Taxes, Mergers and Mini-Tenders

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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Yahoo?!?

Yahoo will not be spinning off its Alibaba shares into a separate company. Instead, it will work on spinning itself off into a separate company, leaving the Alibaba shares behind:

The Board will now evaluate alternative transaction structures to separate the Alibaba stake, focusing specifically on a reverse of the previously announced spin transaction.

In the reverse spin off, Yahoo's assets and liabilities other than the Alibaba stake would be transferred to a newly formed company, the stock of which would be distributed pro rata to Yahoo shareholders resulting in two separate publicly-traded companies.

Everyone realizes that that's the same thing, right? Yahoo wanted to separate its actual business from its pile of Alibaba shares without paying taxes on those Alibaba shares. (Presumably, though not definitively, as preparation for one day selling those Alibaba shares back to Alibaba in a tax-efficient way.) It came up with a plan to do that. The Internal Revenue Service didn't like that plan, because it involved avoiding billions of dollars in taxes, and because it looked sort of chintzy. The market got nervous that the IRS would stop the plan. Yahoo's directors still "believe that the previously announced spin off would be tax free to Yahoo and its shareholders," but because they were "concerned about the market's perception of tax risk," they are changing course to another plan. The other plan will avoid the same billions of dollars in taxes, but will look a bit less chintzy. Perhaps the IRS will object to this one too. Probably it will just call it a victory and move on. It will be a victory against chintziness, but not, as far as I can tell, against tax avoidance.

Here is an interesting Victor Fleischer column arguing that "deal flow tends to be cyclical, and the tax phase is waning": Yahoo's abandonment of its tax-free spinoff of Alibaba is one sign of a decline in tax-driven dealmaking. The inversion wave might have peaked with Pfizer/Allergan, Congress is looking to stop tax-free REIT spinoffs, and now Yahoo's spinoff is dead. That seems plausible: There really has been a backlash against all the recent big deals by household-name companies that seem to have tax avoidance as a main aim, and there's reason to think that there might be fewer of those deals in the future. But Yahoo is still pursuing a deal that will let it avoid taxes on those Alibaba shares! Of course it is! Its whole purpose as a company is to avoid those taxes. Tax-driven dealmaking is not dead, at least for Yahoo. It is just ever so slightly more subtle.

DowPont.

Elsewhere in dealmaking, Dow Chemical and DuPont "are in advanced talks to merge" and then split up into three separate companies, "a common approach to mergers and acquisitions of late." That's not a tax trade, but just sort of a business rationalization trade along lines advocated by activists like Dan Loeb and Nelson Peltz. Kevin Allison calls the potential deal "an activist coup on Corporate America," and Dennis Berman reads it as a sign that "these two companies—absolute bedrock of U.S. industrial might—have given up faith in themselves and their futures." There is something to these critiques: Mashing two ancient $60 billion companies together to produce three new companies, for the sake of a few efficiency gains advocated by champions of shareholder value, is a bit uninspiring. We used to build things in this country, etc., not just optimize corporate structure to generate shareholder returns. But the fact that a merger isn't particularly romantic is not a real reason to oppose it. Efficiency is a good thing; it's just a boring good thing.

In other news, here's "How Dow Chemical Is Turning Sewage Into a Refreshing Drink":

There’s one lingering hitch: the gross-out factor. Even given the desperation of drought, drinking your own waste is nobody’s first choice. “Accepting recycled wastewater is kind of like being asked to wear Hitler’s sweater,” says Paul Rozin, a social psychologist at the University of Pennsylvania who’s researched consumer response to toilet-to-tap programs. “No matter how many times you clean the sweater, you just can’t take the Hitler out of it.”

Finance jobs.

On the one hand, "Morgan Stanley will eliminate 1,200 jobs, including 470 fixed-income and commodities traders and salespeople, as Wall Street’s outlook for its debt-markets businesses dims." Of course that makes sense: If you don't have as much business as you used to, you don't need as many people to do it. Bond traders bet their careers on the bond trading business, and as that business retrenches those bets won't pay off.

On the other hand this man seems cheerful:

Evercore Partners Inc. Chief Executive Officer Ralph Schlosstein said when he sees a banker with a proven track record, his instinct is to bring the dealmaker on board even if there isn’t a job opening.

"Great bankers will figure out a way to make money," Schlosstein said Tuesday during a conference hosted by Goldman Sachs Group Inc. “I once read a really great quote from Siegmund Warburg, and he was asked, how did he have so many great bankers at S.G. Warburg. And he said, 'It’s very simple. I look at a great banker the way I look at a nice tie. If I see it, I buy it whether I need it or not.'"

I suppose that's the difference between a boutique and a generalist bank? Or is it just that this is a huge year for mergers and acquisitions, and in tough times for M&A, Evercore will be discarding even the finest of its ties?

Mini-tenders.

A mini-tender is an odd little niche trade that takes advantage of market inefficiency and investor inattention. Someone -- it often seems to be a company called TRC Capital Corporation -- offers to buy a chunk of a company's shares at a fixed price. The chunk is less than 5 percent of the shares, to avoid Securities and Exchange Commission rules about fairness and disclosure for larger tender offers. And the offer price is less than the market price of the stock. Why would you sell shares for less than their market price? There is some mumbling about brokerage fees, but the real point of mini-tenders seems to be to catch unsuspecting investors who just see a tender offer and assume that they're getting a good price. Here is the SEC's warning:

Many investors who hear about mini-tender offers surrender their securities without investigating the offer, assuming that the price offered includes the premium usually present in larger, traditional tender offers. But they later learn that they cannot withdraw from the offer and may end up selling their securities at below-market prices.

Last month TRC launched a mini-tender on Kinder Morgan, Inc., which warned its shareholders not to tender into the offer. That offer was for $23.30 a share, below the market price at the time. But then Kinder Morgan's stock had a bit of an accident, and it closed yesterday at $15.72, making that $23.30 mini-tender an amazing deal for shareholders. Except:

TRC Capital Corporation (TRC) announced today that it has withdrawn its tender offer of US$23.30 per share in cash for up to 4,000,000 Class P Common Shares of Kinder Morgan, Inc. (NYSE: KMI). As of December 7, 2012, 34,919 shares of Kinder have been deposited to the offer.

Weak. When last we talked about mini-tenders, I said of TRC's president that "he's basically writing shareholders a free put on their stock for a month, which is generous of him." Apparently not.

What's Martin Shkreli up to?

Here is a delightful Bloomberg Businessweek feature about the Wu-Tang Clan and their intriguing/pretentious/Benjaminian plan to sell only a single copy of their latest album, "Once Upon a Time in Shaolin," at auction. They found a buyer at a price "in the millions," and then "spent months finalizing contracts and devising legal protections for a distinctive work whose value depends on its singularity." But the buyer turns out to have been Martin Shkreli, the hedge-funder/pharmaceutical exec infamous for acquiring a drug called Daraprim and raising its price by more than 5,000 percent. In hindsight, that seems sort of inevitable, but still embarrassing:

After learning that Bloomberg Businessweek was about to report that Shkreli had purchased the album, RZA e-mailed a statement: “The sale of Once Upon a Time in Shaolin was agreed upon in May, well before Martin Skhreli’s [sic] business practices came to light. We decided to give a significant portion of the proceeds to charity.”

Well, fine, charity. But the real chessboxing move here would be for Wu-Tang to turn around and sell the album for $1 to anyone who wants it. I assume the "legal protections" that Shkreli negotiated are supposed to prevent that, but maybe they could release a close substitute? Consider how Express Scripts and Imprimis teamed up to undercut Shkreli by offering a generic substitute for Daraprim for $1. If Wu-Tang pulled that off it would be the best business story of the year, and I would laugh and laugh and laugh and buy 10 copies. 

Holiday tips from JPMorgan.

Here (via Paul Kedrosky) is a "Holiday and Election Season Family Gathering Survival Guide" from Michael Cembalest, Chairman of Market and Investment Strategy at J.P. Morgan Asset Management:

If dinner table discussions become too contentious, put on some music that progressives and conservatives enjoy equally, according to Facebook’s Data Sciences group. Instead of the polarizing sounds of Beyoncé, Bob Marley and Neil Young on one side, and George Strait, Hank Williams Jr and the Zac Brown Band on the other, here are some artists that both groups like: Metallica, Taylor Swift, Aerosmith and Elvis. Actually, this is a rare example where I prefer the extremists to the moderates. 

At Christmas time, nothing brings people together across generational and political divides like the soothing music of Metallica, advises JPMorgan.

People are worried about bond market liquidity.

"Investment funds could pose a systemic risk to the financial system because of 'herding' behavior by investors, according to a senior U.K. regulator," and I am going to go ahead and call that a bond-market-liquidity worry even if he's also worried about stock funds. Elsewhere: "Why An Interest Rate Raise May Not Revive Bond Trading."

Me yesterday.

I wrote about Jesse Litvak, the former Jefferies bond trader (or salesman) whose fraud conviction was overturned yesterday. 

Things happen.

Wall Street Mounts Final Push to Kill Tougher U.S. Broker Rules. There's a new Satoshi Nakamoto candidate, according to Wired and Gizmodo, and Australian police raided his house for apparently unrelated reasons. SEC Approves Overstock.com S-3 Filing to Issue Shares Using Bitcoin Blockchain. It's All Gone Wrong for One of World's Biggest Mining Companies. Shares of BTG Pactual Fall After Ex-Leader Is Formally Charged. Gender equity in private equity. Twitter continues to try to destroy itself. Evergreen repos. Law Professors Ask Congress to Delay Changes in Debt Law. Hotels Think Millennials Don’t Use Desks—So They’re Making Rooms Desk-Free. The Top 10 Things Wall Street Was Only Pretending To Understand In 2015. "I’m not a corporate dress-in-a-suit-to-try-and-impress-people-with-my-organized-thought guy." Father-Son Duo Busted for Stealing $40,000 Worth of Chicken Wings.

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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