Turning the Page: Why 2025 May Be the Year Merger Arbitrage Steps into the Spotlight

Strategic Resilience in 2024: Playing Defense to Win

"If you were to summarize it in one word, it would be defensive." That opening frame by moderator Picton Mahoney Asset Management’s Vice-President, Retail Sales, Taylor Duncan-Barr, Vice President,  perfectly captured the posture that defined 2024 for Picton Mahoney's arbitrage team. In a year when the Biden administration was at full stride in its antitrust enforcement and the courtroom became the battlefield for dealmaking, merger arbitrage success depended not on aggressive positioning but calculated restraint.

In recent webcasts^{1, 2} Picton Mahoney’s Merger Arbitrage portfolio managers, Craig Chilton and Tom Savage shared their review of 2024 and their views on the merger arbitrage landscape for 2025. We've done our best to capture the tone and the content of these high value webcasts here, and we urge you to tune in.

"Really, the story of the year was not taking a lot of risk in a year where it didn't pay to take a lot of risk," Savage explains. “We really differentiated merger arb managers last year by the things you didn’t own.”

Chilton highlighted multiple deal failures in Q4 alone—Capri-Tapestry, Albertsons-Kroger, and U.S. Steel-Nippon Steel—each halted by the FTC or DOJ, often with narrow or novel arguments. "Defense was definitely helpful there," Chilton says, noting their exposure to those deals was "de minimis."

Amid the headwinds, opportunities did emerge. Catalent's acquisition by Novo Holdings, despite initial market skepticism, proved profitable. "It was worry, worry, worry—and then all of a sudden, everything's fine," says Chilton. Their approach? Wait for weakness, enter with discipline, with an exposure to a long bond position separate from the common to manage volatility. The result: a high-conviction win in a tough environment.

Zooming out, the strategy delivered a smoother ride than traditional fixed income in recent years. "2022 was a challenging year for fixed income proxies. We still managed to put up positive numbers," Chilton reminds. As inflation spiked stock-bond correlations, merger arbitrage proved resilient.

Back to Business: A More Constructive Landscape in 2025

Looking ahead, the team sees 2025 as a turning point. The change in administration ushers in what Savage calls a "back to normal, back to pre-2020 framework." It's not about who’s coming in, he emphasizes. "It's more getting rid of the old guard."

Gone is the unpredictability of Lina Khan and Jonathan Kanter, replaced by nominees like Andrew Ferguson and Gail Slater, who signal a return to pragmatic, precedent-based merger enforcement. "One of Ferguson’s key items was to end the war on mergers," says Chilton, quoting leaked comments. "Many mergers are consumer enhancing in terms of efficiencies and adding value to the economy."

Still, they caution against complacency. Horizontal deals with heavy overlaps and transactions involving China or national security themes remain complex. "Business as usual doesn’t mean every deal is risk-free," Savage notes. But the path is clearer, and the team expects materially improved deal volume and more favourable regulatory outcomes.

As Savage shares, "One of the silver linings of the Trump administration is that there's been a change of leadership, and all signs point to a much clearer, more straightforward regulatory environment for our strategies." That shift was clearly visible in the Johnson & Johnson acquisition of Intracellular. "This is the type of thing that would have been tied up for a while in regulatory hell," Chilton observes. "But what we've seen was it was announced and closed in very short order."

Despite this regulatory thaw, deal flow hasn’t yet surged. "We're not seeing as many deals as we originally expected," Chilton admits. "We thought... we’d see a real unplugging of deal flow." The delay, he suggested, may be due to "the fog of war" from market turbulence and tariff policies.

Still, that uncertainty breeds opportunity. "We have had a bunch of deal spreads widen during this period," says Chilton. Savage added, "Being able to put money to work in a wider spread feels like we're getting paid more for the same risk that we were taking earlier." In their view, the current setup—temporary disruption paired with long-term tailwinds—may mark an inflection point for savvy allocators.

A Repriced Opportunity: Spreads and Setup

Where does the opportunity lie today? Chilton sees median deal spreads in the high single digits before leverage, or "400 basis points over short rates." But the key is that spreads, deal volume, and deal quality have all been moving in the right direction. “More deals, attractive spreads, and fewer deal breaks—that’s the formula for a stronger year.”

With riskier transactions sidelined and the core deal universe broadening, the team anticipates the ability to deploy more capital and modest leverage, both of which amplify return potential.

SPACs: The Quiet Rebuild

While the SPAC mania of 2020-2021 may be in the rearview, 2024 offered a subtle resurgence. Savage describes it as "a year for planting seeds," with a healthy level of new issuance but little excitement in terms of business combinations. Still, the strategy remains a strong diversifier.

New issues are yielding 50 to 200 basis points over risk-free rates, with improving terms and limited downside. Warrants, while "very depressed," are priced for pessimism. Rights-based structures, now more common, offer a cushion against failed combinations.

"We don't need 500 SPACs with $200 billion in capital," Savage adds. "We'd rather have fewer SPACs doing better deals."

Convertible Arbitrage: The New Leg of the Strategy

2024 also marked the introduction of convertible arbitrage to the strategy suite. As Chilton explains, it’s been a long time coming. "There’s not a lot of people in Canada that would do it or do it well," he noted.

The convert space brings a distinct return stream with a strong U.S. market and attractive entry pricing. “If you buy something in the new issue market, typically, it comes with a few extra points of cheapness.” The strategy is still being built out, but 2025 could be the year it adds meaningful lift.

Where It Fits: Strategic vs. Tactical Role

"A lot of the advisors that I work with utilize merger arb as a bond replacement," said Duncan-Barr. Chilton agrees. "Very similar risk reward profile to short-dated fixed income," but with key advantages: tax efficiency, portfolio diversification, and macro agnosticism.

"You don’t have to get rates right," Chilton emphasizes. “We tend to be completely agnostic to where short rates are and the direction of interest rates."

The positioning becomes even more attractive given what Duncan-Barr describes as the "played out, priced in, what's next" theme. As the appeal of GICs and high-rate savings accounts fades and rate cuts stall, merger arbitrage presents an appealing absolute return profile without duration risk.

This leads to a key insight: Merger arbitrage may not just be a strategic anchor—it may also be a timely tactical overweight. Chilton frames it succinctly: "We’ve got a catalyst sitting in front of us."

Additional Edge: Tax, Rate, and Inflation Insulation

When it comes to tax treatment, Savage points out that arbitrage strategies generally generate capital gains rather than interest income. While high turnover is a feature, distributions tend to mirror the strategy's return profile—taxed favourably relative to traditional fixed income.

And unlike most bond portfolios, the strategy is well-insulated from rate and inflation shocks. As Savage explains: “Merger spreads have been a spread over a risk-free rate. And as that risk-free rate adjusts, we’re investing in that new rate environment very quickly.”

Inflation? "We don’t spend a lot of time thinking about it." Returns are idiosyncratic and not correlated to macro variables.

Normal Never Looked So Good

If the past few years have felt anything but normal, that’s because they weren’t. COVID. Zero to 5% interest rates. The most aggressive antitrust enforcement in decades. A simultaneous stock and bond sell-off. But as Savage reminded listeners, the strategy kept delivering.

Looking ahead, "2025 feels like a pretty realistic target for us," he says. The combination of M&A tailwinds, new SPAC activity, and convertible arb potential could make it a breakout year.

Add in attractive spreads, smoother regulatory waters, and rate neutrality, and merger arbitrage may be exactly what investors need next. It’s an absolute return engine that doesn’t care about equity market froth or bond market whiplash. And right now, it’s priced to perform.

For those seeking a portfolio solution that meets this moment—not just strategic, but tactical—merger arbitrage deserves a serious look.

Footnotes:

1 "Our Merger Arbitrage Views 2024-2025 with Craig Chilton and Tom Savage." Mar. 2025.

2 "2025 Q1 Arbitrage View with Craig Chilton and Tom Savage." Apr. 2025.