Four Stocks Trending on M&A Deals; Which Ones You Should Follow Hedge Funds Into?

Shares of Williams Companies Inc (NYSE:WMB), Energy Transfer Equity LP (NYSE:ETE), Baker Hughes Incorporated (NYSE:BHI), and Halliburton Company (NYSE:HAL) are off to a rocky start this week as they have opened in the red on Monday. The stocks of Energy Transfer Equity and Williams Companies are trading more than 8% and 9% lower, respectively, on the back of a $37.7-billion takeover deal, ending months of negotiations after it was reported last week that the two firms were in the final stages of talks. Meanwhile, Baker Hughes Incorporated and Halliburton Company, whose shares inched down by 1.83% and 2.59%, respectively, want to proceed with their proposed $35-billion merger, hoping to appease regulators into a favorable position, by divesting even more of their business units. With this in mind, let’s take a closer look at the both deals and see the hedge fund sentiment that surrounds the stocks in question.

We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular stock picks in real time since the end of August 2012. These stocks have returned 118% since then and outperformed the S&P500 Index by more than 60 percentage points (see more details here). That’s why we believe it is important to pay attention to hedge fund sentiment.

Williams Companies Inc (NYSE:WMB) shareholders will be given $43.50 per share either in cash or stock of Energy Transfer Equity LP (NYSE:ETE) affiliate’s Energy Transfer Corp. LP, a 4.6% premium over Williams’ share price on Friday. The deal includes the assumption of debt and other liabilities. Texan billionaire Kelcy Warren, who founded Energy Transfer, started courting Williams Companies nine months ago and his first offer was rebuffed in June when Williams said that the proposal undervalued the firm. Energy Transfer operates about 71,000 miles of pipelines that link energy facilities in the Gulf Coast, the Midwest and Texas. Meanwhile, Williams operates approximately 33,000 miles of pipelines with strong operations in the Midwest. Williams’ most prized pipeline is the Transco pipeline spanning over 10,000 miles and connecting Texas to New York City. The Transco pipeline is expected to become more valuable when it is connected to Energy Transfer’s pipelines.

While the deal is deemed as beneficial to both companies, hedge funds we track did not see Williams Companies Inc (NYSE:WMB) and Energy Transfer Equity LP (NYSE:ETE) in the same light in the second quarter. There were 26 more hedge funds which invested in Williams Companies in the second quarter compared to the first quarter, bringing the total number to 86. Furthermore, even though there was an over 13% increase of the Williams Companies’ stock, the total value of funds’ holdings increased by 60.68% to $10.64 billion, making hedge funds own just under 25% of the company at the end of June. Keith Meister’s Corvex Capital owned 41.68 million Williams Companies shares at the end of June. On the other hand, the number of hedge funds with long positions in Energy Transfer Equity fell by one during the second quarter to 33. The total value of their positions fell by 15% to $1.21 billion. The stock declined 1.26% in the three months that ended June 30 and hedge funds only owned 3.5% of all Energy Transfer Equity’s outstanding stock. Daniel S. Och’s OZ Management owned 8.12 million shares of Energy Transfer Equity shares at the end of June, 31% less than a quarter earlier.

Meanwhile, Baker Hughes Incorporated (NYSE:BHI) and Halliburton Company (NYSE:HAL) are also in the limelight today as the firms’ shares edged lower on news that they will be divesting more business units to help move their proposed merger forward, particularly to get approval from antitrust authorities. The companies said that they plan to sell Halliburton’s expandable hangers business and Baker Hughes’ core completions business, sand control business in the Gulf of Mexico, and offshore cementing businesses in Australia, Brazil, the Gulf of Mexico, Norway and the United Kingdom. Previously, Halliburton announced that it would sell its fixed cutter and roller cone drill bits, directional drilling, and logging while drilling and measurement while drilling units. The two firms said that the companies which are being sold produced $5.2 billion in revenues in 2013.

It should be noted, however, that hedge funds we track were bullish on both Baker Hughes Incorporated (NYSE:BHI) and Halliburton Company (NYSE:HAL) during the second quarter. The number of hedge funds long Baker Hughes increased by six to 73, and the value of their holdings went up by 8.30% to $4.59 billion, despite an almost 3% decline of the stock. This brings hedge fund ownership to over 17% of Baker Hughes by June 30. At the end of the second quarter, Jeffrey Ubben’s ValueAct Capital owned 23.25 million shares of Baker Hughes shares. Hedge funds liked Halliburton even more, as the number of investors in the company increased by nine in the second quarter to 69, while the total value of their holdings surged by 40.79% to $4.21 billion, despite a 1.85% decrease of the stock price. Hedge funds ended the second quarter owning 11.50% of all Halliburton shares. ValueAct was also Halliburton’s largest shareholder by the end of the second quarter, owning 37.52 million shares. ValueAct started amassing shares  of Halliburton in February to push for the merger with Baker Hughes.

Disclosure: none