Special Situations Newsletter: February 2025

Monthly newsletter covering two spotlight ideas, M&A activity, custom screens and more.

Not Out of the Woods Yet

There was a lot of optimism among arbitrageurs when the new administration took office in Washington D.C. with expectations of regulatory pressures easing on businesses. This optimism is well founded but we are not out of the woods just yet.

Lina Khan has stepped down as the Chair of the FTC but she is still a commissioner and only two out of the five current commissioners were appointed by Republicans. This will change over time as Lina Khan steps down as commissioner in the coming weeks.

There were 13 new M&A deals announced in January, including three deals that were over $10 billion in size. However this is actually a decline from January 2024 when 23 new deals were announced, including two that were over $10 billion in size.

One of those two deals was the acquisition of Juniper Networks (JNPR) by Hewlett Packard Enterprise (HPE) for $14.31 billion or $40 per share in cash. The deal ran into turbulence at the end of January when the DOJ decided to sue to block the deal.

Once Trump nominee Gail Slater gets senate confirmation to serve as the assistant attorney general in charge of the antitrust division of the DOJ, we might start to see some of these antitrust pressures ease. Following the news of the DOJ suing to block the Juniper - HPE deal, dropped about 2% to $34.57 and the spread on the deal widened to nearly 16%. This action was widely expected and the stock had already dropped from about $39 to a little over $35 before confirmation of the lawsuit.

As I outlined in our article Concentrated Merger Arbitrage Funds - Q1 2024 Update, six out of the seven concentrated arb funds I track had a position in Juniper Networks and five out of them added to their positions based on the last 13-F filed for Q3 2024. Juniper Networks was trading at about $30 per share before this deal was announced, implying the upside from here is a little over $5 per share and the downside is a little less than $5. The companies have decided to fight this lawsuit. HPE will have to pay Juniper Networks a $815 millon termination fee if the deal fails. This works out to 6.6% of Juniper’s enterprise value.

Considering how Juniper Networks’ competitors like Cisco (CSCO), SolarWinds (SWI) and Netgear (NTGR) have performed over the last year, the downside from here might be limited and any drop from forced selling if the deal breaks could be a short-term buying opportunity.

The news was not all bad on the M&A front. The $1.2 billion acquisition of Paragon 28 (FNA) by Zimmer Biomet (ZBH) for $13 per share in cash included a contingent value right (CVR) of up to $1 per share. The stock closed just below $13 the day after announcement and is still hovering close to that $13 level, providing for a potential free lottery ticket assuming the deal closes.

Other (nearly) free lottery tickets we have written about in the past include Tobira in 2016, Celgene in 2019, Biohaven in May 2022, Abiomed in November 2022, Chinook in June 2023, Mirati in October 2023, Fusion in March 2024 and Poseida in December 2024.