DealBook: Avago in Talks to Buy Broadcom | Growing Appeal of Pension Obligation Bonds | Sunac Cancels Takeover of Kaisa | Parallels to Yahoo Spinoff Plan in 1934 Tax Case

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Thursday, May 28, 2015
TODAY'S TOP HEADLINES

M & A Charter Customers Say Bigger Isn't Likely to Mean Better

INVESTMENT BANKING JPMorgan Chase Said to Receive Inquiry Over Chinese Official

PRIVATE EQUITY G.E. Leveraged Buyout Finance Unit Said to Draw Big Bids

HEDGE FUNDS New Jersey Pension Fund Withdraws From BlueCrest

OFFERINGS Buzzfeed C.E.O. Says I.P.O. Planned

VENTURE CAPITAL DJI and Accel Partners Form Drone Investment Fund

LEGAL/REGULATORY San Francisco Fed President Says Rate Rise Likely This Year

For the latest updates, go to NYTimes.com/DealBook
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By DEALBOOK

AVAGO IN TALKS TO BUY BROADCOM Avago Technologies, a chip maker based in Singapore, is in advanced talks to buy Broadcom, a rival semiconductor maker based in the United States, Michael J. de la Merced and Quentin Hardy report in DealBook, citing people briefed on the matter. A deal could be announced as soon as Thursday, one of the people said, but cautioned that talks could collapse. Avago, which specializes in chips for things like fiber-optic lines and lighting, has relatively little overlap with Broadcom's products, which are used in iPhones and other popular devices. A merger could combine the two companies' wares to offer comprehensive products to big communications companies, while negotiating cheaper manufacturing costs from the third-party factories where both companies' chips are made.

As of Tuesday's market close, before the rumors of a deal publicly surfaced, Broadcom's market value was about $28.1 billion. "If completed, the deal would be the latest in the chip-making industry, which has been swept by a wave of consolidation as companies look to gain scale and negotiating leverage with customers," Mr. de la Merced and Mr. Hardy write. Broadcom shares closed 21.5 percent higher on Wednesday, while those in Avago were up 7.7 percent, after The Wall Street Journal reported news of the talks.

GROWING APPEAL OF PENSION OBLIGATION BONDS As more local governments scramble to plug shortfalls in public workers' pensions, several states and municipalities are considering the use of so-called pension obligation bonds, even though these bonds have contributed to financial crises in Detroit, Puerto Rico, Illinois and other places, Mary Williams Walsh writes in DealBook. The deals are generally pitched to state and local officials as an arbitrage play, she explains: "The government will issue the bonds; the pension system will invest the proceeds; and the investments will earn more, on average, than the interest rate on the bonds. The projected spread between the two rates makes it look as if the government has refinanced its pension shortfall at a lower interest rate, saving vast sums of money."

However, in reality, the higher returns are merely assumptions, and the deals are often used to make struggling pension systems appear healthier for a few years, allowing lawmakers to postpone the changes needed to make the system sustainable in the long run. To make matters worse, the influx of cash from the bonds may also tempt officials to suspend contributions to the pension fund - "the very action that has caused so much pension distress to begin with," Ms. Walsh writes.

SUNAC CANCELS TAKEOVER OF KAISA Sunac China Holdings said on Thursday that it had abandoned its proposed takeover of the Kaisa Group, the Chinese property developer that had recently defaulted on some of its offshore bonds, David Barboza reports in The New York Times. Sunac said in a filing with the Hong Kong Stock Exchange that it decided to terminate an agreement to acquire the company because "certain conditions" it had set for the deal were unlikely to be met before the deadline it set earlier this year. Morgan Stanley has also resigned as financial adviser to Sunac in the terminated deal, The Financial Times reports.

Doubts about Sunac's willingness to continue with the acquisition began to emerge, analysts say, after the surprise return last month of Kaisa's chairman and co-founder, Guo Yingcheng, who had resigned late last year. Since his return, Mr. Guo had dismissed some Sunac employees who had been working at Kaisa's offices, in a sign that he was reasserting his control over the company. "Sunac's decision to call off the planned deal to acquire 49.3 percent of Kaisa for about $580 million is the latest twist in the dramatic downfall early this year of one of China's most successful mid-sized property developers, one that had been heavily backed by global investors, many of whom had purchased the company's offshore bonds in Hong Kong," Mr. Barboza writes.

ON THE AGENDA Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, speaks about monetary policy at the Helena, Mont., branch of the Minneapolis Fed at 12:45 p.m. (2:45 E.D.T.). Companies reporting earnings today include Avago Technologies and Abercrombie & Fitch. Weekly jobless claims data is out at 8:30 a.m. and the National Association of Realtors' pending home sales index for April is out at 10 a.m. Michael L. Corbat, Citigroup's chief executive, speaks at the Sanford C. Bernstein's Strategic Decisions Conference in New York at 10 a.m. Richard S. Fuld Jr., the former chief executive of Lehman Brothers, will speak at the Marcum MicroCap Conference in New York at 12:30 p.m. John Stumpf, Wells Fargo's chief executive, is on CNBC at 4:10 p.m.

PARALLELS TO YAHOO SPINOFF PLAN IN 1934 TAX CASE If history is any guide, Yahoo's shareholders may have good reason to be nervous about the company's plan to spin off its stake in Alibaba, Victor Fleischer writes in the Standard Deduction column. Professor Fleischer finds that Yahoo's plan, which is structured to avoid taxes by bundling Yahoo's small-business services division with its 384 million shares of Alibaba, has some similarities to the landmark case of Evelyn Gregory against Guy T. Helvering, then the commissioner of the Internal Revenue Service, in 1934. "Yahoo's plan to spin off Alibaba stock to its shareholders follows the same basic playbook as Mrs. Gregory's old plan, making it vulnerable to the same kind of judicial attack," he writes.

In the 1934 case, Mrs. Gregory was the sole shareholder of United Mortgage Corporation, which owned shares of Monitor Securities Corporation. When she wanted to sell the Monitor stock, to avoid paying ordinary income taxes, she created a new company so that United could transfer Monitor shares there. United Mortgage then distributed the new company's stock to Mrs. Gregory in what purported to be a tax-free reorganization. After three days, she liquidated the new company and sold the Monitor stock, reporting her profits as a capital gain, which had a lower marginal tax rate than ordinary income.

All the transactions met the literal requirements of the statutes, but Judge Learned Hand of the United States Court of Appeals for the Second Circuit ruled that it was not enough for Mrs. Gregory to comply with the literal words of the tax code. When lawmakers wrote the tax code, he explained, they did not intend to allow reorganizations for the purpose of tax avoidance. Just as Judge Hand found the three-day life span of Mrs. Gregory's new company too ephemeral, "a judge might find Yahoo Small Business too flimsy to carry the weight of the Alibaba shares," Professor Fleischer writes.

MERGERS & ACQUISITIONS »
Terence Allen, a longtime Charter Communications customer, said he was disappointed with frequent service interruptions.

Charter Customers Say Bigger Isn't Likely to Mean Better Despite recent improvements in consumer satisfaction ratings, many of the cable company's subscribers believe a merger won't improve service.

Breakingviews: Fiat Boss Too Cautious on Case for Industry Consolidation Sergio Marchionne argues that mergers would increase shareholder returns. But he hurts his case by playing down the scale of potential cost cuts.

INVESTMENT BANKING »

JPMorgan Chase Said to Receive Inquiry Over Chinese Official American authorities have asked JPMorgan Chase to provide information about Wang Qishan, a powerful Chinese government official, as part of an investigation of the bank's hiring of people linked to Chinese government officials, The Wall Street Journal reports.

Breakingviews: Why Lehman Brothers Lives On Almost seven years after the Wall Street bank's collapse, the reputations of financial markets, central banks and economic theorists remain tarnished.
For the latest updates, go to NYTimes.com/DealBook
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PRIVATE EQUITY »

G.E. Leveraged Buyout Finance Unit Said to Draw Big Bids General Electric's unit that finances leveraged buyouts has drawn several private equity bidders in a sale that could fetch more than $17 billion, The Wall Street Journal reports, citing people familiar with the sale process.

HEDGE FUNDS »

New Jersey Pension Fund Withdraws From BlueCrest New Jersey's public pension plan said it is pulling about $284 million from BlueCrest Capital Management because of disappointing returns, Bloomberg News reports.

I.P.O./OFFERINGS »

Buzzfeed C.E.O. Says I.P.O. Planned BuzzFeed is planning to go public, Jonah Peretti, the website's chief executive, said at ReCode's conference on Wednesday, but he declined to provide a timeline.

VENTURE CAPITAL »
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DJI and Accel Partners Form Drone Investment Fund The Chinese drone maker and the venture capital firm have formed an investment fund to support more drone and advanced robotics start-ups.

LEGAL/REGULATORY »

San Francisco Fed President Says Rate Rise Likely This Year John Williams, president of the Federal Reserve Bank of San Francisco, said at a regulatory symposium in Singapore that the United States is likely to raise interest rates later this year, Bloomberg News reports.

FIFA Investigation to Include Examination of Banks' Conduct The Justice Department's indictment of FIFA officials said money involved in bribing international soccer officials passed through American banks including Citigroup and JPMorgan Chase, Bloomberg News reports.

Hong Kong Regulator Confirms Hanergy Investigation Hong Kong's securities watchdog has for the first time confirmed that it is investigating Hanergy Thin Film Power Group, a solar equipment manufacturer, after the company's shares plunged and trading in the stock was suspended, The Financial Times reports.

The Fitbit Force. Jawbone has sued Fitbit, which has filed for an initial public stock offering.

Jawbone Accuses Fitbit of Stealing Information by Hiring Workers Away The legal action is an unusual twist as Fitbit prepares to make its stock market debut to take advantage of huge demand for wearable devices.

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