Editor’s note: Porter turned today’s Daily Journal over to Distressed Investing lead analyst Marty Fridson, who looks at the Paramount Skydance-Warner Bros. Discovery merger. The deal was recently halted by a federal judge, leading to another round of share-price fluctuations for both companies. Marty views the merger from the perspective of the traders who work the deal along its long path to success or failure.

Here’s Marty…

If anything moves markets, it’s the tortuous path of a big-time merger – as most recently seen with the ongoing attempt by media and entertainment conglomerate Paramount Skydance (PSKY) to acquire the much-large media giant Warner Bros. Discovery (WBD).

When I worked in bond research at Salomon Brothers from 1981 to 1984, I often interacted with traders involved in the high-stakes business of risk arbitrage, also known as merger arbitrage. We called these traders “arbs.” I’ve been intrigued by that specialty ever since, further fueled by the evolution of the government’s antitrust regulation along the way.

In merger arbitrage, the action begins when Company A (the Acquirer) bids to take over Company B (the Target). This typically occurs at a substantial premium to the Target’s prevailing stock price. The Target’s shares jump higher on the news, but not all the way up to the Acquirer’s bid price. Investors know there’s a chance that the deal will get blocked by the antitrust authorities. In such a situation, the Target’s share price would tumble back toward its pre-merger-talk level. The “arbs” aim to profit from the fluctuations in Target stock’s price in response to changing perceptions of the probability that the deal will ultimately be consummated.

The months-long attempt by Paramount to acquire Warner Bros. highlights several fascinating aspects of merger arbitration. Only a few days ago, the deal looked solidly on track after being waved through by the Department Of Justice’s (“DOJ”) antitrust division. For a bit of context, this merger entails the $10 billion Paramount Skydance gobbling up the much-larger Warner Bros. for $110 billion, making it one of the largest media mergers and the largest all-cash transaction in corporate history. It would combine the legacy film studios with extensive assets like HBO Max and CNN.

But two days ago, on July 20, the proposed transaction hit a speed bump. U.S. District Judge Araceli Martínez-Olguín ordered a 14-day pause on the deal. Shares of WBD dropped nearly 4% and shares of PSKY also declined, falling 2%.

The judge’s ruling came in response to a lawsuit filed by the attorneys general (“AG”) of 12 states, who claimed that further consolidation in the entertainment industry would lead to higher prices for consumers.