Levine on Wall Street: Massive Mergers and Mass Hysteria
More merger Monday.
Bloomberg's MA function tells me that 98 mergers and acquisitions were announced yesterday, including the acquisitions of five malls by Macerich and eight farms by Farmland Partners. But the headline is the $100 billion or so in two deals, Actavis/Allergan and Halliburton/Baker Hughes, which between them will probably bring in over $300 million in fees for their advisers, and that's not even counting the fees that Valeant and Pershing Square and Salix and Zoetis and the rest of the Allergan bit players have paid. Lawyers were busy too, with two Wachtell Lipton partners working on both deals. It's more of a mixed bag for investors: Allergan was a win/win/win/win, but Halliburton's deal seems to have destroyed value, with Halliburton losing almost $5 billion in market cap yesterday while Baker Hughes gained only $2.3 billion. That's partly driven by antitrust concerns, which also seems to be what drove Halliburton's comically oversized $3.5 billion reverse breakup fee. Here's a story on how Halliburton closed the deal with Baker Hughes, and here is Steven Davidoff Solomon on what it all means, including that "in the new shareholder-centric world, companies are struggling to justify a case against not just an activist but also a hostile bidder."
Credit sales and trading is rough.
Deutsche Bank is exiting most of its single-name credit-default swap business, which is quite striking. The way I envision credit investing is, you know, investors go long credit by buying bonds or writing CDS, or they go short credit by buying CDS, and those are pretty much the building blocks. If you're only buying and selling cash bonds, you are not exactly giving investors all the tools they need to trade credit. On the other hand I may just be stuck in 2011: Single-name CDS "shrank to less than $11 trillion from $32 trillion before the financial crisis," and is subject to rather more regulatory red tape, so perhaps it is both unloved by banks and unlamented by clients. Elsewhere Citigroup is cutting back on bond salesepeople who sell to smaller money managers, who presumably do lament the loss of service, but that is the problem with being a smaller money manager.
Do investors pay $600 billion a year in active management fees? Umm, maybe? That's what the New York Times (and Gawker) have reported, based on this State Street paper called "The Folklore of Finance." But State Street in turn bases the number on this Boston Consulting Group report on the asset management industry. BCG reports $68.7 trillion under management, and State Street "approximated" the $600 billion number "by multiplying assets under management ($68 tn) by estimated average fee levels, including advisory and consulting fees (1%) by percentage of mandates which are active (85%)."
But the BCG report also reports fees! It says right here that net revenues for asset managers average 29.4 basis points, implying about $200 billion of fees. Still a lot, sure, but State Street more than tripled that number without much explanation. Explanations are available -- BCG nets out distribution costs, which for mutual funds can be substantial, and State Street adds in advisory and consulting fees -- and State Street's number might well be right. But it is not derived with any particular science. And its acceptance everywhere feels a little, um, folkloristic.
Diversity fights bubbles.
Neil Irwin writes about a new paper finding that ethnically homogeneous traders "place undue trust in the decisions of others" and so "are more likely to spread others' errors by accepting inflated offers," while ethnically diverse markets tend to deflate bubbles. The paper -- whose lead author is Sheen S. Levine, so we've at least got a diversity of Levines -- is based on a stock-market-game simulation, and I suppose you should always be wary of those. Elsewhere: "We Spent A Day With The 18-Year-Old Who's Starting A Hedge Fund In His Dorm Room." And the Goldman Sachs Global Opportunities Fund lost some money on interest rates.
A dual-class share structure.
I guess a rule is, if you have a dual-class share structure with high-vote and low-vote stock, it's important to make sure that the high-vote stock has enough votes to prevent the low-vote stock from voting out the dual-class structure? Weird, but Rupert Murdoch and his family only control 39.4 percent of the voting power of News Corp.'s stock (versus 14 percent of the stock), so Southeastern Asset Management's efforts to reduce the Murdochs' voting power are actually rather suspenseful?
Some pump and dumps.
There is a depressing sameness to most of the pump-and-dump cases that the Securities and Exchange Commission brings. A guy has a company. It is purportedly in some momentarily exciting line of business. He issues fake press releases saying it's about to strike gold in that line of business. The stock price goes from like one cent a share to three cents a share. He sell some stock. He waits. The company moves into some entirely unrelated but newly momentarily exciting line of business. Fake press release, stock goes up, sell stock. Etc. Here's one about YesDTC, which distributed a "line of nutraceutical supplement products 'for the worldwide consumer market,'" was allegedly pumped and dumped, and then a week later "issued a press release announcing its introduction of an automobile engine conditioner called MotorBooster,'" why not, allegedly so it could be pumped and dumped again. And here's one about a longer-running alleged scheme involving John Babikian, whom connoisseurs will recognize as the Bugatti-driving fugitive promoter of AwesomePennyStocks. This alleged scam at least had a sense of humor about itself. Among the stocks the group promoted were Blast Applications (first a health services company, then an iPhone app developer), whose ticker BLAP made their touts sort of self-evidently goofy:
We are extremely confident that BLAP will continue its move north!! BLAP is sitting on a beautiful support level and we believe there are amazing gains to be made here. Traders flock to volume and strength and BLAP has both!!!
And then there is the handbag manufacturing company turned into a multimedia entertainment company with the name Mass Hysteria. If you are buying a stock called "Mass Hysteria" based on a tip you read on MonsterStox.com, there is no hope for you.
Get excited for the Senate hearing on commodities this week. What do those secret Fed tapes have to say about JPMorgan? What will Yahoo do about its Alibaba stake? Nick Dunbar on non-transparent ETFs and regulating financial innovation. From Russia with bonds. Carl Icahn thinks stocks might go down. Wing Chau lost his defamation lawsuit against my Bloomberg View colleague Michael Lewis. Strip-offs. Broker self-routing. Get packages delivered to your Volvo. Buy more bitcoins from the U.S. Marshals. Send money using Snapchat. ESPN will be broadcasting from The Game. A dungeonmaster.
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