The Morning Brief: The Hedge Fund Backers of Failed Mergers
Two potential mega-mergers in the works that attracted huge hedge fund support either fell apart or were dealt a major blow on Wednesday. In response, the stocks of all of the participants surged in value, but are still mostly way down from their highs. Many of the top holders of the four stocks involved in the two deals are large hedge fund firms.
For example, Allergan and Pfizer terminated their planned $160 billion merger. Shares of the two stocks surged 3.5 percent and 5 percent, respectively, on Wednesday. However, Allergan’s stock is still down nearly one-third from its late July high. At year-end, the most recent period for which comprehensive data is available, Allergan was the third most widely held stock among all hedge funds, with no fewer than 185 reporting a position in the stock, according to Goldman Sachs’ analysis of public filings. In addition, 108 hedge funds were shareholders of Pfizer, the 13th most widely held hedge fund stock.
Allergan (along with Amazon.com) was also the third most popular stock among funds with ties to Julian Robertson Jr.’s Tiger Management. For example, Greenwich, Connecticut-based Viking Global Investors was the ninth-largest shareholder of Allergan, which was the third-largest position of the hedge fund firm co-founded by O. Andreas Halvorsen. Allergan was also the largest U.S. long position of John Paulson’s New York-based Paulson & Co. and the second-largest U.S. long of Daniel Loeb’s New York-based Third Point. Pfizer is the second-largest U.S. equity long position of South Norwalk, Connecticut-based Discovery Capital Management and the fourth largest long of Dallas-based Maverick Capital.
Meanwhile, the Department of Justice filed a civil antitrust lawsuit seeking to block Halliburton Company’s proposed $35 billion acquisition of Baker Hughes, alleging that “the transaction threatens to eliminate competition, raise prices and reduce innovation in the oilfield services industry.” In response to the DOJ’s news, shares of Baker Hughes surged nearly 9 percent, while Halliburton jumped nearly 6 percent. However, over the past year shares of Baker Hughes are down about 38 percent, while Halliburton is down 25 percent.
At year-end, San Francisco-based ValueAct Capital was the fourth-largest shareholder of Baker Hughes and the ninth largest of Halliburton.
In anticipation of the government’s announcement, Deutsche Bank Wednesday cut its rating on Baker Hughes from buy to hold and slashed its price target from $78 to $43. In addition, the investment bank cut its price target on Halliburton from $53 to $40. In separate notes to clients, DB says that although Halliburton would be better off in the long-term with a merger with Baker Hughes, it “would still be on extremely strong footing should they have to go it alone.” In fact, it asserts that without the merger-related distractions and uncertainty, “investors currently on the sidelines coming in could actually benefit” Halliburton’s stock in the short-term.
Here is another example of a hedge fund faltering after raising money. Jason Karp’s Tourbillon Global Master Fund, managed by New York-based Tourbillon Capital, posted a 6.6 percent loss in March and a 16.1 percent loss in the first quarter, according to Hedge Fund Alert. Late last year, the SAC Capital alum raised $800 million for the long-short fund after raising another $500 million earlier in the year when it launched a new long-only fund, bringing total assets to $4 billion at the beginning of 2016.
Shares of Valeant Pharmaceuticals International surged nearly 19 percent after William Ackman of Pershing Square Capital Management said on a conference call that the embattled drug maker is close to filing its tardy annual report and naming a new chief executive officer. The stock is up nearly 31 percent in two days. The stock was also up another point or so in after-hours trading.