Murders and Acquisitions

August 6, 2014

People tend to like to see a couple of occurrences and call them “canaries in the coal mine,” a signal of something ominous to come.

Twenty-First Century Fox’s decision to cancel its bid for Time Warner, which was quickly followed by Sprint backing away from buying T-Mobile, certainly could count as one of those things, given the way in which mergers and acquisition signal confidence about an industry, about company earnings, about the economy.

Shares of Sprint are getting hammered in pre-market action, with the stock falling more than 13 percent (even though it was the acquiring party in this deal), and T-Mobile shares are down 7.4 percent in active trade before the bell.

Fox, meanwhile, is higher, gaining 6.3 percent, in part on some worries about valuation and whether the Rupert Murdoch-led company would, once again, overpay for a franchise that would later prove to be a bad decision. Time Warner shares are the ones in the dumper, meanwhile, down nearly 13 percent in heavy trading.

Doug Kass, in a late comment Tuesday that he repeated on Wednesday, pointed to a failed UAL deal in the late 1980s as a precursor for a swift market correction, and suggested many investors would ask whether this has broader consequences for the market, calling it a “mini Black Swan event.”

From what Reuters reported last night, plenty of event-driven hedge fund types probably had a short Fox, long Time Warner trade on in one way or another, and the big positions in out-of-the-money call options expiring in October for Time Warner at least give this some credence (as does the out-of-the-money put activity in Fox as well).

On Tuesday, prior to the announcement, there was some put buying in Time Warner and call buying in Fox, suggesting the possibility that someone had advance notice that this was going belly-up.

Notably, short interest in Fox wasn’t all that big – it jumped shortly after the announcement of the merger, rising to a peak of 8.6 percent of the shares available to borrow, according to Markit, but later fell to less than 5.5 percent overall, suggesting some may have gotten out of the trade in advance.

Either way, the deep bullish options bets in Time-Warner are going to be crushed today, with Randy Frederick of Charles Schwab saying they could lose 90 percent of their value in short order.

All of this may, of course, be a negotiating tactic from Murdoch – he’s famous for playing possum before pouncing again – but that also doesn’t explain the issue with Sprint deciding to can its T-Mobile bid.

Reports on this one also suggest some outside factors – there are really only four major wireless players in the United States (with T-Mobile the upstart #4) and regulators seemingly were worried about consolidation that could hurt consumers. That’s no small thing, particularly given the press T-Mobile got for just doing away with all sort of fees that other wireless providers tack on that make it come across like a racket.

And so if that’s the case, a merger that would have had a hard time winning approval isn’t one that a company wants to bother with right now anyway, particularly given the populist leanings in Washington.

This shouldn’t be taken just yet as a sign that M&A is dead – after all, coming into this week, U.S. M&A deals were up 86 percent on the year, with $997 billion in total M&A, of which $842 billion was “strategic,” a category where both of these deals land (and which has more than doubled from a year earlier).

It could be that these deals had special circumstances – ones that had a long path to approval at best. But with futures down here this morning, it’s not stupid to suggest it’s something to watch.

“I don’t ascribe too much to it as of yet but I will say its something to watch. Because M&A has been so important for these last few quarters,” Dan Greenhaus of BTIG said in an email.

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