Here's Why This Activist Hedge Fund Bought $555M Shares of Rocket Companies A Day After FTC Lawsuit

Activist hedge fund ValueAct Capital, led by Jeff Ubben, purchased 26.3 million shares of Rocket Companies (NYSE:RKT) on Oct. 1, a day after day the Federal Trade Commission (FTC) filed an antitrust lawsuit against its unit, Redfin, and Zillow (Nasdaq:ZG), alleging that the real estate platforms entered into an unlawful agreement to suppress competition in the online rental housing advertising market.

The FTC lawsuit highlighted a $100 million (£74 million) agreement between Redfin and Zillow, executed in February, under which Redfin would terminate its contracts with advertising customers to stop competing in the advertising market for multifamily properties. The agreement also required Redfin to syndicate only Zillow rental listings, giving the latter exclusive control over multifamily rental listings on Redfin's platforms. Redfin also downsized its workforce after the deal, and some of those employees were subsequently hired by Zillow.

Rocket Companies' shares have crashed by over 15% in the days following the FTC lawsuit. However, ValueAct's decision to buy $555 million (£413 million) worth of Rocket shares at an average price of $19.59 (£14.58) per share, despite a sustained stock price downtrend since then, could be linked to Rocket closing its $14.2 billion (£10.5 billion) all-stock acquisition of Mr Cooper Group on Oct. 1.

Rocket Companies estimated that Mr Cooper's acquisition will result in $100 million in new revenues and $400 million (£297 million) in cost savings. Combined with the Redfin acquisition early this year, Rocket now manages the entire home-buying journey from search to servicing.

Mr Cooper is the largest mortgage servicer in the country. Furthermore, the deal represents the biggest independent mortgage acquisition in US history. The combined entity now serves almost 10 million customers and manages a whopping $2.1 trillion (£1.5 trillion) in unpaid principal balance, representing one in every six mortgages in the US.

The Mr Cooper acquisition delivers its mortgage servicing operations to Rocket. Note that servicing generates recurring fee income that somewhat compensates for the volatility in the origination business. Moreover, mortgage servicing fosters ongoing customer relationships, which in turn facilitate cross-selling opportunities for refinancing, insurance, and personal loans, ultimately producing more predictable cash flows for investors. The deal adds around 150 million annual customer interactions to Rocket's database, expected to drive enhanced automation and personalisation across the platform.

'This transaction brings to a close a multi-year journey during which Mr Cooper grew to become the nation's largest servicer and produced enormous value for our clients, partners, stakeholders and investors. Now, by joining forces with Rocket, we start a new journey, which I believe offers an even bigger opportunity. Through the power of our platform and our people, we will create a more personalised experience that makes owning a home more attainable and easier to navigate,' said Mr Cooper CEO Jay Bray, who will join Rocket as the new CEO of Rocket Mortgage.

ValueAct Capital's half–a–trillion–dollar stock purchase could be due to the company's long-term potential following the major acquisition of Mr Cooper. However, activist hedge funds typically acquire a significant stake in publicly traded firms to influence their management and strategy. These funds strive to drive shareholder value through actions like enhancing governance, trimming costs, or changing leadership. Hedge funds like ValueAct Capital often take a long-term, active approach to investing, instead of passively holding shares, by creating catalysts for change through private discussions or public campaigns.

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