Levine on Wall Street: Mergers and Manipulations

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Checking in with Valergan Square.

Is that a portmanteau too far? I'm a little sick of writing "Valeant and Pershing Square's efforts to buy Allergan." Anyway Allergan seems to be somewhat serious about selling itself to Actavis, thwarting those efforts. But here's a column called "Valeant Could Win Even If It Loses Allergan," pointing out that now that Valeant and Pershing Square have their team together they might as well buy Zoetis instead, which is almost as good. More than that though. Here's some rough math on Valeant's Allergan bid. Valeant and Pershing Square own about 28.9 million shares of Allergan stock, which they bought at an average price of about $129.28. Valeant's portion of that is about half a million shares; Pershing Square paid for the rest. Let's say Actavis buys Allergan for $200 a share, the low end of talk. Then Valeant will make about $40 million or so of trading profit on its shares, and Pershing Square will make about $2 billion. Pershing Square has promised to give Valeant 15 percent of its cut, or $300 million. So Valeant gets in effect a $340 million breakup fee for spurring Allergan into Actavis's arms. That's a bit over one-half of one percent of Allergan's equity value, versus a normal breakup fee in a signed deal of 3 to 4 percent. If Valeant ends up serving as a stalking horse for a sale of Allergan to Actavis -- making Allergan shareholders some $20 billion versus the pre-Valeant share price, or a 50+ percent return in under a year -- then a few hundred million dollars for Valeant seems like a pretty modest tip. Which is an argument in favor of Valeant and Pershing Square's toehold structure.

Checking in with FX rigging.

Well. The U.S. Justice Department has big plans for early next year, with FX-rigging cases against banks "followed by charges against individuals." There is also a Swiss criminal inquiry into individuals. I suppose we don't have the whole story from the FCA and CFTC settlements -- which are voluminous yet oddly light on details -- but as of right now my view of these FX riggers is that they're crooks, yes, but not exactly hardened criminals. I suspect that is not a distinction that too many people will make. The Swiss have also "directed UBS AG to use electronic platforms to perform at least 95 percent of its foreign exchange trades after finding that employees conspired to rig currency benchmarks," which is sort of a cool response, though I suppose you could always have a chat room where you conspire to manipulate that electronic platform. But it's a good reminder that when people complain about the evils of electronic trading of equities, the right answer is "compared to what?" It's not like non-electronic markets are less manipulated. Elsewhere, here is a funny story about why you should never communicate in writing about anything, in case the FX scandals didn't teach you that.

Checking in with the AIG trial.

How on earth is it still going on? I kind of stopped paying attention after the senior government officials testified, what feels like ages ago, but it sounds like it's pretty interesting these days:

The testimony has been entertaining at times. Asked if he was present at the AIG board meeting where the bailout was voted on, Mr. Studzinski answered: “What sort of advisor do you think I am? I was present in person. Oh, my God, shocking questions.”

Studzinski -- that is, Blackstone banker John Studzinski -- was not present in person in court (he was videotaped in London), giving you some sense of priorities. He was in charge of finding AIG $20 billion in non-bailout financing:

“You could argue among sane people” that the assignment was “in the category of fantasy,” he testified.

He said Blackstone had had “no ability to verify/analyze” exactly what kind of problems AIG had, both because of the time squeeze and shortcomings in AIG’s management-information system at the time -- “slightly somewhere between the abacus and some variation thereof,” he said.

Oh yeah that bailout was definitely too harsh. Elsewhere, remember that AIG has agreed to indemnify the government for damages in this lawsuit, so even if Greenberg wins he loses, sort of. And this is a few days old, but Yves Smith noticed a New York Fed e-mail saying that Morgan Stanley called Tim Geithner on September 19, 2008 to say "they can not open Monday." The e-mail continues that "we will definitely need to resolve both entities" -- Morgan Stanley and Goldman Sachs -- "in one way or another this weekend." That's "resolution" in the non-technical sense: The options included becoming bank holding companies themselves, and that's what they did. Still, crazy times.

Stopping shareholders from suing.

A Florida public company called Imperial Holdings has adopted a new bylaw that "restricts small shareholders from bringing class actions or derivatives suits"; you need at least consents from at least 3 percent of the stock to sue the company. From its press release:

The board has noticed a disturbing trend of lawsuits brought by shareholders with very small stakes in publicly traded companies against the companies, their directors and their officers, purportedly on behalf of a class of shareholders or on behalf of the company. These lawsuits often result in other shareholders receiving no meaningful benefit and indirectly incurring the cost of the plaintiff’s lawyer and the company’s lawyer.

Look, this sounds sort of mean, but they're right. Most of the time, when shareholders sue a public company, they're taking money from other innocent public shareholders and giving it to plaintiff's lawyers. You really ought to get some buy-in from the rest of the public shareholders before you do that.

Is high frequency trading rocket science?

I don't know, but an astrophysicist ran the numbers from Virtu's IPO filing and wrote a paper with some interesting findings, including that Virtu's one-way latency between Chicago and New Jersey is 4.7 milliseconds, beating the Spread Networks time recorded in "Flash Boys." He also computes that Virtu's expected profit in U.S. equities is around $0.0027 per share, and that those small expected values add up to a mildly, but consistently, profitable business:

At Virtu’s rate of equity trading, the model (taken at face value) indicates an effectively zero chance of having an unprofitable full day of trading. We can therefore conclude that Virtu’s single reported losing day (out of Nd = 1, 278 trading days from 2011-2014) resulted from either a technological or human-caused error.

Warren Buffett can afford tax lawyers.

I have no problem with this, but some people like getting exercised about it, so I'll point you to the fact that he's saving $1 billion of taxes by properly structuring his $4.7 billion acquisition of Duracell from Procter & Gamble:

For the third time in a year, the billionaire chairman of Berkshire Hathaway Inc. has structured a deal in which he buys businesses in exchange for stock that has appreciated. The transactions, called cash-rich split-offs, allow him to avoid capital gains taxes that would be incurred if he sold the shares in the open market.

Checking in with Herbalife.

A member of Herbalife's board of directors "is among 12 people charged in a years-old Brazilian embezzlement case that has never been mentioned in Herbalife public disclosures," so just another Thursday in the Herbalife battle. Dan McCrum has more.

Payday lending for businesses.

Here is the story of OnDeck capital. Here is a sample:

Near his office in October, over a lunch of pizza, calamari, and tequila shots, his brand-new BMW 6 Series parked outside, he describes how an OnDeck representative offered to pay thousands of dollars for every borrower he brought in. He could hardly believe it was legal to charge such high rates, until he learned that most states’ usury laws don’t apply to business loans. His salesmen, who spend their days cold-calling businesses to offer easy money, are a colorful lot. The list of Figueroa’s past and present employees includes a former hedge fund manager convicted of stock fraud and a recovering heroin addict on probation for a motel stickup gone bad. One new hire stopped coming to work after he robbed a bank.

Things happen.

Pimco pays well. Merrill Lynch brokers are eating meat again. Goldman is hiring programmers. Activists like to hel pick CEOs. Dan Loeb made a movie about Dow Chemical called "Broken Promises." Secure Investments wasn't. Lonestar Capital is shutting down. Rankings critiqued. Colin Powell Has a Hot Tub Room Decorated with Portraits of Himself. The Onion is for sale. "Ed Haines told The Post he didn't even realize he had been naked on the subway until he saw himself in the newspaper."

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matthew S Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Toby Harshaw at tharshaw@bloomberg.net