Posted on 5/01/2014 @ 12:00PM
Article from http://www.forbes.com/sites/nathanvardi/
Mallinckrodt is a pharmaceutical company specializing in pain treatment. Its name may sound foreign, but it traces back to the Mallinckrodt brothers, who founded the company in St. Louis in 1867. Most of the company’s sales take place in the U.S. and its main corporate office remains in Missouri. The one major foreign component of Mallinckrodt’s story is its legal domicile, which has been located for tax purposes in Ireland ever since it separated from Covidien and reemerged as an independent public company in 2013.
The biggest backers of Mallinckrodt are two of the nation’s most prominent hedge fund managers. The hedge fund of billionaire John Paulson, who became one of the nation’s richest men betting against subprime mortgages, is the biggest shareholder of Mallinckrodt with a 9.7% stake. Activist hedge fund manager Barry Rosenstein’s Jana Partners, which likes to impose its views on corporate management, is the third biggest shareholder in Mallinckrodt with a 5.69% stake.
In April, Mallinckrodt struck a deal to buy California-based Questcor Pharmaceuticals for $5.6 billion in cash and stock. Questcor is a controversial company that has dramatically increased the price of its key immune system drug. But Mallinckrodt’s Ireland domicile makes the deal compelling and paying taxes there will lower Questcor’s tax rate by 10%, according to Mallinckrodt.
Paulson is publicly pushing for the deal. Last week, Paulson’s hedge fund agreed to support the Mallinckrodt acquisition of Questcor with all the shares it owns in both companies in a deal that gives Paulson the ability to buy just under 20% of the company. Mallinckrodt’s Questcor acquisition comes on the heels of Mallinckrodt’s tax-driven $1.3 billion deal originally announced in February for San Diego-based Cadence Pharmaceuticals . “Mallinckrodt is an outstanding company with excellent management that is growing rapidly due to both internal and external factors,” Paulson & Co., said in a statement. “Competitive tax rates is just one of many factors that make the company an attractive investment.”
Prominent hedge funds are helping to fuel the wave of so-called inversion deals that are structured to lower tax rates by moving the domiciles of U.S. companies, particularly those operating in the pharmaceuticals sector, to foreign jurisdictions like Ireland. It’s pretty clear that Wall Street has cheered on the inversion trend, feasting on the investment banking fees generated by these deals, and that the markets even enjoy an increase in price of the stocks of both the seller and the buyer on the day the deals get announced. The business development offices of major U.S. pharmaceutical companies like Pfizer clearly know what they are doing. But hedge funds are playing a role in encouraging and even creating corporate deal machines that are engaging in tax-driven deals. For hedge funds, these deals are essentially a tax arbitrage trade. One place where these deals is less popular: Washington. The Obama Administration has said that “inversion transactions raise significant policy concerns because they facilitate the erosion of the U.S. tax base” and Pfizer’s recent $100 billion tax-lowering bid for AstraZeneca will only increase political attention.
But hedge funds are moving faster than Washington. Billionaire hedge fund manager William Ackman had never made a pharmaceutical investment before April. But last month his Pershing Square hedge fund made its biggest investment ever, taking a 10% stake in California-based Allergan. Ackman is making the $4 billion bet while working with Valeant, a company based in Canada whose senior executives work in New Jersey and has its tax-domicile in Barbados. Valeant has made a $45 billion bid that is driven by tax considerations to buy Allergan with Ackman.
Valeant itself is a hedge fund-created machine. ValueAct Capital Management, the activist hedge fund run by Jeffrey Ubben, has been a major shareholder for years and ValueAct’s Mason Morfit sits on the company’s board. Morfit even designed the highly-lucrative compensation package of Valeant CEO Michael Pearson, who has become a billionaire since he started running the company six years ago. When ValueAct got involved and Pearson started running the show, Valeant was based in California. Valeant then bought and folded the company into Canada’s Biovail to take advantage of Canada’s tax rules. Using Valeant’s lower tax structure, Pearson has done about 100 or so deals since 2008 and pushed Valeant’s stock up by some 800%.
Also in April, a group of high-profile hedge funds started to pressure Walgreen, America’s biggest pharmacy chain that is based in Illinois, to move to Europe for tax purposes. The Financial Times reported that activist hedge funds like Barry Rosenstein’s Jana Partners and Keith Meister’s Corvex Management, together with billionaire Dan Och’s Och-Ziff Capital Management hedge fund and Goldman Sachs, urged Walgreen’s senior management in a meeting in Paris to domicile its tax base in Europe as part of its $16 billion takeover of Alliance Boots, which is based in Switzerland.
Another major recent inversion story, Endo International, has been a den for so-called Tiger Cub hedge funds. John Griffin’s Blue Ridge Capital hedge fund owns 5% of the company. Other big Tiger Cub holders have been billionaire Stephen Mandel’s Lone Pine Capital and billionaire Andreas Halvorsen’s Viking Global Investors. A non-Tiger Cub owner of the stock is Jana Partners. The company was based in Pennsylvania, but moved its domicile to Ireland after agreeing in November to buy Canadian-based Paladin Labs for $1.6 billion. Halvorsen’s hedge fund sold its position in the company in the quarter when the deal was announced. There is no evidence Endo’s hedge fund investors did anything to support Endo’s decision to do an inversion deal, but they certainly benefited when the stock popped after the deal was announced.
Nathan Vardi, Forbes Staff
Posted on 5/01/2014 @ 12:00PM
Article from http://www.forbes.com/sites/nathanvardi/
