The market for mergers and acquisitions, particularly with regards to private equity’s role in dealmaking, may suffer as more and more hedge funds embark on activist investing campaigns.
That’s according to both industry observers and participants in Tuesday’s Bloomberg Markets 50 conference, including Blackstone Group CEO Stephen Schwarzman and James Lee, vice chairman of J.P. Morgan, both of whom argued this point during their panel discussion Tuesday in New York.
Lee, who frequently uses the word “bank” as a verb and is one of the most prominent debt financing dealmakers on Wall Street, said the proliferation of hedge funds jumping on the activist bandwagon could bring hurdles for the M&A process.
“There are a very large number of hedge funds that most people would not be familiar with that are event-driven funds,” Lee said. “They have money flowing in the door and they have to put that money to work, and there’s activism being practiced by many hedge fund players. What it’s going to do is create a floor on M&A activity.”
For his part, Schwarzman was less blunt but still acknowledged the difficulties activist hedge funds represent for private equity firms in M&A deals.
“It’s a better time to be a seller than a buyer,” said Schwarzman, whose Blackstone Group attempted and withdrew a bid for Dell earlier this year amid famed activist investor Carl Icahn’s fierce battle to keep the company public. “You have to be a little more clever now on the buy side because the M&A cycle has not come back the way it should have. It’s a little more work on the buy side and it’s less work with more reward on the sell side.”
Schwarzman’s views are not surprising to M&A experts, given that private equity firms are often competing with hedge funds that have more money and resources and, perhaps most importantly, the time to ride out battles for higher share prices — which is usually the goal of activist investing campaigns.
“The risk arbitragers are of course going to make a bet on deals going through and usually they’re going to buy the target and short the bidder,” said Ben Branch, a professor of finance specializing in M&A and risk arbitrage at the Isenberg School of Management at UMass Amherst. “They can get in the way of an M&A deal because they can insert themselves into it and try to prevent the deal from going through at a price that they feel is too low. So I can see why the private equity people would find them annoying.”
At bottom, this could dampen M&A activity if, as has happened in the past, hedge funds drive up the share price of a company being sold to the point where its private equity buyers no longer see value in the deal and walk away. Or choose not to engage at all.