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The Morning Brief: Pershing Square, Valeant in Bid to Buy Allergan

In a potentially blockbuster merger deal in the drug industry, William Ackman’s Pershing Square Capital Management and Valeant Pharmaceuticals International, a popular hedge fund stock, are teaming up to make a bid to buy Allergan, best known for its Botox anti-wrinkle products. Pershing Square disclosed in a regulatory filing that it owns 9.7 percent of Allergan’s shares.

The hedge fund firm began buying the stock in late February and now owns 28.88 million shares of common stock — which includes 24.83 million shares underlying call options and 3.45 million shares underlying forward purchase contracts — according to the filing. This makes his stake worth more than $4.1 billion, making it the largest investment ever by the activist. Interestingly, while he was building this stake, Ackman was aggressively paring his position in Beam, the distillery.

At the end of the fourth quarter, no activist was ranked among the top-ten holders of Allergan. Valeant is favored by many activists and other hedge funds, including Jeffrey Ubben’s ValueAct Capital, a long-time activist in the stock who has made a lot of money from the position over the years. Several high profile Tiger Cubs are also big investors in Valeant, including Stephen Mandel, Jr.’s Lone Pine Capital.

“Valeant and others are part of a pharmaceutical industry restructuring that should continue over the next decade,” Mandel recently told clients in his first quarter report. It was also the fourth largest long position in O. Andreas Halvorsen’s Viking Global Investors fund, according to its first quarter letter recently sent to clients. Shares of Allergan surged 6 percent on Monday and then another 13 percent or so in after-hours trading. Shares of Valeant jumped 3.24 percent on Monday and another 11 percent or so in after-hours trading.

Investors pumped $26.3 billion of new capital into the hedge fund industry in the first quarter, according to the latest hedge fund industry report from Chicago-based data tracker Hedge Fund Research. This boosted total global hedge fund capital to $2.70 trillion. This was the largest total amount of inflows in one quarter since the second quarter of 2011. First quarter inflows were led by equity hedge strategies, which took in the largest quarterly inflow since the first quarter of 2007. Event driven strategies also experienced major inflows, led by activist strategies. On the other hand, fund of hedge funds experienced their thirteenth consecutive monthly net outflow.

It looks like many of the top performing hedge funds in the first quarter were among the smaller funds. For example, Bruce Berkowitz’s The Fairholme Partnership rose 8.61 percent during the three-month period. It had $243 million in assets as of April 1. The fund, launched in January 1, 2013, invests in equity and fixed-income securities acquired at prices that Fairholme deems to be well below their intrinsic value. The securities include preferred and common stock, bank debt, convertible securities and bonds, warrants and interests in real estate investment trusts.

Good news for momentum investors. Shares of Netflix surged more than 6 percent in after-hours trading after the video streaming company reported quarterly earnings that beat consensus forecasts and revenues and subscriber growth that were in line with expectations.

Deutsche Bank raised its price target on DuPont, one of the core holdings of Nelson Peltz’s Trian Partners, to $75 from $70, noting that the stock fell 1 percent following its first-quarter results, which were in line with expectations. It pointed to the planned spinoff of its performance chemicals unit, scheduled for the second quarter of 2015, and $2 billion in buybacks, among other factors.

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