Andrew Bary

Chevron's merger with Hess is good news for Wall Street's takeover arbitrage community, which is having a favorable 2025 after two disappointing years.

The Hess deal, announced in late 2023, was one of the larger merger transactions at $46 billion and carried an attractive spread because of concern about Exxon Mobil's challenge to a key aspect of the deal. Many arbitragers had a sizable exposure to the transaction.

Chevron said earlier Friday that it's closing the transaction after an arbitrator ruled in its favor in the dispute with Exxon over Hess's crown jewel, a 30% stake in a huge oil deposit off the coast of Guyana.

Hess shares ended Thursday at nearly $149, a discount of $6 a share to the value of the Chevron all-stock offer of 1.025 of its shares for each Hess share. Chevron shares are down 0.9% at $150.04 in Friday trading while Hess shares did not trade. Arbitragers were able to pocket that spread with the deal closing Friday.

The discount had gotten as wide as $20 a share amid concern that Exxon would win the arbitration dispute and potentially scuttle the deal.

Exxon, the lead partner in the Guyana development, had argued that its partnership agreement with Hess gave it the ability to buy out Hess's stake if it merged with another company. Chevron argued otherwise, and an arbitrator agreed.

Hess was the largest holding in the Merger Fund (MERFX) at about 10%. The $2.4 billion fund was up over 5% this year through Thursday while the NYLI Merger Arbitrage exchange-traded fund $(MNA)$ is up about 7% in 2025.

In its monthly report for June, Merger Fund portfolio managers Roy Behren and Michael Shannon noted that the merger market has benefited from a number of completed transactions including deals involving targets Juniper Networks, ChampionX, Interpublic Group, and Ansys.

The managers wrote that the average annualized spread tightened in June to about 8%. They added that the fund had a number of positions with annualized spreads above 10%.

Merger arbitrage is one of the older alternative-investment strategies -- it has been practiced for decades, and Berkshire Hathaway CEO Warren Buffett has long dabbled in it. Participants buy shares in the merger target, and often sell short the shares of the acquiring company to lock in a spread, which they pocket if the deal closes. The risk is that the merger deal collapses due to antitrust or other reasons, resulting in a drop in the price of the merger target and losses to the arb community.

The nice thing about the Hess deal was that arbitragers didn't see a lot of downside in Hess stock if the Chevron deal had collapsed due to the strategic value of Hess's stake in the Guyana field. Chevron might have walked away from the deal if it lost the arbitration case.

Merger arbitragers try to earn a spread of several percentage points above the risk-free rate, now 4%. In 2024, that goal wasn't attained at the Merger Fund when it returned about 3%. So far this year, the fund and other merger arbs are comfortably ahead of targeted return.

The outlook for merger arbitrage looks good given a fairly active merger environment including a pick-up in deals from financial sponsors doing leveraged buyouts and decent deal spreads.

Write to Andrew Bary at andrew.bary@barrons.com

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July 18, 2025 16:16 ET (20:16 GMT)

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