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The Morning Brief: Paul Singer’s Elliott Unveils New Activist Stake

Paul Singer’s New York-based Elliott Management disclosed an 8.1 percent stake in Mentor Graphics, sending the electronics design company’s shares surging more than 7 percent, to close at $26.44. In a regulatory filing, Elliott, which has a strong record taking activist positions in technology companies, said the stock is deeply undervalued and it has spoken with management and the board of directors about ways to boost the shares.

Elliott added that it sees opportunities to enhance operational efficiency and revenue quality — and it sees strategic opportunities as well. This seems to be a recurring theme for Elliott. In June, Qlik Technologies agreed to be acquired by private equity firm Thoma Bravo for about $3 billion in cash three months after Elliott disclosed an activist stake. In December 2014, network equipment maker Riverbed Technology agreed to be acquired by private equity firm Thoma Bravo and Teachers’ Private Capital, the private investor department of the Ontario Teachers’ Pension Plan, for $3.6 billion. Elliott had offered to buy the company earlier in the year. Tech companies Compuware and Informatica also were acquired by private equity firms after Elliott earlier targeted them in activist campaigns.

At the end of the second quarter, Elliott was the third-largest shareholder of Mentor Graphics, with about 4 percent of the shares. It now appears to be the largest shareholder.

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Fitch Ratings put Och-Ziff Capital Management's BBB- rating on negative watch after the New York hedge fund firm settled bribery charges with the federal government, agreeing to pay $413 million in penalties. This means the firm’s debt is now closer to junk status.

“The Rating Watch Negative indicates a heightened probability of potential negative rating action over a shorter period of time relative to the Negative Outlook previously assigned to OZM,” Fitch said in a press release. “While OZM’s parent company avoided a guilty plea as part of the settlement, Fitch believes that the guilty plea by its subsidiary, OZ Africa Management GP LLC, and the administrative settlements agreed to by Daniel Och and Joel Frank could potentially contribute to reputational damage for the overall firm and result in near-term assets under management (AUM) outflows.” Shares of Och-Ziff fell 3.34 percent, to close at $4.34.

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Credit Suisse raised its price target on Willis Towers Watson Public Limited Co., a big holding for Jeffrey Ubben’s San Francisco-based ValueAct Capital Management, from $108 to $124. The bank’s analysts made the change after attending the first investor day event held by the consulting and human resources firm following its recent merger.

In a note to clients, the investment bank said the company’s primary message was management’s confidence that it could meet key targets, such as at least $10.10 in earnings per share in 2018 and a 25 percent cash flow margin under a variety of revenue growth scenarios, even if the company only grows revenues at an average of 2.5 percent for the next two years. “An emphasis on expense management was the main idea underpinning the company’s confidence,” it adds. Credit Suisse also notes that until the meeting it had been on the sidelines regarding the stock. Barclays raised its earnings estimates but maintained its $148 price target and overweight rating.

Not everyone was impressed, however. Deutsche Bank laments to its clients that management failed to answer important questions. “In particular, our questions involve the achievability of 2018 guidance and the true extent of the savings possible under current restructuring,” it adds. So, the investment bank thinks the 2018 EPS guidance of $10.10 “could be a stretch.” So it maintained its hold rating on the stock. Shares of Willis Towers Watson Friday jumped 2.30 percent to close at $132.77.

ValueAct is the third largest shareholder. The company resulted from the merger of Willis Group Holdings and Towers Watson & Co., two earlier ValueAct investments.

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