Firms Wager Billions of Dollars on Potential Takeover Moves
Hedge Funds are wagering billions of dollars on companies they believe will benefit from a wave of takeover deals designed to lower taxes for U.S. acquirers.
The boom in "inversion" deals, in which a U.S. firm buys a foreign company and moves overseas, has raised the ire of President Barack Obama, who has said the practice is "wrong." But many bankers and lawyers believe the trend could continue until at least the end of the year, potentially enabling hedge funds to make hefty profits.
Wall Street has long tried to guess which companies are likely to engage in takeovers, both acquiring companies and target firms, sometimes a lucrative game.
This time hedge funds are scouting for U.S. companies and the foreign firms they could target in a bid to reincorporate overseas to escape higher U.S. taxes.
Almost a dozen such transactions are pending valued at more than $100 billion, including
"It's very simple when the math works," said Dr. Jacob Gottlieb, founder of Visium Asset Management LP, a roughly $7 billion New York hedge-fund firm.
The companies have said these deals bring strategic as well as tax benefits.
At the hedge-fund firm that has historically focused on health-care stocks, Dr. Gottlieb said the rising interest in tax inversions has partly guided his stock picking for more than a year. In investor letters, Visium has credited positions in ActavisACT -0.56% PLC and Endo InternationalENDP -1.17% PLC, both of which moved to Ireland through inversion deals in the past year, as helping drive gains for the firm's funds this year. The firm's flagship fund gained 6% in the first half of the year, according to investor letters.
Such bets are becoming more complicated now, though, because this type of deal is under scrutiny by the White House as well as Congress. But despite President Obama's call to action, legislation appears unlikely to pass soon.
"The ability to do an inversion is not going to be out there forever," said Ted Chen, a portfolio manager at Water Island Capital LLC, whose funds bet on corporate mergers and other events.
And the deals may not pan out for other reasons. AstraZenecaAZN.LN -0.73% PLC this year rejected as too low a $120 billion takeover bid from Pfizer Inc. PFE -0.49% that would have allowed Pfizer to reincorporate in the U.K. in the largest inversion deal ever.
Investing in merger trends "is difficult enough as it is," said Bob Cotter, who invests in hedge funds at Merritt Capital Investment Advisors LLC in Darien, Conn. "When you're counting purely and simply on an inversion, there's an element of risk there."
Still, managers including Lone Pine Capital LLC, Jana Partners LLC and Sachem Head Capital Management LP would profit from what is expected to be an increasing number of these deals for now.
About 50 have occurred during the past decade, but the pace has accelerated in the past couple of years, with a particular focus recently in the health-care sector.
A crop of likely inversion targets has outperformed the market over the past year.
Shares of the 23 Irish- and U.K.-domiciled health-care companies with market values of more than $500 million have risen 82% over the past 12 months, according to S&P Capital IQ, compared with a 17% rise in the S&P 500. Four of those companies have received takeover bids, and three—Shire, Covidien and MallinckrodtMNK -2.86% PLC—have struck deals.
Yet as more investors have caught on to the trend, share prices are rising so much that the ability to make a handsome gain is diminishing.
"Every fund in New York is looking for stocks that could rise from inversions," said Mr. Chen. "It has become a mainstream thing."
The funds are betting they may profit in two ways. The stock of acquiring companies tend to get a bounce on the promise of future tax benefits. Also, buyers are paying big premiums to shareholders of target companies.
Event-driven hedge funds, which seek to profit from mergers and other corporate actions, were up on average more than 4% in the first half of the year, according to research firm HFR Inc., beating the performance of stock funds overall.
Other popular stocks include Actavis PLC and Forest Laboratories Inc., which agreed to merge this year in a deal that would allow New York-based Forest to pay corporate taxes in Ireland, Actavis's legal home.
Some hedge funds are directly urging companies to pursue inversion deals.
Jana, an activist hedge fund, has taken a $1 billion position in Walgreen Co. WAG +0.29% and along with other funds is pushing the company to move abroad as part of its planned acquisition of the rest of Alliance Boots GmbH, a European pharmacy chain. Doing so could cut Walgreen's effective tax rate by more than a third, analysts have said. Walgreen's shares are up about 28% this year and 14% since news broke of Jana's campaign, outperforming the S&P 500 over both periods.
Sachem Head, a $1.6 billion New York hedge fund run by a protégé of activist investor William Ackman, this year urged Helen of Troy Ltd. HELE -0.30% , a Bermuda-based maker of personal-care products, to seek a U.S. buyer.
Helen of Troy is "a potential candidate for an inversion transaction," Sachem Head founder Scott Ferguson wrote in a public letter to the company's board. "Its offshore status could provide meaningful economic value" to potential merger partners.
Helen of Troy later acquired vitamin maker Healthy Directions LLC, but said the company would remain based in Maryland.
Lone Pine Capital, a Greenwich, Conn.-based firm that manages about $12 billion in hedge funds, in the first quarter bought $325 million of shares in Irish drug maker Jazz PharmaceuticalsJAZZ -0.57% PLC, securities filings show.
As one of the few remaining independent, midsize Irish drug companies, and boasting a stable of marketed drugs, Jazz has long been named by analysts and bankers as an inversion candidate. Representatives for Lone Pine and Jazz declined to comment.
Jazz's stock price has roughly doubled over the past year
M&A WAVE - "Double Irish With A Dutch Sandwich" Taxation
Back in October 2010 we presented an analysis by Bloomberg which showed not only that courtesy of not paying taxes at its statutory rate of 35% Google was adding about $100/share to its then stock price of $607/share, but just how this was executed. Now, it is the turn of Apple, with its $110 billion in cash, to fall under the spotlight, with an extended expose in the NYT titled "How Apple Sidesteps Billions in Taxes" in which we learn that, shockingly, if you are at a table with only corporations sitting to your left and right, then you are the only person in the room paying taxes. Why - because global corporate tax "avoidance" schemes are not only perfectly legal, but they are actively encouraged, and in some cases form the backbone of a sovereign's (ahem Ireland) economic and even domestic policy, which just happens to be front and center in virtually every global corporate org chart permitting virtually the entire elimination of cash taxation at the corporate level.
As a reminder, here is what the Google tax avoidance structure looked like 2 years ago (and hasn't changed one bit since):
Now we find that Apple is also a material beneficiary of Irish tax creativity, which in turn has allowed the company to promptly raise a cash horde which may soon rival that of the Federal Reserve (and the Fed prints its money).
Apple was a pioneer of an accounting technique known as the “Double Irish With a Dutch Sandwich,” which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean. Today, that tactic is used by hundreds of other corporations — some of which directly imitated Apple’s methods, say accountants at those companies.
Without such tactics, Apple’s federal tax bill in the United States most likely would have been $2.4 billion higher last year, according to a recent study by a former Treasury Department economist, Martin A. Sullivan. As it stands, the company paid cash taxes of $3.3 billion around the world on its reported profits of $34.2 billion last year, a tax rate of 9.8 percent. (Apple does not disclose what portion of those payments was in the United States, or what portion is assigned to previous or future years.)
By comparison, Wal-Mart last year paid worldwide cash taxes of $5.9 billion on its booked profits of $24.4 billion, a tax rate of 24 percent, which is about average for non-tech companies.
"Double Irish" is so popular it even has its own Wikiedia entry:
Typically, the company arranges for the rights to exploit intellectual property outside the United States to be owned by an offshore company. This is achieved by entering into a cost sharing agreement
between the U.S. parent and the offshore company, in the terms of U.S.
transfer pricing rules. The offshore company continues to receive all of
the profits from exploitation of the rights outside the U.S., without
paying U.S. tax on the profits unless and until they are remitted to the
It is called "The Double Irish" because it requires two Irish
companies to complete the structure. The first Irish company is the
offshore company which owns the valuable non-U.S. rights. This company
is tax resident in a tax haven, such as Bermuda or the Cayman Islands.
Irish tax law provides that a company is tax resident where its central
management and control is located, not where it is incorporated, so
that it is possible for the first Irish company not to be tax resident
in Ireland. The first Irish company licenses the rights to a second
Irish company, which is tax resident in Ireland, in return for
substantial royalties or other fees. The second Irish company receives
income from exploitation of the asset in countries outside the U.S., but
its taxable profits are low because the royalties or fees paid to the
first Irish company are deductible expenses. The remaining profits are
taxed at the Irish rate of 12.5%.
For companies whose ultimate ownership is located in the United
States, the payments between the two related Irish companies might be non-tax-deferrableand subject to current taxation as Subpart F income under the Internal Revenue Service'sControlled Foreign Corporation
regulations if the structure is not set up properly. This is avoided by
organizing the second Irish company as a fully owned subsidiary of the
first Irish company resident in the tax haven, and then making an entity classification election
for the second Irish company to be disregarded as a separate entity
from its owner, the first Irish company. The payments between the two
Irish companies are then ignored for U.S. tax purposes.
The addition of a Dutch Sandwich to the Double Irish scheme further
reduces tax liabilities. Ireland does not levy withholding tax on
certain receipts from European Union
member states. Revenues from income of sales of the products shipped by
the second Irish company are first booked by a shell company in the Netherlands,
taking advantage of generous tax laws there. Funds needed for
production cost incurred in Ireland are transferred there, the remaining
profits are transferred to the first Irish company in Bermuda. If the
two Irish holding companies are thought of as "bread" and the
Netherlands company as "cheese", this scheme referred to as the "Dutch
Sandwich". The Irish authorities never see the full revenues and hence cannot tax them, even at the low Irish corporate tax rates. There are equivalent Luxembourgeois and Swiss sandwiches.
And so on: lots of ins, lots of outs, lots of what have yous - all quite technical, and best if left to your professional tax avoidance attorney. The end result is the following:
Or, in other words, profits increase, taxes stay flat or decline. Most importantly don't try this at home kids, because hefty jail time usually is usually imposed when an individual is caught engaging in comparable such tax "avoidance" schemes, or at least one is quite terrified to speak American (sic), and understandably so, in the middle of Zurich or Geneva.
Yet for those who want to cut to the chase and visualize just what some of the crowning achievements of globalization are, the entire Apple tax scheme is summarized below:
The complete narrative can be found over at the NYT but the bottom line (net of no taxes of course, for cash flow purposes that is... GAAP taxes always gets the 35% treatment of course) is simple: companies can get away with paying negligible taxes if they so desire.
At the end of the day the question of corporate taxation is more philosophical than anything: by now everyone knows that America is becoming progressively more insolvent courtesy of exponentially rising spending and a tax revenue base that now funds less than half of all US spending, in the process forcing the Treasury to issue ever more debt, which in turn also makes Fed monetization of debt inevitable.
All of this is occurring at a time relentless populist class warmongering focusing on the individual income tax level, and just what according to one or two people in the administration is deemed a fair level of being "rich."
Which begs two questions:
Since the only reason for the myth of corporate taxation is to fund the retainers of international tax avoidance lawyers, why not just do away entirely with corporate tax, period. If the justification for such pervasive global schemes (whereby hundreds of companies use them), is that double taxation is ultimately senseless, that's fine, but then at least equalize the playing field, because while an Apple may be able to afford the complicated tax loopholes that allow it to pay 10% tax, there are thousands of Small and Medium businesses, those that do generate domestic jobs, which can't afford this, and are thus stuck paying 3-4 times more relative taxes compared to the Apples and the Googles of the world, generating far less jobs than if they could retain triple the cash they do currently.
Probably more importantly, if America truly does not care about the foregone hundreds of billions in taxes associated with such ubiquitous corporate tax loopholes, then let's just drop the entire farce that America desperately needs more tax inflows (apparently not if corporate taxes are being paid only by the biggest suckers) and while at it, let's just kill individual level taxation as well, so nobody has to pay any taxes. After all at this point what does it matter: if the Fed is indirectly monetizing half of US deficit funding, why not just go all the way, and at least avoid the hypocritical undercurrent prevalent within this and all other US administrations
Probably the biggest lesson for the day, which also should be known to all, is that it is the corporations that run the
world, with governments and politicians merely placeholders to fool as many as possible
that the this thing called democracy exists, and that the voices of the people, or the only ones who pay taxes, are heard.
Finally this also means that the fundamental American creed can now be adjusted to better reflect the times to "No Representation without Double Irish with a Dutch Sandwich taxation."
“What the government is good at is collecting taxes, taking away your freedoms and killing people. It’s not good at much else.” —Author Tom Clancy
Call it what you will—taxes, penalties, fees, fines, regulations, tariffs, tickets, permits, surcharges, tolls, asset forfeitures, foreclosures, etc.—but the only word that truly describes the constant bilking of the American taxpayer by the government and its corporate partners is theft.
We’re operating in a topsy-turvy Sherwood Forest where instead of Robin Hood and his merry band of thieves stealing from the rich to feed the poor, you’ve got the government and its merry band of corporate thieves stealing from the poor to fatten the wallets of the rich. In this way, the poor get poorer and the rich get richer. All the while, the American Dream of peace, prosperity, and liberty has turned into a nightmare of endless wars, debilitating debt, and outright tyranny.
What Americans don’t seem to comprehend is that if the government can arbitrarily take away your property, without your having much say about it, you have no true rights. You’re nothing more than a serf or a slave.
In this way, the police state with all of its trappings—from surveillance cameras, militarized police, SWAT team raids, truancy and zero tolerance policies, asset forfeiture laws, privatized prisons and red light cameras to Sting Ray guns, fusion centers, drones, black boxes, hollow-point bullets, detention centers, speed traps and abundance of laws criminalizing otherwise legitimate conduct—is little more than a front for a high-dollar covert operation aimed at laundering as much money as possible through government agencies and into the bank accounts of corporations.
The rationalizations for the American police state are many. There’s the so-called threat of terrorism, the ongoing Drug War, the influx of illegal immigrants, the threat of civil unrest in the face of economic collapse, etc. However, these rationalizations are merely excuses for the growth of a government behemoth, one which works hand in hand with corporations to profit from a society kept under lockdown and in fear at all times.
Indeed, as I point out in my book A Government of Wolves: The Emerging American Police State, the real motivating factor behind erecting a police state is not to protect the people, but to further enrich the powerful. Consider the following costly line items, all part of the government’s so-called quest to keep us safe and fight terrorism while entrenching the police state, enriching the elite, and further shredding our constitutional rights:
$4.2 billion for militarized police. Almost 13,000 agencies in all 50 states and four U.S. territories participate in a military “recycling” program which allows the Defense Department to transfer surplus military hardware to local and state police. In 2012 alone, $546 million worth of military equipment was distributed to law enforcement agencies throughout the country.
$34 billion for police departments to add to their arsenals of weapons and equipment. Since President Obama took office, police departments across the country “have received tens of thousands of machine guns; nearly 200,000 ammunition magazines; thousands of pieces of camouflage and night-vision equipment; and hundreds of silencers, armored cars and aircraft.” While police departments like to frame the acquisition of military surplus as a money-saving method, in a twisted sort of double jeopardy, the taxpayer ends up footing a bigger bill. First, taxpayers are forced to pay millions of dollars for equipment which the Defense Department purchases from megacorporations only to abandon after a few years. Then taxpayers find themselves footing the bill to maintain the costly equipment once it has been acquired by the local police.
$6 billion in assets seized by the federal government in one year alone. Relying on the topsy-turvy legal theory that one’s property can not only be guilty of a crime but is also guilty until proven innocent, government agencies have eagerly cashed in on the civil asset forfeiture revenue scheme, which allows police to seize private property they “suspect” may be connected to criminal activity. Then whether or not any crime is actually proven to have taken place, the cops keeps the citizen’s property. Eighty percent of these asset forfeiture cases result in no charge against the property owner. Some states are actually considering expanding the use of asset forfeiture laws to include petty misdemeanors. This would mean that property could be seized in cases of minor crimes such as harassment, possession of small amounts of marijuana, and trespassing in a public park after dark.
$11,000 per hour for a SWAT team raid on a government dissident. The raid was carried out against Terry Porter, a Maryland resident who runs a welding business, is married with three kids, is outspoken about his views of the government, and has been labeled a prepper because he has an underground bunker and food supplies in case things turn apocalyptic. The raiding team included “150 Maryland State Police, FBI, State Fire Marshal’s bomb squad and County SWAT teams, complete with two police helicopters, two Bearcat ‘special response’ vehicles, mobile command posts, snipers, police dogs, bomb disposal truck, bomb sniffing robots and a huge excavator. They even brought in food trucks.”
$3.8 billion requested by the Obama administration to send more immigration judges to the southern border, build additional detention camps and add border patrol agents. Border Patrol agents are already allowed to search people’s homes, intimately probe their bodies, and rifle through their belongings, all without a warrant. As one journalist put it, “The surveillance apparatus is in your face. The high-powered cameras are pointed at you; the drones are above you; you’re stopped regularly at checkpoints and interrogated.” For example, an American citizen entering the U.S. from Mexico was subjected to a full-body cavity search in which she was subjected to a variety of invasive procedures, including an observed bowel movement and a CT scan, all because a drug dog jumped on her when she was going through border security. Physicians found no drugs hidden in her body.
$61 billion for the Department of Homeland Security, one of the most notoriously bloated government agencies ever created. The third largest federal agency behind the Departments of Veterans Affairs and Defense, the DHS—with its 240,000 full-time workers and sub-agencies—has been aptly dubbed a “runaway train.”
$80 billion spent on incarceration by the states and the federal government in 2010. While providing security, housing, food, medical care, etc., for six million Americans is a hardship for cash-strapped states, it’s a gold mine to profit-hungry corporations such as Corrections Corp of America and GEO Group, the leaders in the partnership corrections industry. Thus, with an eye toward increasing its bottom line, CCA has floated a proposal to prison officials in 48 states offering to buy and manage public prisons at a substantial cost savings to the states. In exchange, the prisons would have to contain at least 1,000 beds and states would have to maintain a 90% occupancy rate for at least 20 years. This has led to the phenomenon of overcriminalization of everyday activities, in which mundane activities such as growing vegetables in your yard or collecting rainwater on your property are criminalized, resulting in jail sentences for individuals who might otherwise have never seen the inside of a jail cell.
$6.4 billion a year for the Bureau of Prisons and$30,000 a year to house an inmate. There are over 3,000 people in America serving life sentences for non-violent crimes. These include theft of a jacket, siphoning gasoline from a truck, stealing tools, and attempting to cash a stolen check. Most of the non-violent offenses which triggered life sentences were drug crimes involving trace amounts of heroin and cocaine. One person imprisoned for life was merely a go-between for an undercover officer buying ten dollars’ worth of marijuana. California has more money devoted to its prison system than its system of education. State spending on incarceration is the fastest growing budget item besides Medicaid.
93 cents an hour for forced, prison labor in service to for-profit corporations such as Starbucks, Microsoft, Walmart, and Victoria’s Secret. What this forced labor scheme has created, indirectly or not, is a financial incentive for both the corporations and government agencies to keep the prisons full to capacity. A good portion of the 2 million prisoners in public facilities are forced to work for corporations, making products on the cheap, undermining free laborers, and increasing the bottom line for many of America’s most popular brands. “Prison labor reportedly produces 100 percent of military helmets, shirts, pants, tents, bags, canteens, and a variety of other equipment. Prison labor makes circuit boards for IBM, Texas Instruments, and Dell. Many McDonald's uniforms are sewn by inmates. Other corporations—Microsoft, Victoria's Secret, Boeing, Motorola, Compaq, Revlon, and Kmart—also benefit from prison labor.”
$2.6 million pocketed by Pennsylvania judges who were paid to jail youths and send them to private prison facilities. The judges, paid off by the Mid Atlantic Youth Service Corporation, which specializes in private prisons for juvenile offenders, had more than 5,000 kids come through their courtrooms and sent many of them to prison for petty crimes such as stealing DVDs from Wal-Mart and trespassing in vacant buildings.
$1.4 billion per year reportedly lost to truancy by California school districts, which receive government funding based on student attendance. The so-called “solution” to student absences from school has proven to be a financial windfall for cash-strapped schools, enabling them to rake in millions, fine parents up to $500 for each unexcused absence, with the potential for jail time, and has given rise to a whole new track in the criminal justice system devoted to creating new revenue streams for communities. For example, Eileen DiNino, a woman serving a two-day jail sentence for her children’s truancy violations, died while in custody. She is one of hundreds of people jailed in Pennsylvania over their inability to pay fines related to truancy, which include a variety of arbitrary fees meant to rack up money for the courts. For example, “[DiNino’s] bill included a laundry list of routine fees: $8 for a “judicial computer project”; $60 for Berks constables; $40 for “summary costs” for several court offices; and $10 for postage.” So even if one is charged with a $20 fine, they may end up finding themselves on the hook for $150 in court fees.
$84.9 million collected in one year by the District of Columbia as a result of tickets issued by speeding and traffic light cameras stationed around the city. Multiply that income hundreds of times over to account for the growing number of localities latching onto these revenue-generating, photo-enforced camera schemes, and you’ll understand why community governments and police agencies are lining up in droves to install them, despite reports of wide scale corruption by the companies operating the cameras. Although nine states have banned the cameras, they’re in 24 states already and rising.
$1.4 billion for fusion centers. These fusion centers, which represent the combined surveillance and intelligence efforts of federal, state and local law enforcement, have proven to be exercises in incompetence, often producing irrelevant, useless or inappropriate intelligence, while spending millions of dollars on “flat-screen televisions, sport utility vehicles, hidden cameras and other gadgets.”
In sum, the American police state is a multi-billion dollar boondoggle, meant to keep the property and the resources of the American people flowing into corrupt government agencies and their corporate partners. For those with any accounting ability, it’s clear that the total sum of the expenses being charged to the American taxpayer’s account by the government add up to only one thing: the loss of our freedoms. It’s time to seriously consider a plan to begin de-funding this beast and keeping our resources where they belong: in our communities, working for us
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - JULY 27th - Aug 2th, 2014
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