Often in December, money managers are watching client portfolios for year-end adjustments, including tax-based transactions and hedging to preserve gains. Most years, news flow is not high. Earnings are reported in the first half of the quarter and companies seem to be focused on operations as year-end approaches.
This does not seem to be the case in 2012. A surprising number of transactions are taking place, many seemingly driven by the fiscal cliff and the prospect of higher tax rates on dividends and capital gains in 2013. Within the broadly defined media, entertainment, and communications sector, there have been a series of special dividend announcements from Sirius XM
(NASDAQ:SIRI) (in effect Liberty Media
(NASDAQ:LMCA)), Las Vegas Sands
(NYSE:LVS), Wynn Resorts
(NASDAQ:WYNN), and Regal Entertainment
The impact of the fiscal cliff may also be felt in mergers and acquisitions where transactions are being concluded in 2012 to bring forward capital gains taxes. One such transaction was announced yesterday when Barry Diller sold his stake in Tripadvisor
(NASDAQ:TRIP) to John Malone’s newly created Liberty Ventures. The deal gives Liberty 22% of Tripadvisor’s equity and 57% voting control.
Diller’s motivation seems likely to be at least partially tax-driven. Booking gains at a 15% federal capital gains rate instead of 24% in 2013 can mean serious savings. It is worth noting that some of the Tripadvisor appears to be in a foundation, so taxes are not the sole motivation. Diller noted that he wanted to simplify his investments and his life. Exiting Tripadvisor accomplishes that and still leaves him plenty busy with IAC/InterActiveCorp
(NASDAQ:IACI) and Expedia
Malone is likely driven by taxes as well, something he is well known for. Under Liberty’s prior Tripadvisor position, an unrealized capital gain of several hundred million existed. Assuming that at some point, Liberty would want to exit this position, finding a tax-efficient exit strategy makes sense. Malone has eliminated taxes on large positions Liberty once owned in DirecTV
(NASDAQ:DTV) and Discovery Communications
(NASDAQ:DISCA) by gaining control. Liberty also once had a big stake in Interactive, which it unwound in tax-efficient transactions that resulted in Liberty’s current ownership of Tripadvisor and Expedia. In addition, recent purchases of Sirius are at least partially due to a desire to have the option to tax efficiently monetize the ownership. A Reverse Morris Trust or a cash-rich spin of Tripadvisor is possible now that Liberty has a controlling stake. Timing is less important for Liberty as there is no 2012 realized gain at a lower tax rate, but it seems likely that Diller was open to a deal at a better price knowing that he has tax savings.
Diller and Malone might not be done yet. As mentioned, Liberty Ventures has a similar stake in Expedia that could see the same type of transaction. Apparently, Malone commented favorably on the outlook for Expedia at a recent public forum. Expedia shares popped yesterday when the Tripadvisor news hit on speculation a similar deal could be announced before year-end.
Wall Street has also been speculating that fiscal cliff is impacting investor decisions to realize profits on big winners. A good example is Apple
(NASDAQ:AAPL). There have been some missteps. The maps rollout was a mess and Apple has been unable to supply popular products at the same time that competitors are rolling out more competitive phones. Margins are under pressure this quarter as Apple upgrades its product line.
Those are real reasons to sell the shares if you are so inclined. A number of analysts and commentators also believe that Apple, and other big-winning stocks of recent years, are being sold in 2012 to avoid the big bump in capital gains taxes coming in 2013. For high-bracket, taxable investors this does seem like a motivator. I am a little skeptical of the broader market implications, however, as most money invested is in non-taxable accounts, like pensions, IRAs, and charitable entities.
The bottom line is investors have to be on their toes this December. Paying close attention is always important, but this year, with uncertainty over pending changes in tax laws, there is less time to relax and celebrate the season.
Las Vegas Sands, Liberty Interactive, and Liberty Media are net long positions in the Entermedia Funds. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in Entermedia’s investment management company, and has personal monies invested in the Funds. Liberty Media is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor.
This column was previously published by SNL Kagan on www.snl.com.
No positions in stocks mentioned.
Entermedia is a long/short equity hedge fund focused on media, communic=
ations, and related technologies. Steve Birenberg is co-portfolio manager o=
f Entermedia, owns a stake in the Funds' investment management compan=
y, and has personal monies invested in the Funds. CBS and Discovery Communi=
cations are widely held by Northlake Capital Management, LLC, including in =
Steve Birenberg's personal accounts. Steve is sole proprietor of Nort=
hlake, a long only registered investment advisor.
The information on this website solely reflects the analysis of or opin=
ion about the performance of securities and financial markets by the writer=
s whose articles appear on the site. The views expressed by the writers are=
not necessarily the views of Minyanville Media, Inc. or members of its man=
agement. Nothing contained on the website is intended to constitute a recom=
mendation or advice addressed to an individual investor or category of inve=
stors to purchase, sell or hold any security, or to take any action with re=
spect to the prospective movement of the securities markets or to solicit t=
he purchase or sale of any security. Any investment decisions must be made =
by the reader either individually or in consultation with his or her invest=
ment professional. Minyanville writers and staff may trade or hold position=
s in securities that are discussed in articles appearing on the website. Wr=
iters of articles are required to disclose whether they have a position in =
any stock or fund discussed in an article, but are not permitted to disclos=
e the size or direction of the position. Nothing on this website is intende=
d to solicit business of any kind for a writer's business or fund. Miny=
anville management and staff as well as contributing writers will not respo=
nd to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.