It’s a sign of nerves when some of the world’s best-known hedge funds rush to buy into a tiny stock few have heard of. Within hours of announcing that it had received several takeover approaches, shares in Whatman, the health technology provider, had attracted names such as Perry Capital and GLG Partners. Six months ago these guys wouldn’t have bothered spending time and money on a company valued at just £300m. None of them have any real idea what Whatman’s suitors think the company’s worth.
Aside from BHP Billiton’s $114bn hostile bid for Rio Tinto and Vale’s stalking of Xstrata, there isn’t a lot for merger arbs to play these days. Even if there is, they can’t double their bets with leverage or borrowings.
Many investors, panicked by the seizure in the debt markets, withdrew their money from merger arbitrage around three months ago and reallocated it to more traditional, or macro strategies.
The trading around Scottish & Newcastle shows today’s merger arbs jitters. The brewer’s shares fell to 680p on Thursday morning on vague rumours Carlsberg and Heineken were to pull their 800p offer. Two hours on, S&N said it had begun talks with the bidders and its shares went up to 766p. Those that sold out would have been in pain.
Only so many hedge funds can go into the same merger-arb trade before the target’s shares rise to the agreed price, completely wiping out the price spread opportunity. But the irony is the less merger arbitrage opportunities there are, the more dangerous these funds can become. To create action, they will be less tolerant of incompetent management at companies. With valuations so volatile at the moment, some situations could get nasty.
