If you run a hedge fund domiciled in the Cayman Islands or Bermuda (as many are), you are not happy with the bankers who advised Novartis on its deal to acquire the 23 percent of Alcon it doesn‘t already own.
The deal calls for the payment of cash to Alcon holders if 2.8 shares of Novartis do not equal $168 a share.
This so called CVA (contingent value amount) will represent the difference between $168 and any price below that equal to 2.8 Novartis shares.
The problem for off-shore hedge funds (unless they operate in Switzerland) is that they are subject to a 35 percent tax on the value of the CVA. And, because there is no tax treaty between Switzerland and the Caymans or Bermuda, they will not get that money back.
U.S.-based hedge funds will be required to pay the tax, as well, but can get it back (though it does require paper work and waiting six months to get your money).
Many off-shore hedge funds devoted to risk arbitrage might be expected to own this stock as the deal heads to closing next spring, but will now either not play or be forced to sell their shares prior to closing.
Suffice to say, those funds are wondering why the bankers chose a mechanism that will result in a larger spread in the deal, when they easily could have made the CVA paid in stock.
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