mohd izzuan
It has been a tumultuous time to be a merger arb investor. So many second requests. So many deals hung up. More than a few deal busts and lawsuits. When we have a new President in January, whoever that may be, things could change. But for now we must play the cards we are dealt.
Each quarter, I compile the top 10 stocks held in the funds that specialize in merger stocks and share it with our Seeking Alpha community.
My rules:
- I only count a stock if it is at least 1% of the fund’s portfolio.
- I only include stocks that are still actively trading.
- I only choose funds where the majority of positions are merger-related.
This quarter’s top stock is Hess Corporation (HES). Hess is in 24 of my 34 funds. 10 months ago Chevron (CVX) signed an agreement to purchase Hess in an all-stock transaction. At the time of the deal Hess was trading at $163 per share but has since fallen $27 per share or 17%. As of this writing, the nominal deal spread is currently almost 11%. But what was originally thought to be a first half 2024 close is now looking like a 3rd quarter, 2025 close, possibly later or possibly never. At the heart of the delay is Exxon’s (XOM) argument that the proposed Chevron/Hess tie-up triggered a right of first refusal clause in their Guyana joint operating agreement. Exxon has challenged the merger, while Chevron and Hess dispute that claim. A hearing is scheduled for next May. The market knew of Exxon’s objection before the end of the second quarter (when 13-F’s are finalized) but not of the incredibly long timeline to the arbitration hearing. So it will be interesting to see what the 13-F’s look like in mid-November. There are some analysts who think that Hess stock may not drop at all even if the deal were not completed.
HashiCorp (HCP) is number two on my list. IBM (IBM) is in the process of acquiring HCP for $35 per share. 20 of the 34 funds are involved. The deal is on a second request from the FTC and offers an 11% IRR. Closing is anticipated by the end of the year.
Top 10 Merger Arb Stocks Held By Funds
| 1) Hess | Held by 24 funds | 10% IRR |
| 2) HashiCorp | Held by 20 funds | 11% IRR |
| 3) ANSYS (ANSS) | Held by 17 funds | 31% IRR |
| 4) Axonics (AXNX) | Held by 16 funds | 12% IRR |
| 4) Endeavor Group Holdings (EDR) | Held by 16 funds | 2% IRR |
| 6) Juniper Networks (JNPR) | Held by 15 funds | 12% IRR |
| 6) Albertsons Companies (ACI) | Held by 15 funds | 182% IRR |
| 8) United States Steel Corporation (X) | Held by 14 funds | 87% IRR |
| 9) Catalent (CTLT) | Held by 12 funds | 18% IRR |
| 10) Amedisys (AMED) | Held by 10 funds | 32% IRR |
When a fund makes an M&A stock its top holding, it signals strong conviction that the deal will ultimately close. 11 funds had Hess as its top pick.
Top Positions Among The 34 Funds
| Hess | Top Position in 11 Funds |
| Endeavor Group | Top Position in 3 Funds |
|
Discover Financial Services (DFS) |
Top Position in 2 Funds |
Oversized Holdings
Some arb funds oversize the positions that they have great conviction in. As of June 30, there were an unusually high number of stocks that were at least 11% of a fund.
| Hess | 76% of a fund |
| Endeavor Group | 46% of a fund |
|
Marathon Oil (MRO) |
19% of a fund |
|
Surmodics (SRDX) |
18% of a fund |
| Axonics | 16% of a fund |
| HashiCorp | 16% of a fund |
| Albertsons | 13% of a fund |
| Capri Holdings (CPRI) | 12% of a fund |
|
The Liberty SiriusXM Group (LSXMK) |
11% of a fund |
|
Amedisys |
11% of a fund |
Conclusion
While there is no substitute for doing one’s own work and developing one’s unique trading/investing style, looking at what some of the top arb hedge funds are doing with their money is quite valuable. These funds have more resources, staff, and contacts that an individual investor can possibly have.
While there is no guarantee that the above deals will close, the fact is historically approximately 94% of all mergers do close and when the M&A professionals allocate their money to an arb position the odds even get better.
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