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Risky Business: M&A in Emerging Markets

Wall Street Journal MoneyBeat - 2 hours 34 min ago

Western companies may be underestimating the risks that come with making acquisitions in emerging markets, according to a recent survey by Deloitte Financial Advisory Services LLP.

Only 10.4% of the respondents say they are confident their companies will manage the risks associated with acquisitions in emerging markets well in the next 12 months, according to the poll of 1,300 financial professionals conducted last month.

“These are very challenging markets,” said Bill Pollard, a partner at Deloitte. “Companies are going into these markets keeping their fingers crossed.”

Despite concerns over emerging-market growth, companies from developed nations have been scouring emerging markets for deals. Western companies have made more than $750 billion worth of acquisitions in emerging markets over the past five years, according to Dealogic.

So-called compliance and integrity risks, such as corruption, money laundering and fraud, are among the biggest concerns facing Western companies. Yet only 27% of the respondents say their organizations conduct compliance and integrity risk due diligence before the deals are closed.

“These risks have a high likelihood of existing in emerging markets,” but are often overlooked during traditional financial and tax due diligence, Mr. Pollard said.

Some Western companies tend to overlook these risks when they’re trying to beat their competition to gain a foothold in a certain emerging market.

“The lack of understanding of some of the cultural and business risks that exist in emerging markets provides Western companies with a false sense of security about the challenges in those particular geographies,” he said.

Categories: Transactions

Bitcoin Entrepreneur Charlie Shrem Reports to Prison

Wall Street Journal MoneyBeat - 3 hours 14 min ago

Charlie Shrem’s new home doesn’t accept bitcoin.

The one-time bitcoin entrepreneur reported to federal prison on Monday to serve a two-year sentence for his involvement in what prosecutors alleged was a drug scheme involving his virtual-currency exchange and an online black market.

Mr. Shrem, 25 years old, reported to the federal facility in Lewisburg, Pa., where he will serve his time in a minimum security camp that is adjacent to a high-security penitentiary, said Shawn Barlett, a prison spokesman. The camp holds 466 inmates, according to the U.S. Bureau of Prisons website.

Mr. Shrem was one of the virtual currency’s most prominent advocates at the time of his arrest, dealing a blow to the virtual currency’s reputation just as it was attracting interest from mainstream investors and merchants.

“Well, I’m off to prison now!” Mr. Shrem tweeted on Monday, adding “follow my twitter for tweets from the inside.”

But Mr. Barlett, the prison spokesman, said inmates don’t have access to Twitter or the internet, although they may receive restricted email.

As for the prison commissary, accounts are funded the old-fashioned way – via money order, Western Union or Moneygram, according to the prison website.

Mr. Shrem’s attorney couldn’t be reached for comment on his incarceration.

Launched in 2009, bitcoin is an electronic currency that is created on computers and traded between people who store it in digital wallets. It has also raised concerns among lawmakers and regulators due to its reputation for being used for illicit activity.

Mr. Shrem was the founder of BitInstant, a New York exchange that allows users to buy and sell bitcoin. He was arrested in early 2014 and indicted on charges of money-laundering and other crimes that carried a possible prison sentence of 25 years.

The New York native later pleaded guilty to aiding and abetting the operation of an unlicensed money-transmitting business.

Mr. Shrem continued to advocate for bitcoin after his arrest, even as he remained confined to his parents’ Brooklyn home.

Categories: Transactions

What Biotech Bubble? Specialty Pharma Stocks Pop Again on Merger Monday

Wall Street Journal MoneyBeat - 3 hours 56 min ago
Reuters

M&A has helped drive the rally in biotech stocks in the past few years. And while many investors have grown concerned that valuations are getting too lofty, pharmaceutical companies showed that they remain willing to pay up for their targets.

On Monday, Teva Pharmaceutical Industries Ltd. announced that it would acquire Auspex Pharmaceuticals Inc. for roughly $3.2 billion at a 42% premium to its closing price on Friday. Horizon Pharma PLC announced that it would purchase Hyperion Therapeutics for $955.7 million in cash, at a price just 7.6% premium over its closing price Friday but roughly 55% above its price one month ago.

The deals announced Monday show how M&A is both reshaping the pharmaceutical industry and rapidly responding to it. Midsize and large pharmaceutical companies have struggled to refill their product pipelines as many of their biggest cash-generating drugs come off patent.

Both Auspex and Hyperion develop so-called orphan drugs – medicines approved by the U.S. Federal and Drug Administration to treat rare diseases.  Companies that manufacture such drugs are able to charge six-figure annual prices for them and receive seven years of patent protection from the FDA compared to the typical five years for other drugs. In early March, AbbVie Inc. announced a $21 billion deal to buy Pharmacyclics , a company that manufactures orphan drugs. At the time, investors were concerned about the steep price paid by AbbVie.

Shares of a number of orphan-drug makers jumped Monday on all the deal making.  Atara Biotherapeutics, Inc., Concert Pharmaceuticals , Inc., and Retrophin , Inc. were up double digits. Hyperion’s stock traded above Horizon’s $46 offer price, indicating that investors are betting that another rival could come in with a higher offer.

Health care has been the busiest sector in M&A in 2015, accounting for roughly 15% of the overall volume, and pharmaceutical M&A has accounted for roughly 11% of the overall M&A volume, according to Dealogic.

“I see no reason to think that the activity in the first quarter of this year will not continue. As long as great drugs are being created there will be buyers,” said Stuart Cable, a partner at the law firm, Goodwin Procter, who advised Teva on its deal for Auspex.

Still investors have become concerned about the possibility of a bubble brewing in biotech amid the massive rally. Last week, biotech stocks sold off. On Monday, investors shook off such worries and back into sector, seemingly fearful of missing out on the next target — and a big stock pop.

It’s not only targets or potential targets that have been richly rewarded by investors. Buyers have too. Teva’s stock traded up more than 1% Monday, roughly in line with the market, yet Horizon’s spiked more than 15%.

Sterne Agee analyst Shibani Malhorta said Teva’s stock remains a buy in a research note as “further and potentially transformational deals are likely to provide a catalyst for TEVA shares.”

The stocks of two of the most aggressive buyers in the pharmaceutical industry — Valeant Pharmaceuticals International , Inc. and Actavis PLC — are up 50% and 45% respectively.

It’s also notable that two of the buyers Monday are headquartered outside of the U.S. Pharmaceutical companies with non-U.S. headquarters and lower tax rates have been aggressively buying up U.S. rivals.

Categories: Transactions

Consumers Cut GDP Down to Size

Wall Street Journal MoneyBeat - 4 hours 7 min ago

There are plenty of reasons why the economy has been weaker in the first quarter than forecasters expected, including tough weather, the strong dollar and a big drop in oil-related spending. But Americans’ reduced penchant for spending is the biggest culprit.

There was another round of cuts to economists’ gross-domestic-product estimates Monday after the Commerce Department reported that personal spending rose only 0.1% in February from a month earlier, and lowered its spending-growth figures for January as well. Barclays now sees GDP growing at a 1% annual rate in the first quarter; J.P. Morgan Chase said it is now thinking “close to 1%;” and Morgan Stanley has moved to 0.8%.

That’s not the sort of quarter people expected to see just a month ago. Forecasting firm Macroeconomic Advisers, for example, at the end of February saw GDP growing at a 2.4% rate. Now, it is looking for 0.9%.

 

The bulk of the change to economists’ GDP estimates has come about because even as the job market has performed better than expected and boosted incomes, consumer spending hasn’t responded. Indeed, Monday’s report showed that after-tax income in February was 1.1% higher than three months earlier. Since 2000, this size of increase has tended to be associated with a three-month increase in spending of about 1%. Yet spending was flat with where it was three months earlier.

The break between what’s happening with consumer spending and what’s happening with the job market is something economists don’t believe can continue — without more money coming into businesses’ tills, there are fewer incentives to keep hiring. That’s one reason why economists are forecasting that Friday’s employment report will show job gains moderated a bit in March, with the economy adding 248,000 new jobs, versus the average monthly gain of 322,000 over the previous four months.

If the drop-off in job gains doesn’t happen, economists will have an even harder time explaining what’s going on.

Categories: Transactions

Breakingviews: UnitedHealth’s $12.8 Billion Deal Could Reduce Further Consoldiation

New York Times DealBook - 5 hours 36 min ago
Catamaran agreement to be sold indicates that benefit managers no longer need to make merger offers themselves to stay alive.
Categories: Transactions

BSI Becomes First Swiss Bank to Settle Under D.O.J. Disclosure Program

New York Times DealBook - 5 hours 57 min ago
The private bank entered a nonprosecution agreement and agreed to pay $211 million resolve its role in helping wealthy Americans avoid taxes.
Categories: Transactions

U.S. Stocks Rally, for 20 Minutes

Wall Street Journal MoneyBeat - 5 hours 58 min ago
Associated Press

U.S. stocks are rallying sharply on Monday, following the direction set earlier by European and Asian stocks. The opening bell on Wall Street ushered in a stampede that last for…about 20 minutes. The S&P 500 rose to 2082 by 9:48 a.m., after closing at 2061 on Friday. It has continued rising into the afternoon, but further gains have been hard to come by.

Much of Monday’s rally smells of window-dressing, that habit of portfolio managers to buy up winning stocks at the end of a quarter to make their overall performance look better when the final numbers are tallied up and sent to clients. But Monday’s rally also reflects the erratic nature of the equities market this year.

“Some PMs did not want to not have certain rebounding groups when they report,” UBS’s Art Cashin wrote in a midday note. In other words, window dressing. But he also noted that the S&P 500 had risen right into technical resistance between 2083 and 2087, and indeed the index has vacillated in that range since this morning. That harkens back to a point we made last week, that the market is oscillating between highs and lows in what is largely a directionless trade.

Equities this year have been wildly erratic this year. The market has been down, then up, then down, then up and down again. It’s left the S&P 500 nearly flat on the year – it was up just 0.1% on the entire year as of Friday. Where recent years have generally seen the market building, with brief drops, this year has been different.

“Last week was illustrative,” BlackRock’s global chief investment strategist, Russ Koesterich, wrote in a research piece on Monday. “The rise in volatility had a predictable impact: Stocks that are most expensive and have been driven by momentum were the hardest hit.” Biotech is one example, he noted. The sector was up 20% this year, far outpacing the broader market, and it has gained about 240% since the beginning of 2012. Last week it got hammered, down 5%.

“Biotech is an obvious example of the momentum trade,” he wrote. But it’s not the only example. Utilities are not a sector that comes to mind when talking about momentum stocks, but it was the best performer in 2014, up around 30%. This year it’s down around 6%.

“Yield plays were some of the best-performing stocks last year,” Mr. Koesterich said. “While investors don’t typically think of these as ‘momentum’ names, their relative valuations are stretched and, like biotech, they have benefited from a steady stream of money into the space. These stocks—utilities, for example—warrant caution as well.”

Categories: Transactions

White Collar Watch: Lawmakers Focus on How S.E.C. Does Its Job

New York Times DealBook - 6 hours 45 min ago
Recently discussed legislation deals with insider trading, waivers from automatic bars and the revolving door between the S.E.C. and private industry.
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Terminal Value in Airport Retail

Wall Street Journal MoneyBeat - 7 hours 25 min ago

Airports are offering Dufry shareholders a good flight.

Dufry, which announced plans to take over rival World Duty Free Monday, wants to become the world’s largest airport retailer with 24% of the market share. If successful, the combination should yield reasonable cost savings helping support Dufry’s expansion plans, particularly in Asia, where hundreds of new airports are planned in the next decade.  It could also give the retailer more negotiating power for long-term contracts in airports worldwide.

While travel retail is correlated to the tourism industry and could prove volatile, there is also higher sales growth potential. A captive audience of travelers means annual duty-free sales growth has averaged about 12% at global airports between 2009 and 2013, according to Generation Research. Growth is expected to slow to around 8%, but this is still twice the average rate for luxury goods, estimates Exane BNP Paribas.

Dufry, which operates Hudson News, has notched up double-digit growth since 2012. Its shares climbed 8% Monday. More investors are also going to the airport to do their shopping.

Categories: Transactions

Swiss Investor Calls for Big Cut in Hedge Fund Fees

Wall Street Journal MoneyBeat - 7 hours 49 min ago
Geneva-based Unigestion thinks that if hedge fund managers are skillful, the fees it proposes make sense. 
Bloomberg News

One of Europe’s biggest hedge fund investors, Unigestion, is pushing hedge funds to scrap management fees in place of a bigger slice of profits as investors attempt to crack down on high charges.

Nicolas Rousselet, head of hedge funds at the $16.7 billion investor, which has $1.9 billion invested in hedge funds, said that a zero management fee in exchange for a higher performance fee of 25% was “a great fee structure”. Hedge funds typically charge a 2% management fee and a 20% performance fee although better performing, more established managers can charge much higher fees. These top managers tend to attract investors easily, often having to turn away new ones, and can dictate terms to investors.

Mr. Rousselet said Swiss-based Unigestion had been pushing for a “transformation of fees”, that his team had successfully negotiated lower management fees with some hedge fund managers last year, and in two instances secured rates of lower than 1%.

Among those were both newer managers and more established ones that wanted to work with Unigestion on a new share class or fund.

Mr. Rousselet said: “If [a hedge fund manager] truly believes in his ability to perform, he should take my deal.” However, he acknowledged that low fees could pose a business issue for the hedge fund manager and conceded that the main challenge for investors was that the best-performing funds were oversubscribed.

He said that this transformed fee structure encouraged hedge fund managers to take on more risk, but that hedge fund investors like Unigestion needed to ensure that funds were prepared to take some risks. The aggressive stance is the latest development in a long-running fee debate between hedge funds and investors.

Data released earlier this month by Deutsche Bank Global Prime Finance showed that the success rate of fee negotiations was only gradually improving: some 37% of investors that negotiated fees were successful in one out of every two negotiations. This rate has increased from 35% a year ago, and 29% the year before that.

Investors are usually able to negotiate fees if they can commit a larger investment, and agree to invest for the longer term.

Deutsche Bank said that the most successful negotiators interviewed for its survey, which spanned 435 investors who have $1.8 trillion worth of investments in hedge funds, had an average of $5.6 billion invested in hedge funds. They agreed to invest on average $70 million for at least one year.

Categories: Transactions

S.E.C. Accuses Financier Lynn Tilton of Defrauding Investors

New York Times DealBook - 7 hours 57 min ago
Regulators said Ms. Tilton and her firm breached their fiduciary duty to clients by failing to value properly the assets of distressed firms.
Categories: Transactions

Banks Find a Surprising Source of Profits

Wall Street Journal MoneyBeat - 8 hours 3 min ago

Earning season starts in a few weeks, and it’s expected to be a pretty dour one. Overall, S&P 500 corporate profits are expected to contract by 4.8%, according to FactSet, the first quarter without profit growth since 2009.

Six of the S&P 500′s 10 sectors are expected to see profits contract, with energy by far the most pulverized. But within the four that should see growth, financials should see profits rise 8.6%, and one reason for that is a surprising source of profit: mortgages.

Just a few months ago, mortgages were expected to a weak revenue stream for the banks, Heard on the Street columnist John Carney said this morning on the MoneyBeat show, given the widespread expectation that interest rates would be rising. That hasn’t happened, so far, so the mortgage market is proving more lively than originally expected.

It’s not a massive run-up, he noted, but it is more strength than expected, and the situation may remain in place for a longer stretch of 2015 than expected, he added.

Categories: Transactions

2 Federal Agents in Silk Road Case Face Charges of Stealing Money

New York Times DealBook - 8 hours 27 min ago
The agents, one with the Drug Enforcement Administration and one with the Secret Service, are expected to be arrested Monday on charges stemming from their roles in the investigation of the website.
Categories: Transactions

London Cutting Back on Banking Habit

Wall Street Journal MoneyBeat - 8 hours 49 min ago

London may be one of the world’s financial capitals, but, nowadays, Peru, Thailand and Indonesia are getting more out of their banking industries than the U.K. At least, that is, in terms of the contribution of profits to the economy.

The U.K. economy was more reliant on finance than most before the financial crisis and the collapse of profits in the sector has been more spectacular than elsewhere. Domestic U.K. bank profits were worth almost 4% of GDP in 2006; by 2016 they will be worth just 1%, according to Citigroup.

Amazingly, growth in Peru, Thailand and Indonesia means each country will have banks whose domestic profits make up a higher share of GDP in 2016 than in the U.K. Peru’s will be about 1.2%, Indonesia’s close to 1.5% and Thailand’s 2%. The financial sector in each country has grown dramatically from less than a 1% share in 2006.

Still, the developing market to watch in terms of growth of the financial sector is China. Profits there will hit 3% of GDP in 2016. With China now the world’s second-biggest economy, that’s a big number.

Categories: Transactions

Ben Bernanke Warns of Risks Tied To Early Rate Rise in His New Blog

Wall Street Journal MoneyBeat - 9 hours 1 min ago
Getty Images

Ben Bernanke’s Blog went live over at the Brookings Institution this morning with the former Federal Reserve chairman touching on both a timely topic and one that he is quite familiar with: interest rates.

Mr. Bernanke, who did not blog nor tweet during his time at the Fed, is now stepping out, delivering his message via a more casual platform. While at the helm of the Fed, Mr. Bernanke was very controlled in his remarks as investors and the markets parsed every utterance he said.

In his second blog post — his first was a brief introductory note — Mr. Bernanke cautions against a premature end of the central bank’s zero interest rate policy, ZIRP.

Mr. Bernanke defends his decision to keep interest rates extremely low during his tenure, saying increasing rates prematurely would have been “exactly the wrong thing to do” because the weak, yet recovering, economy would not have been able to swallow greater borrowing costs.

“A premature increase in interest rates engineered by the Fed would…have likely led after a short time to an economic slowdown and, consequently, lower returns on capital investments. The slowing economy in turn would have forced the Fed to capitulate and reduce market interest rates again.”

He highlights a number of occasions when central banks have acted too early, upping rates only to retract those increases when the economies worsened. “Ultimately, the best way to improve the returns attainable by savers was to do what the Fed actually did: keep rates low (closer to the low equilibrium rate), so that the economy could recover and more quickly reach the point of producing healthier investment returns,” commented Mr. Bernanke.

The previous Fed Chair addresses another criticism that the central bank is distorting markets and investment decisions by keeping interest rates “artificially low.” He argues the Fed can’t allow the markets to determine interest rates. “The best strategy for the Fed I can think of is to set rates at a level consistent with the healthy operation of the economy over the medium term, that is, at the (today, low) equilibrium rate,” he writes.

Mr. Bernanke argues the Fed’s easy-money policies are not the only reason interest rates are depressed. Instead, he says, real interest rates – those that matter most for the economy – are determined by a wide range of economic factors, including prospects for expansion. The central bank, of course, sets the threshold for the nominal short-term interest rate, but Mr. Bernanke claims the Fed’s ability to affect real rates of return, especially longer-term real rates is transitory and limited.

Not only does Mr. Bernanke have a new blog, he also has brand new twitter account, promoting his Brookings piece in his first tweet:

Introducing my new blog on economics, finance, and sometimes baseball: http://t.co/xQ5qTeB9UP

— Ben Bernanke (@benbernanke) March 30, 2015

 

Categories: Transactions

S.E.C. Accuses Financier Lynn Tilton of Defrauding Investors

New York Times DealBook - 9 hours 29 min ago
The S.E.C. said that she breached her fiduciary duty to investors by hiding the poor performance of loans underlying collateralized loan obligations.
Categories: Transactions

Why Investors Like the UnitedHealth Group-Catamaran Deal

Wall Street Journal MoneyBeat - 9 hours 43 min ago
Michael Nagle for The Wall Street Journal

Shares of the health insurance company UnitedHealth Group Inc. jumped more than 3% after the company announced a $12.8 billion all-cash deal for Catamaran Corp., a business that provides pharmacy benefits to businesses.

The deal combines the third and fourth largest-pharmacy benefit managers in the U.S.  That’s a big part of the why the market is cheering the deal. In the PBM space, size matters.

PBMs process prescriptions, usually for clients like insurance companies or corporations, and use their size to negotiate with drug makers and pharmacies. The greater the size of the company, the more power the PBMs have in such negotiations.

Sterne Agee analyst Brian Wright called the deal a win for companies and for consumers:

The acquisition makes tremendous strategic sense as the PBM business is a scale business and drives Optum’s revenue mix. We believe purchase scale efficiencies are the main driver behind the expected ’16 $0.30 in EPS accretion with administrative efficiencies likely to be passed along to customer, which should drive meaningful market share gains for the combined entity.

UnitedHealth paid a 27% premium for Catamaran and roughly 12 times its expected 2016 earnings before interest, taxes, depreciation and amortization. Several analysts called the price tag fair, adequate or reasonable. Few expect another competitor to swoop in and try to upend this deal.

Consolidation has been marching forward in the pharmacy-benefit managers, or PBMs space for almost a decade.

In February, Rite Aid Corp. inked its own, smaller deal for the pharmacy-benefit manager Envision Pharmaceutical Services for about $2 billion. In 2011, Express Scripts Inc. spent $29.1 billion in cash and stock to buy Medco Health Solutions Inc., a deal that united two of the largest U.S. pharmacy-benefit managers. In 2006 CVS Health Corp. agreed to buy pharmacy-benefit manager Caremark Rx Inc. for $21 billion.

Sheryl Skolnick, an analyst at Mizuho Securities, said Monday’s deal “put[s] the kibbosh” on a long-rumored tie-ujp between UnitedHealth and rival Humana Inc. “Thank goodness,” she adds. Humana shareholders don’t seem worried. Its stock is up 1.4% Monday.

Categories: Transactions

Why Private Equity Is Moving Into Ethiopia – At A Glance

Wall Street Journal MoneyBeat - 10 hours 5 min ago
In Ethiopia, a land devastated by famine 30 years ago, western private equity firms are starting to invest in roses, wine and power plants, as the African nation opens to trade with the world.
Categories: Transactions

Why Start a New Bank Today? It’s in the Name.

Wall Street Journal MoneyBeat - 10 hours 33 min ago

 

DARYL PEVETO FOR THE WALL STREET JOURNAL

In Monday’s paper we introduced Bank of Bird-in-Hand, the first U.S. lender to grow up in the era of Dodd-Frank.

While the U.S. used to see 100 or more new banks every year, this local lender in the middle of Amish country is the only firm to start since the regulatory law was passed in 2010. Regulators and bankers argue over the reasons for the drought.

But what made Bank of Bird-in-Hand’s backers decide to become modern pioneers of banking?

According to William O’Brien, the bank’s chief loan officer, the firm might not even have started were it not for a simple event: Another bank in the community changed its name.

Bank of Bird-in-Hand’s original investors, mostly local business owners, decided to apply for an FDIC charter at a meeting in a local woodworking shop in 2012, Mr. O’Brien said. One of the key issues that prompted the meeting, he said, was a change at a nearby branch of a lender called Hometown Heritage Bank. That branch had been bought by the larger National Penn Bancshares , Inc. almost 10 years earlier. But there was a new wrinkle: The branch had just changed the name on its sign to National Penn.

The business owners, who preferred a locally-based lender, took notice of the change and began discussing whether to start a bank of their own, Mr. O’Brien said.

On a recent afternoon, a middle-aged wagon maker rode up to the bank’s sole branch in a friend’s pick-up. The man, who is Amish and preferred to keep his name private, said he moved his checking account to Bank of Bird-in-Hand from a nearby office of Fulton Financial Corp., which he said seemed to lose a “personal touch” in recent years. “I was getting to be just a number,” at the larger firm, he said. Bank of Bird-in-Hand also refinanced his mortgage at a lower rate. Fulton Financial declined to comment.

Bank of Bird-in-Hand’s early success shows there’s still demand for local lenders in parts of the country. Whether or not it will be an outlier or the start of a trend will depend on whether there are other bank investor groups as motivated as the one that started Bank of Bird-in-Hand.

Categories: Transactions

R.B.S. Says Head of Its Corporate and Institutional Bank Will Leave

New York Times DealBook - 10 hours 37 min ago
Rory Cullinan was just named executive chairman of the corporate and institutional bank in February after six years at R.B.S.
Categories: Transactions

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