W h a r t o n Un d e r g r a d u a t e

FINANCE CLUB

Volume V: Issue II December 2014

EBOLA IN THE MARKET

IN THIS ISSUE
EBOLAINTHEMARKET
EXPANDINGHORIZONS:
LENOVO'SACQUISTION
OFMOTOROLA
WHYINVESTIN
ALTERNATIVES?
OUTLOOKON U.S.
DOLLAR:FOREIGN
INVESTMENT,EXPORTS,
ANDMONETARYPOLICY
ABATTLE
OVERBANANAS
VICE PRESIDENT OF
FINANCIAL ANALYSIS
COMITTEE
Karan Parekh

MANAGING EDITOR
Erin-Marie Deytiquez

COPY EDITORS

Coling Pinto, Bob Husni, Jeremy

Rhome, Abigail Richardson, Aaron
Smith,Daniel Weng

FINANCIAL ANALYSTS

Dylan Adelman, Benjamin Avetisian,

Charles Bagley, Krishna Charathala,
VincentCriscuolo, Alexandros
Deligianndis, John Dong, Zachary
Ennis, Jeremy Fedus, William
Helmold, John Lin, Abigail
Richardson, GrantRoss, Arjun Sastry,
Brendan Tsai

Ebola Strikes the West, Piking the Interest of Pharamaceutical Companies

Charles Bagley, Krishna Bharathala and Jeremy Rhome

bola has caused worldwide panic.

The disease is highly lethal to those
infected, and the few domestic cases
have caused great controversy.
Highly lethal to those infect, Ebola
has caused worldwide panic and
great controversy through its few
domestic cases. In the past decade,
successful vaccines for the disease
were developed. A joint effort
between Canadian and American
universities as well as the United
States military yielded an
experimental drug 100 percent
effective in the prevention of the
Ebola virus in monkeys. Aid
organizations are interested in
eradicating the virus from Africa
while the US military is interested in
prevention a potential Ebola
bioterrorism threat. However, the
demand for that experimental drug
was not high enough at the time for
it to travel down the pipeline to
approval and ultimately production.
Until now, though, those vaccines
have not been remotely profitable for
the pharmaceutical giants to pursue.
Until recently, affected
countries have been unable to pay
high prices for a rare drug. Thus,
there no monetary incentives for big
pharma to get developed
pharmaceuticals approved existed the drug was kept on the shelves of
the research labs. The market
movements as a result of Ebola are
now tangible because the virus has
reached the shores of the United
States and Europe where the
pharmaceutical giants reside and
where people (and their insurance
companies) are willing to pay.
Popular media outlets have
covered most of the macro market
responses due to Ebola, such as the

US governments expenditures for

Ebola research. Micro movements
such as Mark Zuckerbergs $25
million donation to the Center for
Disease Control have also been
covered. One story hardly covered
has been the responses of pharma
companies Tekmira, Chimerix, and
Mapp Pharmaceuticals, the three
most viable competitors in the race
to get an Ebola vaccine on the
shelves.
In May 2010, Tekmira
developed an RNAi therapeutic that
was proven to protect non-human
primates from Ebola. These studies
were funded by a $140 million
contract with the Department of
Defense. Even though funding for
Ebola treatment has been substantial
for the last three or four years, it
wasnt until six months ago when the
FDA granted Fast Track and
Animal Rule to the development
of an anti-Ebola viral therapeutic for
use in humans. Fast Track allows
drug companies to expedite the drug
testing process and get therapeutics
to market faster. The most important
part of gaining Fast Track status is
priority review and accelerated
approval so that the waiting time is
decreased. Animal Rule is equally
important because it allows for
companies to skip extensive human
trials if they can sufficiently prove
that it works in humans. Both of
these rulings were huge for Tekmira
from a financial perspective, because
it proved to the markets that the
therapeutic being created has
therapeutic being created has promise,
and during a crisis like this, only a
little hope is needed for whole
countries to stockpile drugs and pump
money
into
companies.
CONTINUE on Page 4...

Volume V: Issue II December 2014

Page 2

EXPANDING HORIZIONS:
LENOVO'S ACQUISTION OF MOTOROLA

Lenovo's Recent Acquistion is an Effort to Expand into New Markets

John Dong, Arjun Sastry and Brendan Tsai

n January, Lenovo unveiled an

aggressive strategy for the year,
announcing $5 billion worth of various
acquisitions to improve its market share
in its core personal computing and
smartphone businesses. The recent
closure of the deal between Lenovo,
the Chinese computer technology firm,
and Google marks the conclusion of
the announced acquisitions in January.
This deal in particular has far more
significant implications for Lenovo
than any of the other announced deals
combined.
Lenovo closed the acquisition
of Motorolas smartphone unit, the
former Google subsidiary focused on
telecommunication equipment, at the
end ofOctober of2014 for $2.9 billion.
This deal comprised of $660 million in
cash, $750 million in Lenovo
equity, and $1.5 billion in
three-year promissory notes.
The deal was $10 billion less
than the original purchase
price paid by Google for its
2011 acquisition of Motorola
Inc. However, Google still
retains the largest proportion
of Motorolas patent
portfolio, with only 2000
patents being transferred in
the acquisition.
Looking back, it
becomes evident that Google
never intended to purchase Motorola
for its manufacturing capabilities, but
rather for its vast arrays of patents. In
fact, Motorola never made Google any
significant profit during the last three
years. At the time of purchase, Apple
had sued Google multiple times over
Android licensing. Motorola's vast
array ofpatents provided Google with a
solid defense during possible lawsuits.
As the lawsuits decreased, Google
decided to sell Motorola. Soon after,
Lenovo made a bid to purchase the
company from Google to make use of
Motorola's manufacturing capabilities.
Wanting to move into the mobile

market, Lenovo hoped to realize the

synergies within the cellular market
with Motorola just as it had within the
PC industry with IBM's Thinkpad.
The $2.91 billion acquisition
as a whole has vastly different
implications for the two tech giants.
For Lenovo, the latest acquisition is
clear evidence of the firms desire to
expand its market share in the mobile
phone market. It currently ranks fourth
(5.2%) behind Samsung (23.8%),
Apple (12%) and Xiami (5.3%). For
Google, the divestiture of Motorolas
smartphone segment signifies the
conclusion of its foray into the
smartphone and tablet business. This
branch of their operations was
characterized by constant struggles to
improve the processes of the mobile
segment and an overall difficulty with
the undertaking that differed

significantly from Googles principal

areas offocus.
While Google has made
significant
investments
into
manufacturing and developing
hardware, its core profit driver in the
mobile market lies in the sale of its
popular Android operating system. At
the beginning of this year, Google
purchased Nest and continued
developing innovative hardware like
Google Glass. However, when it
comes to mobile, Google sees much
more opportunity in updates and sales
of its OS. In fact, in response to
Google's acquisition of Motorola, both

Samsung (with Tizen) and LG (with

WebOS) have created independent OS
as a defensive measure. The sale to
Lenovo of Motorola affirms Google's
core interest in the mobile market.
Lenovo views the acquisition
of Motorola Mobility business greatly
broadens the firms global mobile
competence. In particular, Lenovo aims
to focus on the development of the
smartphone business within emerging
markets. Motorola sales have grown
increasingly global, with 55% of 2013
Motorola Mobility revenues coming
from outside of the United States (as
stated in the 2013 Google 10-K). In
particular, much of global sales result
from emerging markets in Asia and
Latin America. As reported by the Wall
Street Journal, the inclusion of
Motorolas 4.1% global market share to
Lenovos 5.2% global market share
will push Lenovo ahead of
Chinas Xiaomi, right behind
Samsung and Apple.
In particular, Lenovo
strategic plans focus on
growth of premium
smartphones within the
emerging markets. The
Motorola
acquisition
supplements this strategy
with the purchase of an
impressive portfolio that
includes the Moto X, Moto G
and DROID Ultra series.
Having traditionally
served as a low price point smartphone
manufacturer, Lenovo now wants to
place more emphasis on the premium
market. This would prompt a
significant shift in target customers. The
Moto G in fact has been marketed as
offering a "premium" experience at a
rather low price (~$200). Products like
this may very well work as a platform
to move Lenovo into a rather
competitive premium market.
Ultimately, it may reduce competition
with its traditional competitor, Xiaomi,
and increase competition with
Samsung, the standard for premium
smartphone products.

Volume V: Issue II December 2014

Page 3

WHY INVEST IN ALTERNATIVES?

Other Emerging Investment Options to Diversify Portfolios

Alexandros Deligiannidis, Zachary Ennis, Colin Pinto and Abigail Richardson

tandard asset classes such as

stocks, bonds, and cash tend to
reflect on the state of the economy.
This indication is mainly apparent
during a peak or trough period.
During a recession, standard asset
classes tend to perform poorly.In a
bull market, however, they
generally fare better. For example,
the 2008 financial crisis saw huge
portfolio drawdowns, while the
recent equity rally has given way to
large portfolio gains. Consequently,
the last decade has seen a
tremendous growth in the awareness
of not only the need for diversity
across equities, but also the benefits
of incorporating asset classes
outside of the traditional stock/bond
mix.
Alternatives provide this
opportunity. Alternatives can be
characterized as any investment that
does not fall into one of the three
traditional investment classes:
stocks, bonds, and cash. The
alternatives class encompasses a
large number of investment options,
typically ranging from real estate,
precious metals, and commodities
to hedge funds, mutual funds, and

ETFs. Since these individual

investments vary greatly in their
purpose, structure, and accessibility,
they allow for portfolio
diversification.
Sector Prospectus
In todays market, the
prospectus
for
alternative
investments is largely positive. In
addition, many institutional
investors continue to increase the
portion of their portfolios that are
allocated to alternatives. As
investing in alternatives becomes
more popular, investors are creating
new, innovative strategies to further
decrease correlation with the market
and within the specific asset class.
The following sector breakdown
explores these trends in addition to
the opportunities for creativity that
each type of investment has to offer.
Sector Breakdown
Hedge Funds:
Hedge
funds
are
aggressively managed investment
portfolios that use advanced
investment strategies to generate
high returns. They are typically

inaccessible to the average investor

because they require significant
starting capital to gain a foothold.
Although hedge funds are often
viewed favorably amongst investors
due to their high yield, many
investors still voice a number of
concerns about whether the high
returns are worth the higher risk. A
main concern is the lack of
transparency regarding hedge funds
decisions. In addition, investors
have questioned the fee structure of
these funds. On average, hedge
funds follow a 2/20 fee structure,
meaning that the fund charges a 2%
managing fee per year in addition to
receiving 20% of all profits.
Investors have also refrained from
placing assets in hedge funds due to
their highly illiquid nature. Hedge
funds today are adapting to these
concerns. Although public pension
fund CALPERS entirely divested
from the hedge fund space in
October, hedge funds still have an
important space within the financial
industry. Firms with large portions
of capital and less influence by the
public (such as university
endowments) will continue to use
hedge funds to achieve high returns.
CONTINUE on Page 6...

Traditional Investment Classes

Cash Equivalents
Are short-term investment
securities that are highly
liquid. This includes US
government Treasury
bills, CDs, Bankers
acceptances, commercial
paper, etc.

Stock

A type of security that

represents the ownership of
part of a corporations
assets and earnings. Two
kinds of stock exist:
common or preferred.
Common stock gives the
owner the right to
attend/vote shareholders
meetings and earn
dividends. Preferred stock
lacks voting rights, but there
is a higher claim on assets.

Bonds
A debt investment where
the investor loans out
their money for a specific
period of time at a fixed
interest rate to an
institution that is
generally a corporation or
government.

Volume V: Issue II December 2014

Countries with
Outbreaks
EBOLA from Page 1...

Page 4

11+

Companies creating
Vaccines &
Treatments

Unfortunately, Tekmira has a very

limited supply of drugs so unless
there is large cash flow in the
future, they will not be able to
sustain development of the drug.
The second company,
Chimerix, developed a drug called
Brincidofovir to treat Smallpox and
adenovirus and has recently gotten
approval to begin testing for Ebola
virus. Brincidofovir was the
treatment prescribed to Thomas
Duncan, the first US Ebola patient,
but faith in the drug diminished
after his death and alternatives have
been considered for other patients.
Chimerix claimed that Duncan was
at too critical of a stage for the drug
to be effective, so it was tested
again on Ashoka Mukpo, who was
declared Ebola free a week after
treatment began. Brincidofovir has
also been granted Fast Track
status and as of October 16th, will
be entering Phase 2 trials. Unlike
Tekmira, Chimerix has many
tablets available for distribution to
West Africa.
Mapp Pharmaceuticals, too,
has produced an anti-ebola drug.
They call the treatment ZMapp.
The drug has not been through any
clinical trials, but due to the nature
of the outbreak, has been used to
treat patients. It is unknown
whether or not the drug actually
works. Along with Tekmiras
TKM-Ebola drug, ZMapp is the
current treatment for American
patients that contract Ebola. It has
successfully been used on seven
patients, but all supplies have been
exhausted, so production has come
to a halt.
In addition to these three
companies, there are many others
that are vying for the chance to
capitalize on the Ebola outbreak.

20

Cases Reported
Outside of
West Africa

GlaxoSmithKline, Pfizer, and

Johnson and Johnson are all
making pushes to create a drug and
get national funding.
Ebola has caused a lot of
volatility in the pharmaceutical
markets but in very reasonable
ways. In just the last three month
Tekmira went from $16.50 a share
to almost $30 and then back down
again. Large movements in the
charts for all of the above
companies correlate strongly with
events in the Ebola timeline. Now
that the market is becoming more
and more saturated with companies
trying to develop Ebola vaccines,
the big companies are pushing the
smaller companies down, causing
the drop in stock prices. In
particular, Novartis has begun
testing for its own RNAi
therapeutic treatment, which will be
a direct competitor to Tekmiras. In
addition, following Q3 results,
Tekmiras price target was lowered
to $20 from $30 causing the sharp
decline in stock price.
Chimerix on the other hand
has seen a steady increase over the
last three months, despite several
periods of drastic increases and
decreases. In particular, whenever a
new patient was diagnosed, the
stock would experience a huge
increase in price, generally in the
15-20% range. Another date of
interest is the day that Thomas
Duncan, the first American, Ebola
patient died. Because the drug that
failed to save Duncan was created
by Chimerix, the company dropped
from $33 to $29 in just a few days.
The market has seized the
opportunity to look for value that
might be generated from the Ebola
crisis other than pharmeceuticals.
Mainly, medical device companies
that sell sterile gowns and other
preventative products have seen

6598
deceased

higher returns from their stocks. For

instance, Alpha Pro Tech (APT)
saw October orders rise due to the
crisis, with a subsequent 10% surge
in stock price. "The increased
interest in our N-95 respirator
mask, shields and coverall suits was
converted to purchase orders in
hand during the month of October,
with the trend continuing through
early November,"
claimed
company president Al Millar.
It should be mentioned,
however, that variations in stock
price among medical device
companies due to Ebola news is not
anticipated by the market. This may
be because the Ebola epidemic is
still mostly contained to few
countries in West Africa, where
private demand for medical devices
and sterilization products is small.
Furthermore, the market may seek
returns in other sectors due to Ebola
news, not just within healthcare.
One sector that might see
movement due to Ebola is
transportation. Many speculate that
Ebola fears could drive down
airline traffic, causing the stock
prices in those carriers to fall. For
the upcoming winter season,
however, United Continental
(UAL) and American Airlines
(AAL) say that they havent seen a
significant decline in trip bookings.
The CEO of Royal Caribbean, the
cruise line, has said that the effect
of Ebola on bookings has been
negligible, especially in comparison
to the pubic response to the SARS
outbreak almost a decade ago.
Analysts venture, however, that an
outbreak of the disease will cause
declines in stocks among airlines
and cruises, but perhaps gains in
FedEx and UPS as consumers
eschew mall shopping for online
purchasing options.

Volume V: Issue II December 2014

Page 5

OUTLOOK ON THE U.S. DOLLAR: FOREIGN

INVESTMENT, EXPORTS, AND MONETARY POLICY
A Growing Real Economy and Attractive Capital Market Yields Lead to Dollar's Appreciaiton

ast month, the dollar continued to

climb against major global
currencies like the Yen and the Euro.
The 7.7% increase in the US dollar
index compared to the summer can
be attributed to a shift in demand for
American equity and fixed-income
investments. As demand for these
investments has risen, demand for
the US Dollar (to buy these
investments) has also risen.
Building off of a strong prior
year, the American economy
continues to show signs of
expansion, attracting foreign
investors and increasing demand for
the Dollar. The unemployment rate
hit a 6-year low of 5.9% as average
jobless claims also held near 14-year
lows of 266,000. Compared to the
10% unemployment rate reached in
2009, these statistics are reasons for
optimism. Partially fueled by this
growth in the labor market and
significant improvements in the
underlying American economy, the

Jeremy Fedus and William Helmold

S&P 500 Index and Dow Jones

Industrial Average closed last month
at record highs of 2,011.36 and
17,390.52
respectively.
Fundamentals aside, the
uptick in American equities can also
be attributed to behavioral changes.
The forward S&P P/E ratio has
surpassed its 10-year and 5-year
averages, indicating that investors
are paying more for corporate
earnings as they seek out an
attractive yield profile. In this
climate, both investor beliefs and
structural changes have fueled the
bull market in American Equities,
which has contributed significantly
to the dollars appreciation. We can
reasonably expect the appreciation
of the dollar to continue as equities
continue to outperform their
international peers.
Apart from American
equities, the possibility of higher
interest rates could shift demand for
U.S. Treasuries and bonds. Since the
Fed plans to raise interest rates in the
future, yields in the fixed-income

market are expected to appreciate.

Investors seeking higher yields will
adjust their portfolios accordingly,
leading to new foreign investment in
American capital markets, which
will thus add to the already strong
demand for the dollar. Moving
forward, however, this dynamic can
be expected to taper off as yields
equalize via arbitrage. It is important
to note though, that this dynamic will
only hold so long as inflation
continues to be low. That being said,
rising interest rates, due to issues of
inflation and uncertainty, do not
immediately imply appreciative
effects for the dollar. It is distinctly
possible that future appreciation will
be more muted than gains in the
capital markets would suggest.
Capital markets aside, the
dollar can expect to face headwinds
because high appreciation increases
the foreign cost of American
products. Already the relative price
of US exports has increased due to
the Dollars appreciation, and if
appreciation continues, it is likely
that demand for US exports will
decrease. A reduction in demand for
US exports would parallel a
reduction in demand for the Dollar,
as foreigners would no longer need
the currency to purchase as many
American goods.
As a second
order effect to this, it is possible that
falling exports would cause
headwinds for US GDP growth, as
export dependent industries would
see real growth fall. If the impact on
export industries is large enough, this
could then potentially reduce the
attractiveness of the United States as
an investment opportunity. Such a
reduction would also cause the dollar
to depreciate, since investors would
substitute out of the United States in
favor ofbetter yielding opportunities.
This however is unlikely, because
primary repercussions tend to
overshadow secondary effects.
CONTINUE on Page 8...

Volume V: Issue II December 2014

ALT. from Page 3...
Private Equity:

Private equity refers to

investments in capital that are not
listed on a public exchange.
Traditionally, private equity has been
viewed as a fairly illiquid investment
class and, with recent droughts in
fundraising, success has been
extremely bipolar. In other words,
successful firms remain on top
because they are able to lock down
principals consistently, while
faltering groups quickly fall
in profitability.
Recently, there has
been growth in the
secondary private market as
private equity firms are
purchasing target companies
from other firms as opposed
to buying out original
owners. Thus, firms can
liquidate their stake in the
portfolio company without an
IPO, ultimately increasing
activity and popularity within the asset
class. For example, though Q3 of
2014 saw the lowest aggregate capital
raised ($?? billion across 158 firms
compared to $111bn and $143bn in
Q1 and Q2 respectively) in the last
three years, 75% of firms met or
exceeded their fundraising targets - a
positive signal for increased activity in
the coming months.
Real Estate:

Real estate investments

include land as well as buildings or
construction. According to Towers
Watson, investor appetite for real
estate opportunities has significantly
increased over the last five years and
shows no signs of slowing down.
Specifically, quantitative easing by the
Federal Reserve has pushed investors
to employ certain real estate ventures
as bond proxies, emulating the
relatively risk free nature of the bond
market whilst avoiding the extremely
low interest rates the market currently
faces. In 2014, there has been a
significant shift towards Europeanfocused real estate; the geographic
location has made up 44% of the
aggregate capital raised by private real
estate funds, which is a sharp increase
from 17% in 2013. To illustrate this,
Lone Star Funds just closed the largest

Page 6

fund of the year - a $7.2bn real estate

venture - with a 50% European focus.
Investors today are also excited by the
possibility of a large sale of real estate
by Sears Holding Corp. The company
plans to sell real estate to a newly
formed real estate investment trust, or
REIT. Shares will be divided amongst
the companys current shareholders.
The move is part of Searss plan to
stave offsignificant losses.

Europeon Real
Estate comprises
of 44% aggregate
capital raised by
private real estate funds
Infrastructure:

Infrastructure investments
consist of the basic physical systems
of a country, state, or city. This can
range from construction of bridges to
sewage systems. Real estate is quite
often inclusive of the infrastructure
class, but the regulatory nature of the
sector makes it a unique subset. After
the financial crisis, privatization of
infrastructure has been on the rise,
allowing for further institutional
investment and access to the stable
yields the class has to offer. However,
government involvement continues to
be the largest factor in profitability of
these assets, and as such, many
investors are still wary of using
infrastructure strategies as anything
more than a minor addition to their
portfolio. In fact, some institutional
investors are deterred because of
perceived risk. Additionally, all but
the largest firms lack the tools to
assess potential infrastructure projects.
For Example, Q3 of United States
seaport activity was up 3.3% on the
previous 2007 peak, and, as a result, so
too was the required industrial
construction surrounding the area.
More generally, over half of current
national construction activity is
occurringwithin3hoursofamajorseaport.

Commodities:

Commodities are raw

agricultural or material goods that can
be bought and sold on an exchange
market. They can range anywhere
from corn and wheat to gold and oil.
The commodity class is one of the
most traditional alternative investment
classes. However, its traditional high
correlation with the equity market has
prevented the class from being used to
create asset type-based
diversity within a portfolio.
To
combat
this
relationship, investors are
looking to hedge fund-like
strategies that select for
commodities with low
equity correlation. For
example, commodity ETFs
typically have less
correlation with the market
than individual commodity
stocks.
Historically,
investors have tracked gold
because of its safe haven
nature, but the commodities class as a
whole offers a multitude of other decorrelating investment strategies that
have yet to be exploited.
Conclusion
Overall, the last decade has
seen alternatives tranform from a
narrow subset of investments, to a
plethora of potential strategies suitable
for a variety ofclients. With a growing
focus on alternative strategies, the
industry has seen innovation and
adaptation across the board This
includes hedge fund replication
strategies that attempt to eliminate the
illiquidity traditionally associated with
the
sector.
Moreover,
alternatives can be employed in a
versatile fashion; successful portfolio
managers place alternatives at their
core, add them on the edges, or even
compromise an entire strategy with
these investments. In the wake of the
financial crisis, the market has realized
diversification within an asset class is
no longer a substantial position. By
incorporating alternatives, institutional
and traditional investors alike can
decrease risk and protect against selloffs and crisis conditions in the future.

Volume V: Issue II December 2014

Page 7

A BATTLE OVER BANANAS

Examining the Past, Present, and Future of the Chiquita Deal

Dylan Adelman, Vincent Criscuolo and John Lin

The Players
Based in North Carolina,
Chiquita Brands International is the
worlds second-largest banana
producer after Dole, Inc. Chiquita
accounts for 22% of global banana
export volume, and operates in 70
countries. Fyffes is the worlds fourthlargest banana producer and is based in
Ireland. The company gains a plurality
of its revenue from Europe. The
Cutrale Group is an international
conglomerate with investments in
orange, apple, and soybean businesses,
and controls about 32% of the worlds
$5 billion orange juice market. The
Safra Group is a conglomerate of
agribusinesses andinvestmentbanks.
Background ofthe Deal
In March, Chiquita and Fyffes
agreed to a merger where Fyffes
shareholders would receive $500
million in an all-stock deal. Under the
deal, Fyffes shareholders would receive
0.1567 shares per share of Fyffes in the
new company, ChiquitaFyffes.
Meanwhile, Chiquita shareholders
would receive one share of
ChiquitaFyffes per share of Chiquita,
and own 50.7% of the merged
company. The combined company
would be valued at over $1 billion, and
would surpass Dole, Inc. as the largest
banana producer in the world. The
ChiquitaFyffes merger identified an

initial $40 million in synergies with

cheaper shipping costs for Chiquita,
arising through the use of Fyffess
larger shipping vessels in the Gulf of
Mexico.
However, the merger was
delayed in August by an unsolicited bid
from Cutrale and Safra, who jointly
offered a $611 million bid for Chiquita.
This offer valued the company at $13 a
share, a steep increase from the initial
valuation in the March merger. Cutrale
and Safra claimed expected synergies
to stem from Chiquitas shipping
chains merging into the shipping
operations of Cutrales orange, apple,
peach, lemon, and soybean businesses.
Furthermore, Chiquita would benefit
from better access to South American
markets, where Cutrale draws a large
amount of its revenue in the $5 billion
global orange market. While Chiquita
rejected the initial Cutrale-Safra
offerclaiming the offer was too
lowthe bidding warhadbegun.
On August 27th, Chiquita
announced an additional $20 million in
synergy benefits. These annual synergy
benefits were expected to arise from
merging the companies Mediterranean
shipping operations, as well as
implementing
more
efficient
information technology via cloud
computing. Cutrale-Safra immediately
criticized these proposed synergies,
calling Fyffes "an always vulnerable
middleman with no material merger or
integration experience and a heavy

concentration in Europe at precisely the

wrong time." Cutrale-Safra also
emphasized its access to wider markets,
especially in South America, as more
beneficial long-termsynergy benefits.
Final Offers
On September 26th, Fyffes
responded to Cutrale-Safras criticisms
by sweetening the deal. Fyffes offered
Chiquita shareholders 59.6% of the
merged company. At the market close
on September 26th, the merged
company would have been valued at
over 1.06 billion. With the deadline for
Cutrale-Safra approaching, the two
groups presented a new, last minute
takeover bid on October 20th to acquire
Chiquita in an all-cash transaction at
$14 per share. While Chiquita rejected
this proposal as well, shareholder
momentum began to build behind
Cutrale-Safras acquisition.
On October 27th, a
shareholder vote forced Chiquitas
hand, and it accepted the third bid from
Cutrale-Safra. Coming in at $682
million, this deal finalizes the all-cash
buyout of Chiquita at $14.50 a share.
Additionally, Cutrale-Safra will assume
all of Chiquitas debt, and Safra will
conduct a buyback of the companys
seniorbonds. The final value ofthe deal
amounted to $1.3 billion at markets
close on October27th.
CONTINUE on Page 8...

Differences in Benefits for Chiquita

Fyffes

- ChitquitaFyffes is valued at $1 .06B

- $40M in synergies
- Cheaper shipping in Gulf of Mexico
and Mediterranean
- Chiquita shareholders own 59.6% of
merged company

Cutrales and Safra

- Access to South American markets and

Cutrales' distribution, agriculture and
logistics
- Synergies from a combination of
Chiquita's shipping operations of
Cutrales' products

Volume V: Issue II December 2014

Page 8

DOLLAR from Page 5...

demand accordingly falls in tow. This

force may be mitigated however, by the
Feds continued reinvestment of owned
assets. With over $4.48 trillion in
holdings that the Fed continues to roll
over, it is possible that the effect ofQEs
end on the equity market, and on
demand for US currency to participate in
thosemarkets,willberelativelyminor.
Outside of quantitative easing,
the Federal Reserve is still maintaining its
inflation goal of2%; however, it will not
raise benchmark interest rates until
sometime in 2015. The Federal Open
Market Committee also noted that when
it does raise interest rates, it will
simultaneously halt the reinvestment of
its assets. As noted above, this will
continue to support equity prices. The
culmination of these two forces will
make the dollarface headwinds, as rising
interest rates portent slowing economic
growth, which will devalue the currency.
Softer-than-expected capital appreciation
in equities will then lead to less global
demand for the US currency to invest in
those equities. Altogether, the ending of
the Feds QE program represents an end
of inflationary headwinds in the near
term against the dollars appreciation.
However,in the long term,the dollarwill
see new headwinds as the Fed increases

the benchmark interest rate, and as U.S.

Equitymarkets cool.
Closing Remarks
In summary, appreciation looks
likely to continue in the short term, as
American capital markets remain a
compelling investment. The American
economy is outperforming its peers in
Europe, the Middle East, and East Asia,
which has led to substantial foreign
inflows. The real economy continues to
grow, which in turn continues to fuel
growth in U.S. equity prices. With
interest rates set to rise, it is possible that
the U.S. bond markets will see yields
become more attractive compared to
world peers. This in conjunction with
already attractive equity markets will
continue to bring in foreign capital
investment, which would lead to an
appreciating dollar. Furthermore,
inflationary pressure by way of
quantitative easing has reduced, which
shouldprovideatailwindtotheDollar.
Despite the positive near term
prospects, as time continues, the outlook
is less certain. American economic
growth may slow, exports may fall, and
inflationary pressure from rising interest
rates maysetin.

BANANAS from Page 7...

M&A deal volume in August to $1

trillion from $565 billion a year prior is
in part explained by inversions having
recently been the hottest trend in
M&A, as the Wall Street Journal
depicted back in August. However,
following the collapses of the massive
$54 billion acquisition of Dublin-based
Shire PLC by AbbVie Inc. and the
recent Chiquita-Fyffes deal, it appears
that these tax revisions have started to
take their toll on the wave of inversions.
We are thus likely to see a decrease in
M&A volume as the appeal of
inversions is drivendown.
But where does this leave us
now? As the two companies begin to
integrate and Fyffes walks away emptyhanded but for a hefty $20 million fee,
there are a couple key takeaways from
the seven-month-long scramble.
Chiquita will remain headquartered in
the U.S. and have access to Cutrales
distribution, farming, and logistics
expertise in order to compete with Dole,
Del Monte, and other giants in the U.S.

bananamarket.
At the same time, Cutrale,
whose product currently accounts for
roughly one-third of the global orange
juice market, will benefit from
Chiquitas brand name and consumer
base. Previously, Cutrales motivation
forengaging Chiquitahas been apushto
diversify, as it currently boasts high
recognition among wholesales but is
virtually unknown to consumers. Also,
the recent decline in consumer appeal
for orange juice has engendered slowly
decreasing revenues, as consumers turn
to alternatives such as coconut water to
avoid the high sugar content of orange
juice.
As Chiquita and Cutrale
combine their efforts, their mutual
success is in part contingent on the
extent to which they can create value
through Chiquitas brand recognition
and Cutrales added expertise. For now,
shareholders await the annual earnings
release to see whether the result of the
mergerwillbeafruitfulone.

Tightening of Monetary Policy

Provides Tailwinds in the Near
Term, Headwinds in the Long
Term
In the coming months, the US
Dollar will see pressure coming from the
Federal Reserves continued use of
monetary policy to sustain the countrys
ongoing economic recovery. Recently,
the Fedendedits thirdquantitative easing
(QE) program on October 29th, which
had run since last September. Though
the end of this program would primarily
remove a strong inflationary force
against the dollar, it is also important to
consider second order effects of this
development. Specifically, many market
participants have partially attributed the
current bull market in equity prices to the
Feds QE program, which by virtue of
suppressing bond yields drove equity
prices to new all-time highs. Now that
the QE program is over, there will be
much less explicit support ofequity asset
prices, thus making U.S. equity markets
less attractive to both domestic and
foreign investors. As foreign investors
slow investment in US equity markets or
evendivestfromAmericanequity
markets, the dollar may depreciate as
Insights and implications
ChiquitaFyffes represents the
latest inversion deal to fall apart
following revisions to U.S. tax
regulation in September. An inversion
occurs when one company acquires
another company overseas and
reincorporates elsewhere in order to
avoid the domestic corporate tax rate.
Essentially, it is a creative method for
firms in the states to be subject to other
countries tax rates. Many U.S. firms,
especially in the pharmaceutical sector,
have recently been acquiring companies
in countries such as the U.K. and Ireland
in order to move from a corporate tax
rate of 35% to 12.5%, for example. By
having operations in the U.S. highly
levered and holding cash outside of the
U.S., this method allows domestic
earnings to benefit from tax-deductions
oninterest.
The reported 77% increase in