Banks lost big betting on canceled AbbVie-Shire merger

The ripple effects of AbbVie's canceled Shire ($SHPG) deal extend beyond the disgruntled hedge fund managers and spooked investors who've been making noise since the $55 billion buyout collapsed. Several large investment banks lost money, too, raising eyebrows over whether they're illegally betting their own funds.

Under the Volcker rule, banks have the right to inventory shares to sell to their clients, the Financial Times reports. But the AbbVie ($ABBV) agreement breakdown--and ensuing Shire share plunge--highlighted some banks' unusually large positions in Shire. Citi, for instance, lost around $20 million, while Credit Suisse took a $6 million hit. Barclays, Goldman Sachs and others were hit hard, too.

"It is difficult to justify this sort of activity as normal market-making," one London-based senior investment banker told the newspaper.

The banks had plenty of company in the loss department after a U.S. crackdown on tax inversions spurred Illinois-based AbbVie to back out of the pact. Paul Singer, founder and CEO of hedge fund Elliott Management, said last month he might sue AbbVie for calling off the deal, thanks to the losses he had incurred. Other Shire investors had it even worse: Take Frank Brosens' Taconic Capital, which fell 2.5% in October, and John Paulson, whose Advantage fund dove 3%.

Deal-focused hedge funds are feeling the heat, too, as once-burned investors prove slow to return. Many funds are "derisking," cutting down their exposure to deals to lessen the amount of overall risk they'll face down the road.

Shire CEO Flemming Ornskov

Meanwhile, the canceled transaction hasn't scared AbbVie or Shire away from the bargaining table, although neither pharma seems primed to do another deal in the $55 billion range. AbbVie chief Richard Gonzalez says his company has the "wherewithal to be active on the M&A front" and would be scouting for strategic fits.

And last week, Shire helmsman Flemming Ornskov said pickups--part of his company's DNA--would definitely factor into its plans to hit $10 billion in product sales by 2020. "I can assure you that we will be doing additional deals" before then, he said. "It's how we grow business."

- read the FT story (sub. req.)

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