Ben Walsh

from Counterparties:

Buying a tax break

Ben Walsh
May 8, 2014 21:50 UTC

The UK tax rate on profits made from UK patents is just 10%. The nominal US corporate tax rate is 35%. Because of that, US pharmaceutical company Pfizer has spent the last four months trying to acquire London-based AstraZeneca, the maker of heartburn drug Nexium and cholesterol-lowering Crestor. The problem, of course, is that neither AstraZeneca’s board nor the British government seems particularly fond of the tax-avoidance play.

AstraZeneca seems to have the upper hand in negotiations. Pfizer’s drug pipeline is weak and has been for sometime: its two latest cancer drugs debuted to lackluster sales, and it hasn’t had a significant new drug released in a decade. To make matters worse, the patents on some of its biggest drugs are about to expire. The company also just reported a 15% drop in quarterly profits, which is never good, but is particularly bad in the middle of a partially stock-based acquisition attempt. Breakingviews’ Neil Unmackthinks that Pfizer will have to “further loosen the purse strings” in order for its offer to be accepted by AstraZeneca.

Indeed, this deal has been in the hopper for months, with Pfizer slowly increasing its offer. The first whiff of the plan was in January, when Pfizer says it submitted a “preliminary, non-binding indication of interest”, but AstraZeneca broke off talks. At the end of April, Pfizer tried again, and AstraZeneca rejected a new $98.9 billion offer. On Friday, AstraZeneca rejected an improved $106 billion bid. Now Pfizer is rumored to be preparing a new offer worth $113 billion, Reuters’ Sudip Kar-Gupta and Ben Hirschler report.

Victor Fleischer writes that the transaction is just the latest proposed inversion, where “a multinational company like Pfizer, based in New York, becomes an expatriate by acquiring a smaller foreign target”. FT Alphaville’s James Mackintosh says that “the deal only makes sense with the benefit of the UK tax regime”. UK politicians are trying their best to sound displeased with the idea of a putting a massive British (well, half Swedish) company, into foreign, tax-optimizing hands. However, they aren’t really taking concrete steps to stop the deal from happening, either.

Pfizer makes the case that the combined company will pay taxes in the UK and pledges to keep 20% of the combined company’s R&D force in the country. The company is, in essence, pitching itself to the UK as a corporate, taxpaying citizen as prepares to toss out its US passport. Britons, however, are less convinced. David Sainsbury says, Pfizer’s plan “would involve the closure of many of its operations and a substantial reduction of its research and development” in the UK, costing British pharma a lot of jobs. — Ben Walsh

from Counterparties:

Winning BID

Ben Walsh
May 6, 2014 21:21 UTC

Seven months ago, Dan Loeb sent an acerbic letter to Sotheby’s, disclosing he owned 9.3% of the auction house’s shares. The Third Point hedge-fund founder demanded several board seats, cost cutting, and the CEO’s resignation.

Now, after a bitter and expensive legal battle, Sotheby’s is giving Loeb pretty much what he asked for: the company is expanding its board from 12 to 15. The three new seats will be filled by Loeb, Harry Wilson (a restructuring expert), and Olivier Reza (a former investment banker and jewelry expert). The company is dropping its poison pill, which limited Loeb to less than 10% ownership. In return, Loeb is dropping his lawsuitchallenging Sotheby’s plan. He also agreed to cap his ownership at 15% and let Sotheby’s CEO William Ruprecht stay in his job — at least for now.

The outcome makes law professor Steven Davidoff wonder why the company put up a fight against Loeb’s demands at all: “Did Sotheby’s really have to spend well over $10 million to fight off Daniel Loeb’s Third Point only to cave at the last minute to give Mr Loeb almost everything he demanded?” Davidoff cites FactSet data showing that activists win 60% of proxy contests that are voted on by shareholders. As a result, Davidoff says the best way for companies to deal with their demands is negotiate quickly, before things escalate.

from Counterparties:

Mr Markets: Remembering Gary Becker

Ben Walsh
May 5, 2014 21:44 UTC

Economist Gary Becker, the Nobel Laureate who embodied and helped define what it means to be a Chicago school economist, died on Sunday at age 83. He “was the most important social scientist in the past 50 years”, writes Justin Wolfers. No economist since Marx, Wolfers says, has been as influential in changing the way we think about the social sciences. Becker “had the audacity to suggest that virtually every aspect of human behavior was amenable to economic analysis”.

In his 1992 Nobel acceptance speech, Becker said he “tried to pry economists away from narrow assumptions about self interest. Behavior is driven by a much richer set of values and preferences”. Becker’s early work tackled the economics of discrimination during the civil rights movement, proving that discrimination can economically hurt both those discriminated against and those doing the discriminating. He later dug into the economics of family life, restaurant pricing, education, immigration, and organ donation. In other words, Becker was doing freakonomics before Steven Levitt was out of high school.

Tim Carmody said that “people sometimes talk about ‘neoliberalism’ as a kind of intellectual bogeyman. Gary Becker was the actual guy”. What that means, says Crooked Timber’s Keiran Healy, is that economics is not just a topic, “but rather an ‘approach to human behavior’”. Healy says the significance of that leap was recognized by none other than French theorist Michel Foucault. Becker changed economics from the study of exchange, Foucault said, into the study of the individual as an “entrepreneur of himself”. Healy says Foucault viewed Becker as following in the footsteps of Emile Durkheim, the founder of modern sociology. Becker’s work was something of a “general science of society”, according to fellow Chicago economist George Stigler.

from Counterparties:

Letting the sun shine in

Ben Walsh
May 1, 2014 21:26 UTC

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The market is finally doing clean energy a favor. Kyle Chayka writes in Pacific Standard that the price of solar energy has been “falling like a meteor over the past several years, even dipping below” some fossil fuels. Last year, solar energy was already as cheap as conventional sources in Germany, Italy, and Spain, achieving what the energy industry calls grid parity. This scares traditional utilities, the Washington Post’s Matt McFarlandwrites:

Advances in solar panels and battery storage will make it more realistic for consumers to dump their electric utility, and power their homes through solar energy that is stored in batteries for cloudy days.

Falling costs are the best hope for solar and wind energy. Electricity is a commodity – price points beat moral arguments. Fossil fuels receive huge government subsidiesthat aren’t like to go anywhere soon, and while significantly increasing the comparatively miniscule subsidies for renewable energy would help a lot, that’s unlikely in the near term.

from Counterparties:

BofA: Too big to fail a math test

Ben Walsh
Apr 29, 2014 21:45 UTC

Bank of America has joined Citi in the dubious group of banks who have failed the Fed’s stress test twice. The Federal Reserve announced yesterday that the bank would have to resubmit its capital plan due to incorrectly reported data.

While BofA made an accounting mistake, and a rather egregious one, the Fed also failed to spot the error the first time around. Ben White quotes an unnamed senior bank executive performing blame jujitsu: “Easy to blame BofA here but seems like some of the blame goes to the opaque design and implementation of stress testing by the Fed”.

Last month, the Fed approved Bank of America’s plan for a $4 billion share buyback and a $1.5 billion dividend increase. Now, after BofA found problems in its capital calculations, it is halting those plans and will submit a new plan to the Fed. The bank’s error was in calculating the value of a set of structured notes issued by Merrill Lynch in 2009. The WSJ’s Michael Rapoport explains the rule that tripped up BofA, called the “fair value option”:

from Counterparties:

Square’s dance

Ben Walsh
Apr 21, 2014 22:11 UTC

Five months ago, Square was talking to Goldman Sachs and Morgan Stanley about a 2014 IPO. Now the payments company is trying to sell itself before it runs out of cash. The WSJ reports that Google discussed purchasing the company, whose card reader plugs directly into mobile phones. Google’s interest in buying Square was reported earlier this month by Jessica Lessin. Apple and PayPal are also potential acquirers, according the WSJ and confirmed by Forbes.

Square issued a narrowly-worded denial, telling Mashable, “we are not, nor have we ever been in acquisition talks with Google... we have never seriously considered selling to anyone or been in any talks to do so”. TechCrunch gives a sense for the hairsplitting going on here, confirming that while Square met with Google, “none of the meetings the payments company had with Google amounted to actual acquisition talks, we’re told, just ‘a two minute meet and greet’”.

Jason Del Rey summarizes the amusing state of affairs: “The most-asked question, of course, is whether Square is for sale or not. And that answer depends on what you mean by for sale”. Del Rey says the answer is yes, if the price is $8 billion or more. (It was most recently valued at $5 billion.)

from Counterparties:

Ex-ecutive pay

Ben Walsh
Apr 17, 2014 21:43 UTC

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In January, fifteen months after he joined Yahoo, chief operating officer Henrique de Castro was firedSEC filings show that the company paid him $58 million to walk out the door, or around $130,000 per day of service, weekends included.

In a move unlikely to mollify critics, Yahoo’s filing showed that had the company’s stock not risen since de Castro joined the company, he would have exited with a mere $17 million. Bloomberg Businessweek’s Joshua Brustein says that de Castro “got fired at the perfect time”. The company’s shares rose more than two and a half times while he was there. All of that rise is attributable to the rise in the value of Yahoo’s stake in Alibaba.

Golden parachutes offend even Vladimir Putin’s corporate governance sensibilities. The good news is that, despite de Castro’s payout and former Time Warner Cable CEO Robert Marcus’ $80 million parachute, severance packages are on the decline, at least by one measure. Fortune’s Claire Zillman reports that a Thomson Reuters Journal of Compensation and Benefits study found that from 2007 to 2011, the number of randomly selected S&P 500 companies that paid three times salary in severance dropped from 58% to 38%. The number of companies paying two times salary as severance rose from 9% to 20% over the same time period.

from Counterparties:

Chart of the day: Goldman’s shrinking FICC

Ben Walsh
Apr 17, 2014 16:00 UTC

Goldman Sachs released its first-quarter earnings this morning. Reuters' Lauren LaCapra reports that profit was down 11% compared to last year and revenue from fixed income, currency, and commodities (FICC) was down 11% compared to last year. LaCapra writes that "since 2009 - when markets flourished briefly in the aftermath of the financial crisis," Goldman's FICC business has been declining steadily as a portion of its overall revenue.

Quartz's Mark DeCambre charts the post-crisis decline in FICC's contribution to Goldman's overall revenue. In the first quarter of 2014, FICC accounted for $2.85 billion, or 30%, of Goldman's $9.33 billion in total revenue.


Addressing FICC's performance on this morning's earnings call, CFO Harvey Schwartz said, "we don't look at it on a quarter by quarter basis. We look at it on a multi-quarter basis." Different businesses within the unit will be up some quarters and others will be down, so, Schwartz said, "if you are going to be in these businesses, you really need diversification."

from Counterparties:

The housing density is too damn low

Apr 16, 2014 21:11 UTC

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Your rent really is too damn high.

Kim-Mai Cutler has a long, detailed explainer on San Francisco’s real estate crisis inTechCrunch. To begin with, she says, there’s just not enough supply: “San Francisco has a roughly 35% homeownership rate. Then 172,000 units of the city’s 376,940 housing units are under rent control”, a number equal to a remarkable 75% of the city’s rental units. That doesn’t leave much for the rental market. As a result, any rents which can rise, will rise. (Marc Andreessen notes that tech has been driving up prices in the area for at least 30 years, and population boom cycles have been part of the city’s history since the Gold Rush.)

Tech companies keep creating jobs in San Francisco and Silicon Valley without building more housing to accommodate the extra workers. As computer programmers flood in to the existing housing stock, the working class is pushed out completely. A big part of this problem, says Ryan Avent, is San Francisco’s restrictive zoning requirements. The city’s longtime residents are very good at keeping new construction out of their backyard. “However altruistic they perceive their mission to be, the result is similar to what you'd get if fat cat industrialists lobbied the government to drive their competition out of business”, he writes.

While the tech industry (and San Francisco’s zoning laws) exacerbate the situation in California, it’s really part of a greater trend in urban housing affordability. Urban populations around the country, Cutler points out, have been rising since the 80’s. A report from the real estate website Zillow found that “nationally, renters are spending more of their income on rent than they have at any point in the past 30 years”, especially in urban centers. In quite a few cities, the average person has shot past the generally accepted 30% of income on rent guideline, and is now paying nearly 40% of what they make on housing.

from Counterparties:

Explanatory journalism

Ben Walsh
Apr 11, 2014 21:45 UTC

Something troubling is happening in the stock market. Not only are markets are down – the Nasdaq and the S&P 500 are down 3.1% and 2.6%, respectively, this week – but no one has come up with a convenient, compelling (and misleading) reason why. Never mind, says Matthew Klein, that US stocks are up 30% since the start of 2013. We need to know why they are down this week, as Barry Ritholz writes, because we crave meaning in a random world.

Perhaps it’s all tech stocks’ fault. They have, FT Alphaville’s Dan McCrum drolly commented, “become a little bit more modestly priced”. The Nasdaq is down 7% in the last month. Over the past two and a half months, Twitter, Facebook, Amazon, and Netflix are down 31%, 7%, 21%, and 16%, respectively.

Maybe biotech stocks are the culprit. They are down 4.5% in the last week, and 16.8% in the last month. But even analysts, people paid to draw conclusions from just about anything, aren’t sure: “Biotech Stocks' Rout Perplexes Analysts”, the WSJ said on Thursday. The article explains the problem: biotech specialists, who know a lot about specific companies, are bullish, while generalist investors, who think 36 times earnings is worrying, are bearish. But just a day earlier, on Wednesday, tech shares were ‘leading’ stocks higher, as “biotech stocks attracted buyers in search of bargains”.