The Hedge Fund That Made a Killing Betting Against Lina Khan
Pentwater Capital predicted that FTC attempts to block big deals would fail
The efforts by Federal Trade Commission Chair Lina Khan to protect Main Street are inadvertently enriching some on Wall Street, generating outsize profits for Pentwater Capital Management and other large hedge funds that bet on merger deals.
For the past two years, Khan has pursued an aggressive strategy as head of President Biden’s antitrust agency, attempting to block proposed deals including Microsoft’s acquisition of videogame maker Activision Blizzard ATVI 1.70%increase; green up pointing triangle and Amgen’s AMGN -0.63%decrease; red down pointing triangle pursuit of drugmaker Horizon Therapeutics HZNP 0.10%increase; green up pointing triangle.
In both cases, the FTC’s intervention spooked investors and sent shares of the target companies swinging. This phenomenon complicated the playbook for a group of hedge funds whose main strategy relies on wagering that mergers and acquisitions will succeed or fail.
Yet for a handful of firms willing to stomach the volatility, the FTC’s antitrust efforts have yielded an unexpected windfall.
Their strategy? Betting big against Khan.
Florida-based Pentwater stands to be a large winner from the FTC’s recent failed bid to block the Amgen-Horizon deal. It built a stake of almost 7% in Horizon after the drugmaker began fielding takeover interest last year.
Pentwater is estimated to have scored around $100 million on its Horizon trade on paper, according to an analysis of the hedge fund’s public filings. It also holds stock valued at more than $1 billion in Activision and in Seagen SGEN 3.54%increase; green up pointing triangle, the biotech company that agreed to sell itself to Pfizer—and is betting that outstanding bids for each of them will ultimately survive FTC and other regulatory scrutiny and close successfully.
D.E. Shaw Group is also among the funds that stood their ground following the FTC lawsuit against Horizon. The New York-based firm steadily increased its position and currently holds more than $500 million in the shares, filings show. Other funds that bet on Horizon include Farallon Capital Management and HBK Capital Management, according to public filings.
“Because of the FTC’s lawsuit, we have had the ability to take something that would have made tens of millions of dollars and instead make many, many times that amount,” said Matt Halbower, Pentwater’s chief executive.
Halbower, a Harvard Law School graduate with a degree in electrical engineering from the Massachusetts Institute of Technology, launched Pentwater in 2007, after stints at hedge fund Citadel and the now-closed Deephaven Capital Management. His firm is named after Pentwater, Mich., on the shoreline of Lake Michigan, near where Halbower grew up and where he and his wife spent their honeymoon.
Pentwater last year scooped up shares of Twitter, now X, in a wager that Elon Musk would ultimately acquire the company, and it was a vocal opponent of Rio Tinto’s takeover of Turquoise Hill Resources, a Canadian miner.
Pentwater was also among the firms that committed to the private investment in public equity, or PIPE, raised to take former President Donald Trump’s social-media company public through a blank-check merger. (The deal hasn’t closed, however, and Pentwater ultimately hasn’t invested and likely won’t.)
Since its inception, Pentwater, which oversees close to $5 billion, has averaged a net return of more than 11% annually, according to a person familiar with the matter. By comparison, the HFRI Event-Driven Index generated an annualized net return of 4.47% from January 2007 through August 2023, according to research firm HFR.
Pentwater’s investment in Horizon started as it often does for M&A deals: The hedge fund spotted a report in The Wall Street Journal—in this case, a late-November article saying that the drug company was holding takeover talks. Halbower’s aim was simple: Pile in shares early, then profit if the acquisition closed and Horizon’s shares rose to their agreed-upon deal price.
From late November through mid-May, Pentwater purchased more than seven million shares in the drugmaker, constructing what Halbower said was his largest risk position at the time. But Halbower was also monitoring what he called a “difficult to predict regulator”—the FTC.
Aware that the agency had moved to block Microsoft’s acquisition of Activision, he bought bearish options contracts on Horizon’s stock, offering Pentwater protection on its position in case the FTC were to intervene.
The FTC’s lawsuit arrived on May 16. As other investors rushed for the exits, Horizon’s shares plunged nearly 20%. Pentwater’s options position offered some protection, while Halbower began reading the FTC’s lawsuit. His takeaway: Buy more shares.
“It was just clear from reading the complaint that the government wouldn’t be able to prove its case,” Halbower said. “I was very surprised that the FTC would bring such a weak case.”
In its lawsuit, the commission argued that Amgen could illegally bundle its products with Horizon’s medicines for thyroid eye disease and gout to entrench its dominance of the top-selling therapies.
Halbower believed the FTC argument was flawed because there was no precedent and because Amgen had told the agency that it wouldn’t bundle Horizon products. He added over two million shares at an average price of slightly more than $93 each following news of the FTC suit—and then kept buying.
Earlier this month, the FTC agreed to end its legal challenge of the deal as part of a proposed settlement with Amgen, paving the way for the company’s acquisition of Horizon to close as soon as next month.
Horizon’s shares finished Friday up 0.1% at $115.61—below Amgen’s proposed $116.50 per share price—offering more upside for Pentwater’s stake. Pentwater now owns more than 15 million shares in Horizon, according to regulatory filings compiled by research firm M&A Monitor.
The regulator defended its opposition to the Amgen-Horizon deal and the resulting settlement.
“The FTC got extensive, binding agreements on all the concerns we raised,” FTC spokesman Douglas Farrar said in an email. “The Amgen-Horizon settlement is a legal victory for the FTC but more importantly, a big win for Americans who need access to affordable medicine.”
The recent flurry of deals on Wall Street—including Cisco Systems’ $28 billion pact for security-software company Splunk and the $11.15 billion tie-up between Smurfit Kappa and paper-and-packaging peer WestRock—opens the prospect for new opportunities for investors who have endured a long stretch of sluggish M&A activity.
Halbower thinks the current windfall from FTC actions, however, will be short-lived.
The FTC is trying to change antitrust policy to give it more powers to block deals—and that, too, has created opportunities to make money, Halbower said. Next year’s presidential election campaign, though, probably means the regulator will need to rein in its current approach, he said.