Big Mergers and Investment Banker CEOs

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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Merger Monday.

I like this explanation of how Dell decided to buy EMC:

A potential new deal emerged when news reports last year speculated that EMC was in merger discussions with Dell. Though the reports were inaccurate, Mr. Dell and Egon Durban, a managing partner at Silver Lake who led the leveraged buyout in 2013, began to weigh the merits of buying the embattled data storage company.

So Dell wasn't thinking about buying EMC until it read in the paper that it was, and then said, hey, why not, let's do it. 

It's a weird deal! For one thing, it requires massively levering up a company that just went private in a leveraged buyout two years ago. You might think that raising another $50 billion in debt on an already-junk-rated company would be difficult, but no less a figure than "Jamie Dimon, JPMorgan’s chairman and chief executive officer, showed up at an EMC board meeting around Labor Day to assure the company that Dell would get the financing it needed to complete an acquisition." In fact, "Moody’s said on Monday that it was reviewing whether to upgrade the credit rating for Dell," emphasis added, which is sort of an unusual consequence of a massive leveraged acquisition.

Part of how Dell is keeping its cash costs (and debt load) down is by paying for a chunk of the deal in a new tracking stock in VMWare. EMC owns "approximately 81% of the economic interest in VMware," but VMWare is itself a public company, and Dell is ... more or less not acquiring it? Or it is acquiring EMC's VMWare stake, but paying for it mostly in shares of VMWare? Except that those shares are not actually shares of VMWare; they are shares of Dell that reference VMWare. This creates some merger-arbitrage pressure on VMWare's stock, and thus on the value of Dell's proposed deal, though with the merger arbitrage the "wrinkle is that the synthetic VMware stock might not be a perfect economic replacement for the real VMware stock." And the pressure on VMWare stock may not be solely from arbitrageurs: "The deal creates a complicated investment case for VMware," which will be controlled by Dell "even though it will retain only a 28% economic interest."

The tracking stock leads to another weird result: Dell went private hoping to escape the scrutiny and short-term focus of the public markets. But with the EMC deal, Dell will be public again, sort of, three times over:

The new VMware tracking stock will be only part of a litter of public market listings that will surround Dell. It is already planning an IPO for its security arm, and said that it would continue with EMC’s plan for a public listing of Pivotal, its cloud software division.

Here's the press release. Here's a list of advisers. Here are some analyst reactions.

Merger Tuesday.

In other merger news, "SABMiller PLC’s board has agreed on the key terms of a sweetened potential takeover offer by Anheuser-Busch InBev NV valuing it at £67.9 billion ($104.2 billion)." It's a big deal:

The takeover would be the largest in U.K. history, surpassing this year’s 47 billion-pound purchase of BG Group Plc by Royal Dutch Shell Plc. It would also be the biggest deal of 2015, already a bumper year for dealmaking, according to data compiled by Bloomberg.

The agreement was announced today, but Andrew Ross Sorkin counts it for yesterday and says that "There was more than $170 billion of deal-making unveiled on Monday." He is not happy about it though:

One Wall Street banker described Monday as feeling “a little bit like 1986 or maybe 2007.”

If that’s right, these deals do not portend good things, and will likely represent the end — or at least the beginning of the end — of a bull market.

Barclays.

When Antony Jenkins lost his job as chief executive officer of Barclays in July, I noted that "Amusingly the problem seems to be that Barclays needs to shrink its investment bank faster," but that for some reason "only an investment banker can do that." And now it seems that Jes Staley -- formerly head of the investment bank at JPMorgan, now at Blue Mountain Capital -- will be the next CEO, but at least one person familiar with the matter is puzzled:

The person said Barclays was braced for a dramatic change of approach compared with the regime led until the summer by retail banker Antony Jenkins.

“Winding down an investment bank with a big American investment banker in charge of the group is going to be challenging,” the person said.

The consensus seems to be that "challenging" is an understatement:

“This makes a capital call even more likely,” said Mr Barua. “The Street will also not like the implied move back to investment banking (the shareholder base will turn) though Jes, if appointed, is likely to play it down.”

And:

“Overall, while this removes one uncertainty regarding the future CEO we see it raising more uncertainties on the outlook which are likely to weigh on the shares,” said James Chappell, banks analyst at Berenberg. “Sadly, having hoped Barclays might emerge as a long term winner in the sector, we fear it is returning to its bad old ways.”

You see the structural problem here: Only someone who understands investment banking can safely navigate an exit from investment banking. But the only people who understand investment banking are, apparently, investment bankers. And, it turns out, they like investment banking!

Disclosure-only settlements.

The way merger lawsuits work is that after a deal is signed, a bunch of plaintiffs' lawyers race to sue, claiming that the merger was underpriced, the board breached its fiduciary duties, and the whole thing was corrupt. This might sometimes be true, but it can't be true in every merger, and the lawyers sue in virtually every merger. But then they sign a settlement with the company in which the company agrees to make a few extra disclosures about the deal and pay the lawyers a six-figure fee. The advantage for the company and the board is that the settlement binds all shareholders, so they get a release from future litigation if someone figures out that the deal was actually corrupt. The advantage for the lawyers is that they get the fee. There is no advantage for shareholders.

So this seems like a big deal: Last week Delaware Vice Chancellor J. Travis Laster rejected one of these "disclosure-only settlements" on the grounds that the lawyers didn't create value for the shareholders:

“We’ve reached a point where we have to acknowledge that settling for disclosures only has created a real, systemic problem,” Mr. Laster said. “We’ve all talked about it for a couple years. When you get the sue-on-every-deal phenomenon, it is a problem.”

The deal at issue here was signed in March, "seven lawsuits were ultimately filed," and they were settled in April for some disclosures and a six-figure fee. You can see why the court was unimpressed.  

Kids these days.

Here is a story about children who day-trade that I found sort of demoralizing, but it's not like I was doing anything all that great when I was 15. Still here is a novel theory of the global financial crisis from a teen:

“I didn’t want to get involved with these professionals who thought they could do it better,” she said. “When 2008 happened, [people suffered] because they didn’t really think for themselves—when they were going to make these investments, they just had faith a professional could do it better.”

Sure yes by all means manage your own money by taking advice from a day-trading teen on Twitter. This is such an American idea -- that the best way to secure your financial future is to ignore the experts, eschew professional help, and day-trade options and futures yourself in the company of people you admire on social media -- but it also feels like a specifically teen idea: Young people think that they're invincible, even from market crashes. I also enjoyed the part about how these kids want to be "The Wolf of Wall Street," but understand that you're not supposed to say that. "While they said his actions were clearly wrong, they said they respected the success he achieved." Oh yes the success, sure.

Sports.

I love this story about how European soccer clubs keep being sponsored by companies that disappear or get raided for fraud. So Power8, a tech company, sponsored Espanyol in Spain and Everton in England, and:

Police in Taiwan now allege Power8 used the sponsorships to lure hundreds of investors in Asia into buying shares in the company before disappearing with their money. Emails to Power8 officials bounced back, and a message on its website says operations are temporarily suspended. Espanyol says Power8 is overdue on its sponsorship payments and has started legal action. An Everton spokesman declined to comment.

“The Power8 name was placed next to other big companies on the websites of the football clubs, so people thought it was another international brand,” said Houchih Kuo, a lawyer in Taiwan who is representing some of the investors. 

Remember: Just because an investment opportunity has been advertised somewhere, that doesn't make it legit! Even if it's been advertised in a soccer stadium!

Elsewhere in sports, apparently people who work at fantasy sports companies are good at fantasy sports? You could see the causation here going either way, though it does look a little suspicious.

Libor.

You get your pick of Libor trials this week: In London, "six brokers from Tullett Prebon, ICAP Plc and RP Martin Holdings Ltd." are on trial for Libor manipulation, and don't forget that they record your calls!

"Have you just done a 35 grand trade today or is that just gone in wrong?" Rogers, who hasn’t been charged with a crime, asked Cryan on the call that was played by prosecutors Monday.

"We did that yeah," Cryan replied in an almost whisper.

"Holy s---!" Rogers said, then asked Cryan where the payment came from.

"You don’t want to know," Cryan warned his boss.

"Oh don’t I?" Rogers replied. "All right I get you. I don’t want to know."

Great, great. Meanwhile in New York, "Two former Rabobank traders from Britain are set to become the first defendants to face trial in the United States on charges stemming from a global investigation into whether various banks sought to manipulate the interest rate known as Libor." The Rabobank traders' lawyers "intend to argue that Rabobank's Libor submissions were within the range of those of other banks and hence were not objectively false," and that, since the conduct took place in England, it is unfair for the traders to be charged in the U.S.

Elsewhere, here is the story of the U.K.'s gratuitously cruel decision to deport UBS rogue trader Kweku Adoboli to Ghana.

So long, Blackberry.

Here's a story about how JPMorgan is cutting expenses by assigning multiple employees to the same desk and reducing "the number of hotels it will approve for business trips." As disappearing perks go, both of those things are probably a bigger deal than requiring people to pay for their own phones. But, oh man, is this the end of an era:

The nation’s largest bank by assets is hoping to save tens of millions of dollars by eliminating support for the BlackBerry wireless devices next year and mandating that some employees pay for their own devices, BlackBerry or otherwise, according to people close to the bank.

People are worried about bond market liquidity.

As I've mentioned before, "bond market liquidity" worries come in two opposite flavors: People are worried about corporate bond market liquidity because there are too few buyers and sellers and it takes too long to trade, but they are worried about Treasury market liquidity because there are too many buyers and sellers and you can trade too fast. Nasdaq, though, seems to have figured out a solution to the second problem:

Nasdaq says a new offering will give investors the option of avoiding trading with high-speed firms, which can almost instantly detect heightened interest in a particular Treasury and change their orders accordingly. The pilot project, called Elect, will be part of the exchange operator’s eSpeed trading platform for buying and selling Treasurys. 

Of course one analyst says "I think it would inhibit liquidity more than anything else," but remember that since both more trading and less trading can count as "inhibiting liquidity," that will always be true.

Elsewhere in bonds: "Credit-rating firms are downgrading more U.S. companies than at any other time since the financial crisis, and measures of debt relative to cash flow are rising."

Me recently.

On Thursday I wrote about Hillary Clinton's proposed tax on high-frequency trading, and why high-frequency traders cancel so many orders. The answer is mostly that the world changes rapidly, and so traders have to change their orders rapidly, but that can sometimes be a problem. A reader e-mails:

A big problem arises from unintentional quote flickering. Say you're a market maker and you think fair is 10.001.  You need 1c of edge to really cover your costs of trading, so the best market you can make is, say, 9.99 x 10.02. Fair ticks down to 9.999; so you need to shift down to 9.98 x 10.01. Fair ticks back up; many quotes are generated when little has changed in the world. 

The problem is that if everyone is constantly changing their orders then that can overwhelm the system: Changing your mind is free to you, but imposes costs on the system generally. So some exchanges already have excessive messaging charges; Nasdaq charges traders for cancelling more than 99 percent of their orders. 

Elsewhere, here is Nathaniel Popper on Clinton's proposal, which he, like me, finds puzzling: High-frequency trading seems to have made the stock market cheaper for small investors, and there are "several other, less automated financial markets, where middlemen are taking significantly more money from ordinary investors on each trade." 

I also wrote on Thursday about Bill Gross's lawsuit against Pimco. Ronald Barusch is also skeptical. Also, I wrote on Wednesday about the Securities and Exchange Commission case against Blackstone for charging fees that the SEC didn't like, and here is a surprisingly long "list of investigations into fund fees."

Things happen.

Fortress Said to Plan Wind Down of Flagship Hedge Fund. Calpers to Propose Lowering Investment Target, Document Says. "A bankruptcy judge largely rejected a 'double-dip' bid by a former Lehman Brothers bond trader for an $83 million bonus he claimed he was owed following the investment bank’s 2008 collapse, with the judge calling his request 'pure nonsense.'" Switzerland Said to Impose 5% Leverage Ratio on Big Banks. Time to review the risk weights of assets: ECB Official. Why Angus Deaton Deserved the Economics Nobel Prize. "Firms in jurisdictions served by powerful representation on U.S. congressional committees that have Securities and Exchange Commission (SEC) oversight responsibilities are less likely to face regulatory scrutiny for financial misconduct." Bank Regulation as Vestigial Corporate Regulation. "So the post-scarcity economy is not utopian, it’s actually not that pleasant, this meritocracy of the Federation." Your taste for coffee could be a sign of sadism.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
Zara Kessler at zkessler@bloomberg.net