance on antitrust issues.

Microsoft-Activision Merger: A Game-Changer

The proposed Microsoft-Activision merger is a game-changer in the video game industry and also tests the FTC’s ability to block tech deals through legal means. The judge’s ruling and the language used in the decision could cause portfolio values to fluctuate significantly, with potential gains or losses in the millions or even hundreds of millions of dollars.

As the July 18 deadline for the deal’s closure looms, a prompt ruling from Judge Jacqueline Scott Corley is anticipated. The gap between Activision’s stock price and Microsoft’s $95-per-share takeover bid has fluctuated in response to regulatory updates. If the deal successfully closes, arbitrageurs who bought Activision shares at lower prices could realize substantial gains.

Notably, this arbitrage position has attracted prominent players like Berkshire Hathaway, Pentwater Capital, and Arrowstreet Capital, showcasing its popularity and appeal within the investment community.

Source: Bloomberg

Beyond the immediate implications for arbitrageurs, the trial’s outcome will help shape the regulatory landscape for future big tech mergers and acquisitions. Lina Khan’s aggressive approach to antitrust enforcement has already had an impact in various sectors, leading to increased scrutiny of blockbuster deals.

The Microsoft-Activision trial offers insights into FTC’s strategy and potential implications for future mergers. As the trial progressed, arbitrageurs began to develop a consensus that the FTC was unlikely to secure a preliminary injunction against the Microsoft deal. Market confidence increased, as evidenced by Activision’s rising stock price during the trial.

However, some arbitrageurs expressed skepticism regarding the FTC’s approach, cautioning against taking weak cases to court and suffering unfavorable precedents.

Brian Lombardi, a New York-based broker at FBN Securities, said:

“The FTC appears to lack a strategy. Acting tougher is one thing, but taking bad cases to court and losing creates unfavorable precedents that put the FTC in a worse position than before she took the helm.”

The trial highlighted the unique role of merger arbitrageurs, who actively participated in the courtroom proceedings to closely observe the judge’s demeanor, exchanges between witnesses and lawyers, and other significant details that could offer valuable insights. While some relied on audio feeds, they acknowledged the potential drawbacks of missing critical information.

The Art of Merger Arbitrage

Merger arbitrage is an investment strategy that requires meticulous research and analysis to assess the likelihood of deal closures and calculate potential profits. The physical presence of arbitrageurs in the courtroom signifies their deep commitment to their investment positions.

These professionals play a crucial role in major legal proceedings, actively shaping the regulatory landscape and influencing the outcomes of high-stakes mergers and acquisitions.

The Microsoft-Activision trial holds broader implications for the field of antitrust law. It serves as a significant test for Lina Khan’s approach to antitrust enforcement and will likely impact future FTC reviews of mergers and acquisitions.

Moreover, the trial underscores the growing importance of merger arbitrage in the financial markets, where these professionals continue to actively participate in major tech deals, contributing to the shaping of the regulatory landscape.

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