WSJ Hedge Funds Bet Big on Overseas Tax Deals

Hedge Funds Bet Big on Overseas Tax Deals
Firms Wager Billions of Dollars on Potential Takeover Moves


Hedge funds are wagering billions of dollars on companies they believe will benefit from a wave of takeover deals designed to lower taxes for U.S. acquirers.
The boom in "inversion" deals, in which a U.S. firm buys a foreign company and moves overseas, has raised the ire of President Barack Obama, who has said the practice is "wrong." But many bankers and lawyers believe the trend could continue until at least the end of the year, potentially enabling hedge funds to make hefty profits.
Wall Street has long tried to guess which companies are likely to engage in takeovers, both acquiring companies and target firms, sometimes a lucrative game.
This time hedge funds are scouting for U.S. companies and the foreign firms they could target in a bid to reincorporate overseas to escape higher U.S. taxes.
Almost a dozen such transactions are pending valued at more than $100 billion, including Medtronic Inc.'s $42.9 billion acquisition of Irish medical-device maker Covidien PLC and AbbVie Inc.'s $54 billion acquisition of Dublin-based pharmaceutical company Shire PLC.
"It's very simple when the math works," said Dr. Jacob Gottlieb, founder of Visium Asset Management LP, a roughly $7 billion New York hedge-fund firm.
The companies have said these deals bring strategic as well as tax benefits.
At the hedge-fund firm that has historically focused on health-care stocks, Dr. Gottlieb said the rising interest in tax inversions has partly guided his stock picking for more than a year. In investor letters, Visium has credited positions in Actavis PLC and Endo International PLC, both of which moved to Ireland through inversion deals in the past year, as helping drive gains for the firm's funds this year. The firm's flagship fund gained 6% in the first half of the year, according to investor letters.
Such bets are becoming more complicated now, though, because this type of deal is under scrutiny by the White House as well as Congress. But despite President Obama's call to action, legislation appears unlikely to pass soon.
"The ability to do an inversion is not going to be out there forever," said Ted Chen, a portfolio manager at Water Island Capital LLC, whose funds bet on corporate mergers and other events.
And the deals may not pan out for other reasons. AstraZeneca PLC this year rejected as too low a $120 billion takeover bid from Pfizer Inc. that would have allowed Pfizer to reincorporate in the U.K. in the largest inversion deal ever.
Investing in merger trends "is difficult enough as it is," said Bob Cotter, who invests in hedge funds at Merritt Capital Investment Advisors LLC in Darien, Conn. "When you're counting purely and simply on an inversion, there's an element of risk there."
Still, managers including Lone Pine Capital LLC, Jana Partners LLC and Sachem Head Capital Management LP would profit from what is expected to be an increasing number of these deals for now.
About 50 have occurred during the past decade, but the pace has accelerated in the past couple of years, with a particular focus recently in the health-care sector.
A crop of likely inversion targets has outperformed the market over the past year.
Shares of the 23 Irish- and U.K.-domiciled health-care companies with market values of more than $500 million have risen 82% over the past 12 months, according to S&P Capital IQ, compared with a 17% rise in the S&P 500. Four of those companies have received takeover bids, and three—Shire, Covidien and Mallinckrodt PLC—have struck deals.
Yet as more investors have caught on to the trend, share prices are rising so much that the ability to make a handsome gain is diminishing.
"Every fund in New York is looking for stocks that could rise from inversions," said Mr. Chen. "It has become a mainstream thing."
The funds are betting they may profit in two ways. The stock of acquiring companies tend to get a bounce on the promise of future tax benefits. Also, buyers are paying big premiums to shareholders of target companies.
Event-driven hedge funds, which seek to profit from mergers and other corporate actions, were up on average more than 4% in the first half of the year, according to research firm HFR Inc., beating the performance of stock funds overall.
A favorite bet is Allegion PLC, an Ireland-based provider of security services, according to Goldman Sachs Group Inc. The company was more than one-third owned by hedge funds as of the latest tally, the firm said.
Other popular stocks include Actavis PLC and Forest Laboratories Inc., which agreed to merge this year in a deal that would allow New York-based Forest to pay corporate taxes in Ireland, Actavis's legal home.
Some hedge funds are directly urging companies to pursue inversion deals.
Jana, an activist hedge fund, has taken a $1 billion position in Walgreen Co. and along with other funds is pushing the company to move abroad as part of its planned acquisition of the rest of Alliance Boots GmbH, a European pharmacy chain. Doing so could cut Walgreen's effective tax rate by more than a third, analysts have said. Walgreen's shares are up about 28% this year and 14% since news broke of Jana's campaign, outperforming the S&P 500 over both periods.
Sachem Head, a $1.6 billion New York hedge fund run by a protégé of activist investor William Ackman, this year urged Helen of Troy Ltd., a Bermuda-based maker of personal-care products, to seek a U.S. buyer.
Helen of Troy is "a potential candidate for an inversion transaction," Sachem Head founder Scott Ferguson wrote in a public letter to the company's board. "Its offshore status could provide meaningful economic value" to potential merger partners.
Helen of Troy later acquired vitamin maker Healthy Directions LLC, but said the company would remain based in Maryland.
Lone Pine Capital, a Greenwich, Conn.-based firm that manages about $12 billion in hedge funds, in the first quarter bought $325 million of shares in Irish drug maker Jazz Pharmaceuticals PLC, securities filings show.
As one of the few remaining independent, midsize Irish drug companies, and boasting a stable of marketed drugs, Jazz has long been named by analysts and bankers as an inversion candidate. Representatives for Lone Pine and Jazz declined to comment.
Jazz's stock price has roughly doubled over the past year.

WSJ : Goldman Faces Record Payout in Mortgage Case

Goldman Faces Record Payout in Mortgage Case
Bank in Talks With Regulator for Settlement of $800 Million to $1.25 Billion

Goldman Sachs Group Inc. GS -0.49% may soon face the largest legal payout in its 140-plus years.

The New York investment bank has held settlement talks in recent months with the Federal Housing Finance Agency, a U.S. regulator that oversees Fannie Mae FNMA +0.24% and Freddie Mac, FMCC +0.24% according to people familiar with the negotiations. A deal to resolve an FHFA lawsuit against Goldman over crisis-era mortgage securities could eventually cost the firm in the range of $800 million to $1.25 billion, according to people familiar with the matter.

While no accord is imminent, a settlement would underline how Wall Street is still paying for its role in the mortgage market nearly a decade ago, in the run-up to the financial crisis. Citigroup C -0.12% recently reached a $7 billion settlement with the Department of Justice, acknowledging it had brushed aside warnings about loans it was packaging into securities and concealed that information from investors. J.P. Morgan Chase JPM -0.27% & Co. in November settled similar crisis-era issues for $13 billion, acknowledging it told investors the loans in securities it was selling complied with underwriting guidelines, when bank employees knew on a number of occasions that they didn't.

In Goldman's case, a payout of $800 million or more could easily eclipse the $550 million settlement the firm reached in 2010 with the Securities and Exchange Commission over its handling of a complex mortgage-linked product known as Abacus. That payout, part of a deal that included Goldman's admission that it made "a mistake" in its marketing of the security, remains the firm's largest legal penalty.

A trial over the FHFA suit is slated to begin in late September. Goldman and other firms are still fighting to have part of the case thrown out. The latest hearing on the issue was held Wednesday.

FHFA sued 18 banks in 2011, alleging they failed to adequately disclose risks on mortgage-backed securities they sold to Fannie Mae and Freddie Mac. By July, the regulator had settled with all but four of the firms. FHFA's settlements on the matter have extracted more than $15 billion from many of Goldman's competitors.

Bank of America BAC -0.19% agreed to pay $5.83 billion, while J.P. Morgan paid $4 billion as part of its bigger $13 billion settlement. And in what was Morgan Stanley's MS -0.48% largest legal expense stemming from the crisis, the Wall Street firm settled its FHFA suit in February for $1.25 billion. Bank of America and Morgan Stanley didn't admit or deny wrongdoing.

Lawyers say Goldman believes it researched the quality of the loans more vigorously than many of its peers. And the firm wasn't a big originator of home loans, though it actively packaged them into securities that were sold to investors, including Fannie and Freddie.

In recent weeks, Goldman and other financial firms asked a federal judge to throw out some of the government's claims, citing a recent Supreme Court decision.

In that case, the court ruled that people living near a former CTS Corp. CTS -1.28% electronics plant in North Carolina couldn't proceed with a lawsuit against the company claiming it contaminated the area with toxic chemicals because action was filed after a state time limit. At the time, CTS's lawyer said the company was pleased with the ruling and that it "will continue to work with the EPA to address the conditions at the site."

At the hearing on Wednesday, the banks argued that the Supreme Court decision made clear the suits against them came too late.

"The disagreement is between the [FHFA] and the Supreme Court," David Boies, a veteran litigator who is representing HSBC North America Holdings Inc., one of the other firms involved, said during the hearing. An HSBC spokesman declined to comment further.

FHFA lawyer Kathleen Sullivan argued in the hearing that the Supreme Court case had no bearing on the claims against the banks.

Both sides await a ruling on the motions from U.S. District Judge Denise Cote in Manhattan.

Some analysts characterized Mr. Boies's argument as a legal long shot.

Judge Cote has rejected similar arguments on statutes of limitation in another case over FHFA claims against a bank. The judge opened Wednesday's hearing by saying the defendants might face a steep task.

But, in light of its June ruling, the Supreme Court has also ordered a federal appeals court to review a separate mortgage-related suit.

A decision on that suit, expected this year, could provide leverage to either Goldman or the government as they consider settling ahead of trial, lawyers said.

The FHFA has been litigating against banks on behalf of the two mortgage-finance companies that collapsed during the financial crisis.

The U.S. Treasury in 2008 rescued Fannie and Freddie as mortgage losses mounted and placed them in conservatorship with the FHFA.

All told, the two received $187.5 billion in infusions to stay afloat. Now, the U.S. Treasury sweeps up most of the companies' profits; the companies have paid more than $200 billion to the Treasury to date.

NY Post : Overseas tax dodge taxing Obama’s patience

In his strongest plea yet to close a popular corporate-tax dodge, President Obama blasted US companies that shift their tax domiciles overseas — known as inversions — for “gaming the system.”
“If you’re simply changing your mailing address to avoid paying taxes, you’re really not doing right by the country,” the president said in a CNBC interview on Thursday.
Never mind the loopholes are “technically legal,” he continued, corporate America “also gets paid to be good corporate citizens.”
US corporations have pulled this switcheroo — where they combine with smaller companies in tax-friendly countries — 85 times since 1983, which adds up to an inconsequential three companies a year.
That it’s gaining steam, though, is evident from the nine inversion deals either pending or completed so far this year — deals effectively exporting such hallmarks of the US landscape as Chiquita and Walgreens.
When US drug giant Pfizer made an unsuccessful play in May for British rival AstraZeneca — mostly to ditch a 40 percent effective tax rate here and benefit from the UK’s 21 percent corporate rate — the trend erupted into a full-blown controversy.
“This kind of strategy undermines people’s confidence in how companies are thinking about their responsibilities to the country as a whole,” Obama said.
The president acknowledged, nonetheless, that it’ll take tax reform to halt inversion altogether.
“We need to lower corporate tax rates and close corporate loopholes,” he said, before promising his administration is “four-square behind” such measures.
“The main thing that’s holding us back is inaction by the federal government.”

NY Post : Zuckerberg richer than Google guys after stock rally

While Facebook and Google duke it out for Internet ad dominance, Facebook CEO Mark Zuckerberg has already beaten Google co-founders Sergey Brin and Larry Page in one key metric — net worth.
The 30-year-old Zuckerberg added $1.6 billion to his personal fortune on Thursday after the world’s largest social network closed at a record high, fueled by blowout second-quarter results.
The gains pushed his net worth on paper to $33.3 billion, catapulting Zuckerberg past Brin, 40, and Page, 41, as well as Amazon boss Jeff Bezos, 50, according to the Bloomberg Billionaires Index.
Zuckerberg is now the 16th-richest man in the world, while the Google founders occupy the 17th and 18th spots. Bezos checks in at No. 20 on the list.
The Menlo Park, California-based company recorded second-quarter sales that jumped 61 percent, to $2.91 billion — surpassing analysts’ average estimate of $2.81 billion — thanks to Facebook’s robust mobile ad business.
Facebook shares, which topped $75 on Friday, are trading at almost twice the $38 price set for its initial public offering two years ago.
The stock has soared 183 percent in the past 12 months, the biggest rally in the S&P’s 500 Index, while Google is up only 7.5 percent for the year.

>>> IBM : Reportedly has broken off talks to sell chip foundry unit to GlobalFou

Reportedly has broken off talks to sell chip foundry unit to GlobalFoundries; could not agree on terms - financial press 


**NOTES: 07/16: There is speculation that IBM transaction with GlobalFoundries may not proceed - Albany Business Review 
- In early June, it was reported that IBM was near a deal with GlobalFoundries for chip-making unit in a deal which could be worth around $1.0B (about half of IBM's expectations for $2B).

(BFW) Goldman’s GOAL: Downgrades Equities, Corporate Credit

--> could be the reason for the sell off on the close on European Markets.

Goldman’s GOAL: Downgrades Equities, Corporate Credit
2014-07-25 19:24:16.218 GMT


By Arie Shapira
July 25 (Bloomberg) -- Goldman, in Global Opportunity Asset
Locator (GOAL) note from global macro research team, downgrades
equities to neutral over 3 mos, sees slide in bonds leading to
temporary selloff in stocks.
* Downgrades corporate credit to underweight for 3 mos and 12
mos.; rising govt bond yields likely to “dominate” returns


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Scott Schnipper

RTR : Eni to revive Saipem sale plans

MILAN/LONDON, July 25 (Reuters) - The new management of Italy's Eni plans to press on with the sale of a controlling stake in oil services subsidiary Saipem so it can focus on the more lucrative business of finding oil and gas, sources said.
Former ENI CEO Paolo Scaroni had inked in plans to dispose of Saipem but they were put on hold when Italian Prime Minister Matteo Renzi drafted in new management to run the state-controlled oil giant.
Saipem became a liability for Eni last year when half its market value was wiped out by two profit warnings and a damaging investigation into alleged corruption in Algeria, which also engulfed Scaroni.
With oil and gas production compromised by conflict in Libya and unrest in Nigeria, along with project delays in Kashagan and Angola, Eni also needs to sell assets to fund increasingly costly upstream investments and maintain its dividend.
"Eni's new management is indeed ready to resume the sale of Saipem, though it first needs to cut its debt either via asset disposals or raising equity," a source close to the matter said.
Eni has a 43 percent stake in Saipem and fully consolidates it on its balance sheet, including 5.5 billion euros of debt. But it keeps it at arm's length and has no day-to-day influence over management because Saipem also works on some contracts awarded by Eni.
Claudio Descalzi, who took over the top spot at Eni in May, has yet to pronounce on plans for Saipem but is expected to flag his intentions at a strategy meeting next Thursday.
Descalzi was head of exploration and production (E&P) at Eni under Scaroni and nurtured in-house engineering skills that would go some way to make up for the loss of similar expertise if Saipem is sold off.
Saipem supplies engineering services, project management and construction services to oil and gas companies for both onshore and offshore projects and carries out drilling worldwide.
"Saipem has been under strategic review for a long while and Eni's new management is willing to go ahead," a second source familiar with the matter said.
"Options under review include a break-up of Saipem's distribution, production and transformation operations," the source said, adding that decisions about this might be taken in the second half of the year.
Eni declined to comment.
DEBT GUARANTEES
In May, Descalzi announced a new structure at Eni to help focus minds on growing the more lucrative exploration and production business, while turning round or downsizing other less profitable businesses such as refining.
In a recent report, HSBC said a sale of Saipem was likely but it might not be in the short term because of low valuations after last year's profit warnings and high debt levels.
"Saipem has historically benefitted from debt guarantees from Eni. We believe Saipem would need to be refinanced if it were to be floated as a stand-alone entity," HSBC said.
Saipem, whose debt-to-equity ratio stands at a hefty 60 percent or so, borrows through Eni, whose A rating is higher than Italy's. But people close to the matter said Eni was taking steps to get Saipem on an independent footing.
A banker who works on funding with Saipem told Reuters that Eni was already calling on lenders to negotiate debt guarantees directly with Saipem.
"They're slowly weaning Saipem off Eni's milk," he said.
A breakup of Saipem would allow the firm to cut its debt pile without tapping the market for new equity, which some bankers say would have to be in the order of 2 billion euros to make the company appetising.
"Previously there was discussion about selling the onshore drilling business which could be worth around 1 billion euros and could find buyers because it's a steady cash generator," a banker who had been privy to Scaroni's plans said.
He said another option the former CEO had been toying with was the issuance of a convertible bond by Saipem.
Saipem's onshore and offshore drilling business accounts for some 15 percent of the company's revenues which in 2013 stood at about 12 billion euros.
The company is feeling the pinch from lower investment by oil majors. This is making life harder for equipment and service suppliers worldwide.
Reports earlier this year said Norway's Seadrill was interested in buying Saipem's offshore drilling business while Subsea 7 was interested in a stake in Saipem.

(BFW) Club Med Board Deems Global Resorts Offer Superior to Gaillon

BFW 07/25 17:52 *CLUB MED BOARD RECOMMENDS HOLDERS SEEKING CASH TENDER SHARES
BN 07/25 17:51 *CLUB MED BOARD RECOMMENDS SHRHOLDERS SEEKING CASH TENDER SHARES
BN 07/25 17:50 *CLUB MED BOARD: GLOBAL RESORTS OFFER SUPERIOR TO GAILLON OFFER
BFW 07/25 17:49 *CLUB MED SAYS BOARD CONSIDERS GLOBAL RESORTS OFFER FAIR
BN 07/25 17:48 *CLUB MED: BOARD CONSIDERS GLOBAL RESORTS OFFER SUPERIOR
BN 07/25 17:47 *CLUB MED SAYS BOARD CONSIDERS GLOBAL RESORTS OFFER FAIR
Club Med Board Deems Global Resorts Offer Superior to Gaillon
2014-07-25 18:02:47.533 GMT


By Andrew Roberts
July 25 (Bloomberg) -- Club Med board considers Global
Resorts offer is in interests of shareholders, recommends those
seeking to receive cash immediately to offer their shares.
* Board comments in statement {NSN N9A3GOMEQTXC <GO>}.


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>>> US Close Dow -0,72% S&P -0,48% Nasdaq -0,50%

Closing Market Summary: Stocks Slump Amid Disappointing Earnings

The stock market capped the trading week with losses across the major averages. The S&P 500 fell 0.5% to surrender its weekly gain, while the Dow Jones Industrial Average (-0.7%) and Russell 2000 (-0.9%) underperformed. The two indices posted respective losses of 0.8% and 0.6% for the week. 

Equity indices were pressured from the get-go after several heavyweights disappointed the market with their earnings and/or guidance, which led to some broader profit-taking. After the opening slide was complete, the major averages began inching higher, but were knocked to fresh lows in short order when it was reported that European Council President Herman Van Rompuy suggested the next round of sanctions against Russia should target oil (but not gas) companies.

The retreat in equities signaled the presence of underlying concerns that a new round of economic sanctions could have a boomerang effect on the global economy. For its part, oil futures responded by spiking off their lows to end little changed at $102.10/bbl.

Eight of ten sectors finished in the red with the consumer discretionary space (-1.2%) at the bottom of the leaderboard. The sector, and Nasdaq Composite (-0.5%), were pressured by shares of Amazon.com (AMZN 324.01, -34.60), which fell 9.7% in reaction to a bottom-line miss and cautious guidance. Other retailers did not escape unscathed with the SPDR S&P Retail ETF (XRT 84.33, -1.00) sliding 1.2%.

Elsewhere among cyclical groups, the top-weighted S&P 500 sector—technology (-0.2%)—ended ahead of the broader market despite a 3.6% drop in Visa (V 214.77, -7.97). The payment processor reported better than expected earnings, but its guidance was a point of concern for investors.

Deeper in the tech sector, high-beta chipmakers displayed broad losses after Freescale Semiconductor (FSL 19.98, -2.11), Maxim Integrated (MXIM 29.38, -3.56), and KLA-Tencor (KLAC 71.60, -1.42) reported disappointing results. The trio lost between 1.9% and 10.8%, while the PHLX Semiconductor Index fell 2.0%.

Even though the tech sector finished ahead of the broader market, other heavily-weighted sectors like energy (-0.8%) and financials (-0.6%) prevented the S&P 500 from staging an afternoon recovery.

The financial sector settled just behind the S&P 500, which was fitting as both the economically-sensitive sector and the benchmark index ended the week unchanged. Insurer Chubb (CB 89.62, -3.14) was a notable underperformer, falling 3.4% in reaction to a lowered full-year outlook on the back of a disappointing second quarter and larger than expected insurance payouts.

Although the market ended near its lows, that was not the case for El Pollo Loco (LOCO 24.03, +9.03), which made its debut today. The newcomer soared 60.2% after its IPO priced at $15.00 per share and opened at $19.00.

Treasuries rallied into the early afternoon and the 10-yr note settled on its high with the benchmark yield down four basis points at 2.47%.

Participation was well below average with under 558 million shares changing hands at the NYSE, suggesting there was no ‘rush for the exits' taking place.

On the economic front, the durable orders report for June surpassed estimates (+0.7% versus consensus 0.3%), but shipments of goods declined 1.0%, which will be a negative for Q2 GDP.

Monday's data will be limited to the Pending Home Sales report for June (consensus -0.8%), which will be released at 10:00 ET.
  • S&P 500 +7.0% YTD 
  • Nasdaq Composite +6.5% YTD 
  • Dow Jones Industrial Average +2.3% YTD 
  • Russell 2000 -1.5% YTD