REPLAY Inversion Immersion | Dissecting New Treasury Rules on the M&A Market

Takeaway: We hosted a call today with Jeff Shapiro of policy firm Peck Madigan Jones on Treasury's new rules. Enclosed is our replay.

REPLAY Inversion Immersion | Dissecting New Treasury Rules on the M&A Market - invite





We hosted a call with a leading policy advocate firm today regarding the Treasury's new rules on permitted M&A inversions. The 40 minute call outlines the latest specifics on the new rules. 3 main takeaways are:


1.) The new language retroactively adjusts the equity contribution of a serial inverter (foreign company in this example). Thus the prior acquisitions of the foreign company are retroactively stripped out for the past 36 months and then that smaller equity amount is counted with the equity of the U.S. acquirer to establish allowable ownership ranges to invert. For example the original Pfizer/Allergan deal resulted in PFE equity in the proforma company of 56%, avoiding the restriction band of 60-80% of U.S. ownership. At 60-80% of U.S. equity percentages (in a combination), Treasury doesn't break up the deal however the benefits of the inversion are nil. At above 80% U.S. ownership, the government treats the combined companies as U.S. based completely, negating the inversion even if the corporate address is foreign. Under these new rules, PFE/Allergan went to 80% U.S. ownership (as the Allergan equity was brought down as its prior deals were stripped out) and hence the deal was called off.


2.) There have been 50 inversions since 1982, but 20 deals since 2012. Total M&A activity from inversions is roughly 5% on a dollar value as deal tickets have tended to be large. Greater than 50% of all inversion activity has been in the Healthcare group.


3.) The earnings stripping parameter goes into effect in 90 days or in June of this year and essentially classifies an intracompany loan of bigger than $50 million as subject to new Treasury regs. If a loan, for example, is characterized as an expanded group instrument, or EGI, then the capital is treated as equity, not debt, and taxed as dividends rather than tax deductible interest payments. The latest Treasury version on EGI's expanded coverage to include partnerships and foreign corporations.


Please let us know of any further questions for our speaker,


Jonathan Casteleyn, CFA, CMT 


Joshua Steiner, CFA


Cartoon of the Day | Earnings: Dead In The Water

Cartoon of the Day | Earnings: Dead In The Water - earnings cartoon 04.12.2016


In what is already expected to be an ugly quarter for corporate earnings, Alcoa kicked off 1Q earnings season with a bang last night. The aluminum producer missed revenue estimates, earnings fell by 92% and reduced guidance for the year. 

Eurozone’s #BeliefSystem Fails!

What do you believe in?  Do you still believe that ECB President Mario Draghi’s policy to do “whatever it takes” to burn the currency can and will spur Eurozone growth and inflation?


As we present in our Q2 2016 Macro Theme of #BeliefSystem (click here for the replay – slides and video – of our second theme starting on page 37 and minute 25:14), not only do Eurozone fundamentals continue to materially slow (witness the progression of slowing data over the last 12 months in the charts of Eurozone Retail Sales, Industrial Production, Exports, Consumer and Business Confidence, and Inflation), but the region is experiencing the perfect storm given the combination of:


Negative interest rate policy (NIRF) + Quantitative (and Qualitative) Easing + Talking Down of Forward Guidance.


According to our Big Bang Theory that we originally discussed ahead of the ECB’s March 10th 2016 interest rate meeting, we’ve underlined our view that after 600 rate cuts globally, there’s a new regime of investors that has given up on the belief that central bankers can artificially produce stimulus and weaken their currency for economic benefit.  This policy hasn’t worked in Japan, and it isn’t going to work in the Eurozone.


Not only were we right with our call that more ECB “easing” would equate to EUR/USD strength (versus a bearish consensus view), but we’ve continued to be right forecasting growth and inflation levels below consensus.  


Specifically, we’ve signaled through our GIP (growth, inflation, policy) model that the Eurozone would return to Quad 4 (equating to growth slowing as inflation decelerates). In the second chart below, we show our forward GDP estimates over the next four quarters, declining to +0.2% in Q4 2016.  #ouch!


Eurozone’s #BeliefSystem Fails! - EUROZONE

Eurozone’s #BeliefSystem Fails! - Eurozone GDP Est.


If the deterioration of growth fundamentals and consumer and business confidence weren’t enough, the ECB’s negative interest rate policy is artificially pushing down bond yields, making it harder for banks to lend (while pilfering savers), and the equity market has taken it on the chin – the EuroStoxx 600 has crashed, down -20% Y/Y.


Schäuble Speaks – In related news, German Finance Minister Wolfgang Schäuble blew the horn this weekend echoing our sentiment on the negative impact of the ECB’s quantitative and qualitative policy. Specifically he suggested that the ECB’s loose monetary policy is partly to blame for the rise of the populist Alternative für Deutschland (AfD) party in Germany, and argued:


“I said to [ECB President] Mario Draghi…be very proud: you can attribute 50% of the results of a party that seems to be new and successful in Germany to the design of this policy. There is a growing understanding that excessive liquidity has become more a cause than a solution to the problem.”


We'll continue to bang the boards with our call that the #BeliefSystem in the Eurozone is broken -- that neither Draghi nor other central banker can bend economic gravity.  This time is in fact not different, and as the Eurozone experiences the drag from an aging population (see chart directly below), the prospect of a buoyant and sustained economic recovery appears even further out of reach. 


Eurozone’s #BeliefSystem Fails! - Eurozone Demographics

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McCullough: ‘We Are Vigilantly Bearish On Corporate Earnings & Junk Bonds’

In a recent excerpt from The Macro Show, Hedgeye CEO Keith McCullough responds to a subscriber’s question about the latest permabull narrative that a weaker dollar will lead to “widespread earnings beats.”

Hillary Clinton Presidency = Obama 3rd Term ... & Trump's Ground Game

Below is a brief excerpt from our Potomac Research Group colleague and Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning. For more information on how you can access our institutional research please email


Hillary Clinton Presidency = Obama 3rd Term ... & Trump's Ground Game - obama


President Obama has been working full time to use executive powers to cement his legacy on many fronts, and now his latest gambit is to protect Hillary Clinton's flank. Within a week, the president has defended Clinton's qualifications for the presidency and has shown support for the Democratic frontrunner through her FBI investigations. Normally, a sitting president would not get involved in the primary, but Obama can't afford to let an opportunity like this pass. For the most part, a Clinton presidency will be  closer to an Obama a "third" term, while a Sanders presidency has the potential to be problematic for the Democratic party.


Hillary Clinton Presidency = Obama 3rd Term ... & Trump's Ground Game - trump forward


After narrowly losing the Iowa caucuses in early February to Ted Cruz, Trump vowed to get his ground game in order - and we're still waiting for that to happen. At the CO Republican convention, Trump's hastily assembled team unintentionally instructed Trump supporters to vote for Cruz delegates helping him sweep the state. States where Trump lost delegate ground to Cruz include IN, GA, LA, ND, SD and TN, and the election of anti-Trump delegates in these places mean that Trump is all but certain to lose support if there is a second ballot in Cleveland.


These mistakes may seem trivial, but they are adding up, and this disorganization could cost Trump a delegate majority heading into Cleveland. The road ahead hardly looks brighter - Trump's campaign emailed WA supporters to encourage them to register as delegates two days after the deadline. We think the arrival of his new top strategist and Washington political veteran, Paul Manafort, will help recalibrate the campaign - Trump has been mostly quiet for the last few days, and avoided all Sunday show appearances for the first time in five months. Good first step...


While Donald Trump maneuvers to amass enough pledged delegates to secure a majority, many pundits are resigned to predicting an open convention. The delegate math supports their predictions, however, those same pundits often ignore a major factor - that at least some of the unbound delegates will also vote for Trump on the first ballot. Many of the people running to be one of the 54 unbound PA delegates have pledged to vote according to the results of their district, while other delegates could easily be swayed to back Trump if he goes to Cleveland just shy of 1,237.  Let's not forget that this is the man that wrote The Art of The Deal.

*TODAY* Speaker Series Call | Inversion Immersion - Dissecting the Treasury's M&A Inversion Rules*

Takeaway: We will be hosting a call with a top DC policy firm today at 2 pm to outline the new Treasury framework and its potential impact on M&A.

*TODAY* Speaker Series Call | Inversion Immersion - Dissecting the Treasury's M&A Inversion Rules* - invite


  • 3rd Cut the Most Impactful? The third iteration of the Treasury's framework on tax inversions released last week seems to have upset the apple cart with already billions of dollars in merger and acquisition (M&A) transactions canceled. The understanding of the specific language and the "before and after" is still superficial however and we will dig into the specifics of the new 200 page parameters.
  • What is the fallout? While we will avoid specific deal-by-deal commentary, the new rule sets will have an industrial impact on the M&A advisory group which handles deal flow with a trickle down impact to specific sectors with a highlight on the Healthcare group. We will outline inversion percentages within total M&A activity and also which sectors have been most active.
  • Around the Beltway - A DOL Fiduciary Rule Update. In a follow up to our recent call with Bob Litan on the Department of Labor Fiduciary Rules, Jeff Shapiro will also give us the latest on the final details of the DOL Fiduciary Rule and what is new from the prior versions.


About our speaker Jeff Shapiro:


Jeff Shapiro joined Peck Madigan Jones following six years as Chief of Staff to Rep. Adrian Smith (R-NE), a member of the tax-writing Ways and Means Committee. He brings more than a decade of political and public policy experience to the firm, having previously served on Capitol Hill for Rep. Lee Terry (R-NE), who was a senior member of the Energy and Commerce Committee.

In his time on Capitol Hill, Jeff gained a reputation as a skilled political professional among Members and colleagues on both sides of the aisle. Jeff’s command of the legislative process, operational dynamics and inner workings of congressional offices was recognized by House Leadership, who tasked him with transitioning into office several Members of Congress following special elections.



CALL DETAILS - Tuesday, April 12th at 2 pm EST

  • To Watch Live Click HERE
  • Toll Free Number:
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  • Conference Code: 13634947
  • To Automatically add to your Outlook Calendar Click HERE

Related Tickers: GS, JPM, MS, LAZ, GHL, EVR, MC, PFE, AGN.


Please let us know of questions,

Jonathan Casteleyn, CFA, CMT 


Joshua Steiner, CFA

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