VH Standard Merger Arb Fund - Quarterly Letter (Q2 '25)
- Robert von Hoffmann
- Sep 17
- 6 min read
Transactions Mentioned In This Letter: None.
We will have boom times and slow times. It’s my goal to never have bust times, but that’ll require patience and discipline. We were fortunate to practice this leading up to the 2nd quarter of ‘25, which set us up for success and ultimately some very good returns, in my opinion.
QUARTER RESULTS
For the 2nd Quarter alone, we had net returns of +8.31%, bringing our year-to-date net returns to +7.14%, as of June 30th. These positive returns continued during July and August, but we will save that for the next letter - please check your monthly statements, if you’re curious. It’s difficult to say that this pace will continue, as it’s somewhat of an anomaly in our two years of returns; however, I continue to see a long runway for positive M&A activity, leading to quality returns for us, if we are able to remain consistent and disciplined in our approach.
REGULATORY ENVIRONMENT
What’s going on with the antitrust regulators? Redfin was acquired by Rocket Cos (Rocket Mortgage), and Rocket Cos’ acquisition of Mr. Cooper Group (the largest mortgage loan servicing company in the United States) saw the HSR filing expire in June without any request for additional information. Omnicom’s takeover of Interpublic Group received approval with behavioral remedies. Same goes for the Hewlett Packard acquisition of Juniper, which reached a settlement prior to their court case on the basis of behavioral remedies. T-Mobile completed its purchase of USCellular. Johnson & Johnson’s $15 billion acquisition of Intra-Cellular received no extra look from regulators.
This is clearly different from the last FTC/DOJ regime… Yes, regime. It’s only obvious in their absence how restrictive and overreaching the previous administration’s approach was. The market will likely soon adjust to this and I expect this to be a tailwind for merger arbitrage.
Morgan Stanley analyst Ryan Kenny said in June: “The key message is that the DOJ is not aiming to deter merger activity generally.” That’s a surprisingly big statement about regulators. Why would they want to deter merger activity in the first place?
It’s important to note that deregulation doesn’t need to come from policy. It can simply come from incentive, culture, and shifting resources at the regulators. This was true with the previous administration, as well, where regulators were ramping up enforcement and shifting the environment without the okay from Congress. There is ample room for interpretation by regulators looking to enforce as they see fit. Each term, we have to adjust to them, at least on the margins.
Another key point is the timeline of deals. There’s a function at the FTC, where they can process an early termination for HSR review and allow parties to close their transaction quickly. This is typically done for transactions that have no competition concerns. To point out the difference between the two administrations, this current FTC has already granted this to over 100 transactions, allowing for a quick close. The previous administration, on the other hand, suspended this practice in 2021, in response to Covid and the heightened deal activity that followed it, and chose to keep that suspension in place until leaving office in January of 2025. A meaningful change.
This being on top of the common practice under the previous administration, where they would issue a second request for additional information, only to leave the transacting parties in limbo for months on end without any real engagement. Comparing this to the Redfin & Mr. Cooper regulatory process shows a stark difference – even if only as one data point.
Outside of HSR early termination of reviews and with the absence of extending second requests indefinitely, I’ve seen timelines to close for typical transactions shortening considerably. In our previous letter, we suggested that times change. It appears in the early data that we’re already in the midst of that change. I believe this is a great opportunity for us.
OUTLOOK FOR M&A ACTIVITY
If overnight we went back to the 1870s free market capitalistic environment in the US, commentators would likely say there’s too much uncertainty out there. That would make sense. Have you ever seen a caged animal let back out into the wilderness?
It’s pretty rare for them to go running freely at the moment the door opens. It would take time to readjust, to gather itself and understand the new surrounding environment. People are no different. Businesses are no different. The more adaptive individuals who can adjust and recognize the changing environment the quickest are the ones who will likely thrive in these situations. That said, changing too quickly could also be disastrous - wisdom says don’t be the impetuous one.
Whether good or bad, I think our economy is going through this change a bit with regard to M&A activity. We seem to be in the process of going from a quasi-centrally planned economy, where incentives, subsidies, social awareness, and banking restrictions direct the flow of capital, into a more quasi-free market economy, where the private sector gets more freedom to make that decision. This is obviously debatable to anyone reading the headlines, as the government will most likely continue to hold the power, protecting national security as it sees fit through public agencies, as well as some private business arrangements that utilize the big technology companies, the defense names, the companies with national importance, and a control over the transactions involving cross-border relationships. Outside of this, on the margins, the rest of the economy seems to be moving towards a freer marketplace, or one with fewer resources for regulators to pursue blocking any and all transactions. This is where I believe M&A arbitrageurs should be focused if they want to find the best opportunities. I may be wrong, but this is my view. Time will tell.
If I’m right, business operators might remember what it’s like to conduct business in a world where you don’t sit around and wait for the orders from a government institution, whether it’s the Federal Reserve on interest rates or the FTC on vague and restrictive merger guidelines or the BLS on labor statistics. In truth, it wasn’t that long ago that the Fed provided no guidance and its actions were much more opaque and independent. Even with Fed transparency, the interest rate spikes from 2022 to 2023 were neither signaled nor forecasted by the Fed with any meaningful timeliness. Maybe it will be a good thing for business operators to rely a little bit on their own insights, again.
If I’m right, I believe this environment leads to M&A activity picking up considerably. The people who run businesses are eventually going to catch on as strategic acquisitions are made and competitors consume larger shares of their respective markets, threatening the position of those who are inactive. Last mover could seem to be at a disadvantage, and that’s a powerful psychological motivator for M&A. I quoted Sam Zell in our last letter, and some of you might see the connection here.
Additionally, some companies will try to complete anti-competitive transactions, and we’ll likely find out over the next six months where the line is going to be for this current set of regulators. There’s always going to be a CEO willing to see it through in court. Union Pacific gets this. So does Rocket Cos, the parent of Rocket Mortgage. There is still risk in M&A arbitrage and that should not be forgotten.
It should also be noted that this perspective is more of a hypothesis on what might happen and not a prediction. I will always try to change my views accordingly.
CASH POSITION
In light of all of this, we’re currently holding a significant amount of cash through our position in SGOV (0-3 month T-bills). Many of our investments in transactions have closed since April and the additional shares that we received as stock compensation have increased meaningfully in market price, causing us to realize some gains. Without a significant pickup in M&A activity, outside of the biotech-pharma-healthcare industry recently, our portfolio naturally moves towards more cash. When that happens, like today, we wait for attractive deal announcements. I have been comfortable holding this substantial amount of cash. There are enough deals for us to continue making money, but I won’t increase our risk in order to give us a short-term boost.
The cash we hold is also a solid protection against volatility in the markets going forward, while simultaneously giving us purchasing power to acquire new stakes in future announced deals. There is also the added benefit of protecting our investment against inflation by making us a direct recipient of the Treasury’s interest payments - effectively, the taxpayer is paying us until the government can figure out its finances.
In the meantime, if an opportunity presents itself or if there’s a high-quality transaction, I'll be sure to put the money to work. We’d be lucky to see a little more volatility in the markets with our current portfolio structure. We saw this play out a little bit during April, when we were able to get some great prices in some high-quality transactions.
On the flip side, if there aren’t enough attractive opportunities, then I’m comfortable letting our cash position build as deals close, dividends come in, and some is reinvested in typical M&A situations. I see this as an advantage versus our competitor funds that run on leverage and always try to be maxed out investing.
If you’d like to have a conversation, please feel free to reach out.
“Great things are done by a series of small things brought together.” – Van Gogh.
Please see the attached document for more details about our portfolio and fund, and all disclaimers.
Comments