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<ul><li>Archegos' use of financial derivatives helped it increase its leverage that triggered a $20 billion liquidation and rattled financial <keyword id="31671" type="CITY" weightage="100" keywordseo="markets">markets</keyword> last week.</li><li>In 2002, <keyword id="6358963" type="DEFINITION" weightage="60" keywordseo="Warren-Buffett">Warren Buffett</keyword> described derivatives as "financial weapons of mass destruction."</li><li>Buffett said that derivatives were expanding "unchecked" and that governments had no way to control or monitor the extreme risks posed by them.</li><li><a href="https://newsletter.businessinsider.com/join/4np/10-things-opening-bell?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingestarkets&amp;utm_medium=ingest">Sign up here for our daily newsletter, 10 Things Before the Opening Bell</a>.</li></ul>The derivatives instruments that triggered the <keyword id="11012106" type="UNKNOWN" weightage="60" keywordseo="archegos-capital">Archegos Capital</keyword> Management implosion have for years been scrutinized by regulators and some of Wall Street's biggest investors, including Warren Buffett.In <a href="https://www.berkshirehathaway.com/2002ar/2002ar.pdf">Berkshire Hathaway's 2002 annual report</a>, Buffett called derivatives "financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."Archegos' investments were partially concentrated in derivatives called total-return swaps. The highly leveraged trading strategy also had a role in the fallout of <keyword id="954594" type="COMPANY" weightage="60" keywordseo="Long-Term-Capital-Management">Long-Term Capital Management</keyword>, a hedge fund that failed in 1998 and ultimately required a bailout from a consortium of Wall Street banks to prevent a financial-market collapse.In the letter, Buffett described how LTCM used total-return swaps and how the instruments are contracts that can facilitate 100% leverage in various markets, including stocks.In a total-return swap, one party, usually a bank, puts up all the money for the purchase of a stock, and another party, without putting up any capital, agrees that at a future date it will receive any gain or pay any loss that the bank realizes, Buffett explained."Total-return swaps of this type make a joke of margin requirements. Beyond that, other types of derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions," the investor said.He said highly experienced investors and analysts could encounter major problems analyzing the financial conditions of firms that are heavily involved with derivatives contracts, including total-return swaps. He said that when he and Berkshire Vice Chairman Charlie Munger read through the footnotes detailing the derivatives activities of major banks, the only thing they understood was that they didn't understand how much risk the institution was running."The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear," Buffett said.He said that the derivatives businesses were expanding "unchecked" and that central banks and governments had found no effective way to control or even monitor the risks posed by these contracts.Almost 20 years later, Bill Hwang's use of derivatives like total-return swaps helped enable him to increase his leverage and ultimately triggered a $20 billion liquidation of his family office. <a href="https://markets.businessinsider.com/news/stocks/archegos-capital-margin-call-20-billion-liquidation-8-stocks-plummeted-2021-3-1030254795?utm_source=markets&amp;utm_medium=ingestgest">The trades rattled stocks last Friday</a>, as ViacomCBS and Discovery faced their largest daily declines on record. And while some banks like Goldman Sachs and Wells Fargo <a href="https://markets.businessinsider.com/news/stocks/wells-fargo-stock-price-no-losses-archegos-capital-margin-call-2021-3-1030260227?utm_source=markets&amp;utm_medium=ingestgest">managed to escape losses</a> by quickly liquidating their exposure to Archegos,<a href="https://markets.businessinsider.com/news/stocks/nomura-takes-2-billion-loss-after-last-weeks-sell-off-2021-3-1030252569?utm_source=markets&amp;utm_medium=ingestgest"> others like Nomura</a> and <a href="https://markets.businessinsider.com/news/stocks/credit-suisse-market-capitalization-archegos-hwang-margin-call-stock-sales-2021-3-1030253684?utm_source=markets&amp;utm_medium=ingestgest">Credit Suisse could face billions in losses from the trades</a>.Archegos was trading on leverage using total-return swaps, and, <a href="https://www.forbes.com/sites/antoinegara/2021/03/29/the-firm-behind-the-30-billion-yardsale-shaking-financial-markets-disclosed-almost-nothing/?sh=51b4dc8b3567">according to Forbes</a>, the family office did not disclose its position and subsequent transactions because Securities and Exchange Commission law exempts family offices from disclosing these trades.The SEC has opened an investigation into Archegos, <a href="https://markets.businessinsider.com/news/stocks/sec-opens-investigation-archegos-capital-trades-sparked-margin-call-2021-3-1030265726">but it might not lead to any allegations of wrongdoing</a>.

Warren Buffett warned 18 years ago about the financial instruments that triggered the Archegos implosion

<ul><li><keyword id="1150206" type="PERSON" weightage="60" keywordseo="Bill-Ackman">Bill Ackman</keyword>'s Pershing Square posted a record 70% return in 2020.</li><li>The billionaire investor's new hedge has already tripled in value to almost $500 million.</li><li>Ackman won't close his first <keyword id="1817616" type="ORGANIZATION" weightage="60" keywordseo="SPAC">SPAC</keyword> deal this quarter, but he's already planning a second.</li><li><a href="https://www.businessinsider.com/?hprecirc-bullet">See more stories on Insider's business page</a>.</li></ul>Billionaire investor Bill Ackman trumpeted his fund's record performance last year, revealed his latest hedge has tripled in value to nearly $500 million, and touched on his plans for a second blank-check company in his shareholder letter <a href="https://assets.pershingsquareholdings.com/2021/03/29100010/Pershing-Square-Holdings-Ltd.-2020-Annual-Report.pdf">this week</a>.Here are the five key takeaways from Ackman's letter.<h2>Pershing outperformed thanks to pandemic bets</h2>Pershing Square scored a 70% increase in net asset value including dividends in 2020, notching its best annual return in its 17-year history, Ackman said. The fund has delivered a compound annual return of 17.1% since its inception in 2004, outpacing the S&amp;P 500's 9.8% return over the same period.Put another way, Pershing's early backers have earned a 15-fold investment gain in 17 years, dwarfing the five-fold gain they would have earned in a zero-cost S&amp;P 500 index fund during that period, Ackman said.Ackman's <a href="https://markets.businessinsider.com/news/stocks/bill-ackman-hedge-profits-billions-coronavirus-tanks-stock-market-economy-2020-3-1029035562?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingestm=ingest">pandemic hedge</a> last spring, which involved spending $27 million on credit-default swaps then selling them for $2.6 billion weeks later, accounted for 45% of Pershing's net gain last year.Another 25% stemmed from Ackman's decision to invest more than $2 billion of the hedge proceeds into beaten-down stocks in its portfolio during the market downturn, he said.In other words, 70% of Pershing's net investment gains had nothing to do with the underlying performance of the companies in its portfolio, Ackman said.<h2>Another hedge is paying off</h2>Ackman noted in his letter that Pershing owns "very large notional hedges in the form of interest rate swaptions" that it <a href="https://markets.businessinsider.com/news/stocks/billionaire-investor-bill-ackman-pershing-square-hedges-pandemic-3-billion-2020-11-1029791140">bought between December and early February</a>. Like his pandemic hedge, they "have a potential payoff that is multiples of our capital at risk," he said.The investor touted the fact that Pershing spent $157 million on those positions, and they've already tripled in value to $493 million, equivalent to 4.2% of the fund's total assets.<h2>The SPAC hunt continues</h2>Ackman discussed Pershing Square Tontine, the special-purpose acquisition vehicle he took public last year, in his letter. While he remains confident the SPAC will be an important contributor to the fund's future success, he admitted it wouldn't achieve its goal of closing an acquisition this quarter.The investor softened the blow by saying Pershing would likely launch a second SPAC after the first one seals a deal. Shareholders in the first SPAC will likely be able to invest in the second vehicle without paying a premium, he added.<h2>Pershing isn't another conglomerate</h2>Ackman quoted from <keyword id="6358963" type="DEFINITION" weightage="60" keywordseo="Warren-Buffett">Warren Buffett</keyword>'s latest letter to <keyword id="6362665" type="ORGANIZATION" weightage="60" keywordseo="berkshire-hathaway">Berkshire Hathaway</keyword> shareholders about the "terrible reputation" of conglomerates.He argued Pershing doesn't suffer from several of the disadvantages of conglomerates that Buffett outlined. For example, it can buy controlling interests in quality companies at attractive prices, and take non-controlling interests in businesses.It also doesn't have to pay corporate taxes as it's a closed-ended fund registered in Guernsey. It can also access cheap, long-term funding via publicly traded bonds, Ackman said.Moreover, Pershing can buy non-controlling interests in businesses cheaply, and still exert similar influence to a controlling shareholder without having to pay a control premium. Ackman described that as enjoying the "best of both worlds."<h2>Companies can help solve the world's problems</h2>Ackman addressed the push for environmental, social, and governance (<keyword id="77363" type="ORGANIZATION" weightage="60" keywordseo="ESG">ESG</keyword>) standards for corporations in his letter. He argued that "philanthropy alone cannot save the world," governments can't be relied on to solve all the problems either, and capitalism is "far from perfect."However, he emphasized that high-quality, responsible businesses can create jobs, generate returns for investors, savers, and pensioners, and provide desirable goods and services. Good ESG practices are "fundamentally aligned with running a successful business," he added.Ackman pointed to Agilent, Lowe's, Starbucks, and Chipotle as four companies in Pershing's portfolio that are making major strides towards greater sustainability.

Billionaire investor Bill Ackman trumpeted a record 70% return, touted a $500 million hedge, and teased a second SPAC in his shareholder letter. Here are the 5 key takeaways.

<ul class="summary-list"><li>Three Chinese tech firms will buyback $1.55 billion in shares after their stocks fell due to the <keyword id="11012164" type="UNKNOWN" weightage="60" keywordseo="archegos">Archegos</keyword>' blow-up.</li><li>Hedge fund Archegos Capital Management was forced to liquidate its positions due to margin calls from banks.</li><li><keyword id="4897273" type="COMPANY" weightage="60" keywordseo="vipshop">Vipshop</keyword>, <keyword id="6050734" type="UNKNOWN" weightage="60" keywordseo="Tencent-Music">Tencent Music</keyword>, and <keyword id="9805348" type="UNKNOWN" weightage="60" keywordseo="gsx-techedu">GSX Techedu</keyword> all announced share buybacks in the past week.</li></ul>The Chinese tech firms <a href="https://markets.businessinsider.com/stocks/vips-stock">Vipshop</a>, <a href="https://markets.businessinsider.com/stocks/tme-stock">Tencent Music Entertainment</a>, and <a href="https://markets.businessinsider.com/stocks/gsx-stock">GSX Techedu</a> all announced share buybacks after getting hammered by the hedge fund Archegos' blow-up at the end of last week.Tencent Music Entertainment's board <a href="https://www.prnewswire.com/news-releases/tencent-music-entertainment-group-announces-1-billion-share-repurchase-program-301257167.html">approved</a> a $1 billion buyback program of its class A shares over the next 12 months on Sunday. Vipshop followed suit this week <a href="https://www.prnewswire.com/news-releases/vipshop-announces-us500-million-share-repurchase-program-301258302.html">authorizing</a> a $500 million share buyback program over the next 24 months on Tuesday. Both companies plan on using their existing cash balances for the repurchases.Larry Xiangdong Chen, the founder, chairman and CEO of GSX Techedu, said he would use personal funds to <a href="https://www.prnewswire.com/news-releases/gsx-announces-mr-larry-xiangdong-chens-share-purchase-plan-of-up-to-us50-million-shares-301258296.html">buy back $50 million worth</a> of his education technology company over the next 12 months in a Tuesday press release as well.The three Chinese firms were hurt by the <a href="https://www.businessinsider.com/archegos-hedge-fund-liquidation-wall-street-credit-suisse-nomura-goldman-2021-3">forced liquidation of Archegos' Capital Management</a>, a hedge fund that failed to meet <a href="https://www.businessinsider.com/what-is-a-margin-call">margin calls</a> from big banks including Goldman Sachs, Morgan Stanley, Credit Suisse, Nomura, UBS, and Deutsche Bank.Archegos' had placed leveraged bets on the Chinese tech firms, among others. When it was forced to rapidly liquidate its positions to pay back banks, shares of its holdings plummeted.In the past week alone, as of Monday's closing price, Vipshop fell over 37% while Tencent Music Entertainment and GSX Techedu fell 36% and 56%, respectively.The Archegos blow-up didn't just hurt the hedge fund's holdings either. Banks like Credit Suisse and Nomura have said they are facing <a href="https://www.businessinsider.com/credit-suisse-price-nomura-losses-banks-archegos-stock-firesale-2021-3">significant losses</a> stemming from the event.Archegos' was run by <keyword id="11012210" type="UNKNOWN" weightage="60" keywordseo="bill-hwang">Bill Hwang</keyword>, a former protégé of the hedge-fund titan Julian Robertson, who founded Tiger Capital Management.Hwang used "total return swaps" to borrow huge sums from banks in relative anonymity without having to put down as much collateral. "Total return swaps" allow users to take on the profits and losses of a portfolio in exchange for a fee.The tactic has been widely criticized by economists and investors including Warren Buffett. The "oracle of Omaha" said in a <a href="https://www.berkshirehathaway.com/letters/2002pdf.pdf">2002 letter to investors</a> that these types of "derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

Chinese tech firms hammered by the Archegos blow-up announce share buybacks

Welcome to <keyword id="11420569" type="UNKNOWN" weightage="60" keywordseo="insider-finance">Insider Finance</keyword>. If this was forwarded to you, <a href="http://newsletter.businessinsider.com/join/4np/insider-finance">sign up here</a>. Plus, download Insider's app for news on the go - <a href="https://apps.apple.com/app/apple-store/id554260576?pt=385758&amp;ct=06292021_newsletters&amp;mt=8amp;mt=8">click here for iOS</a> and <a href="https://play.google.com/store/apps/details?id=com.freerange360.mpp.businessinsider&amp;r[%E2%80%A6]ers%26utm_medium%3Demail%26utm_term%3D06292021%26anid%3Dadmobdmob">here for Android</a>.On the agenda today:<ul><li>Goldman Sachs just hired a top engineer <a href="https://www.businessinsider.com/goldman-sachs-poaches-aws-exec-kamlesh-talreja-asset-management-engineering-2021-8">from Amazon Web Services. </a></li><li><keyword id="42111" type="COMPANY" weightage="60" keywordseo="Wall-Street">Wall Street</keyword> is all-in on the cloud - but <a href="https://www.businessinsider.com/public-cloud-wall-street-regulators-slow-wider-adoption-google-survey-2021-8">one thing stands in the way of its widespread adoption.</a></li><li>China has signalled that its tech crackdown <a href="https://markets.businessinsider.com/news/stocks/china-tech-regulation-crackdown-tougher-legislation-key-industries-2021-8">is nowhere near over.</a> </li></ul>Let's get started. <a href="https://www.businessinsider.com/goldman-sachs-poaches-aws-exec-kamlesh-talreja-asset-management-engineering-2021-8">Goldman Sachs just poached an AWS exec</a><a href="https://www.businessinsider.com/goldman-sachs-poaches-aws-exec-kamlesh-talreja-asset-management-engineering-2021-8"></a>Goldman Sachs just gained a top engineer from Amazon Web Services, as the bank leans more into cloud technology. Kamlesh Talreja will join as a partner and cohead of engineering for asset management. <a href="https://www.businessinsider.com/goldman-sachs-poaches-aws-exec-kamlesh-talreja-asset-management-engineering-2021-8">More on that hire here.</a><a href="https://markets.businessinsider.com/news/stocks/buffett-brazil-fintech-nubank-ipo-digital-bank-stocks-berkshire-nasdaq-2021-8">A Buffett-backed Brazilian fintech firm is eyeing a $2 billion US IPO</a><a href="https://markets.businessinsider.com/news/stocks/buffett-brazil-fintech-nubank-ipo-digital-bank-stocks-berkshire-nasdaq-2021-8"><div type="image" title="NuBank" height="3333" width="4444" msid="85299747" hostid="261"></div></a>Brazilian digital bank Nubank, which is backed by legendary investor Warren Buffett's company, is planning an initial public offering of more than $2 billion in the US stock market. <a href="https://markets.businessinsider.com/news/stocks/buffett-brazil-fintech-nubank-ipo-digital-bank-stocks-berkshire-nasdaq-2021-8">Everything we know so far.</a><a href="https://www.businessinsider.com/public-cloud-wall-street-regulators-slow-wider-adoption-google-survey-2021-8">Wall Street is all-in on the public cloud</a><a href="https://www.businessinsider.com/public-cloud-wall-street-regulators-slow-wider-adoption-google-survey-2021-8"><div type="image" title="banks and public cloud providers 4x3" height="900" width="1200" msid="85299748" hostid="261"></div></a>A recent survey from Google Cloud shows public-cloud adoption on Wall Street is gaining steam. But regulatory uncertainty, which heightened over the past year, remains a threat to its widespread adoption. <a href="https://www.businessinsider.com/public-cloud-wall-street-regulators-slow-wider-adoption-google-survey-2021-8">Here's what Google Cloud is doing to fix that.</a><a href="https://markets.businessinsider.com/news/currencies/cryptcurrency-blockchain-investments-already-at-record-2021-institutional-adoption-kpmg-2021-8">Crypto and blockchain investments in 2021 exceed record</a><a href="https://markets.businessinsider.com/news/currencies/cryptcurrency-blockchain-investments-already-at-record-2021-institutional-adoption-kpmg-2021-8"><div type="image" title="Bitcoin cryptocurrency coin and a graph" height="682" width="910" msid="85299751" hostid="261"></div></a>New data from KPMG show that cryptocurrency and blockchain investments this year have already surpassed 2020's record total. The surge can partially be attributed to increased institutional adoption, while venture capital and NFTs have also played a role. <a href="https://markets.businessinsider.com/news/currencies/cryptcurrency-blockchain-investments-already-at-record-2021-institutional-adoption-kpmg-2021-8">See this year's figures so far.</a><a href="https://www.businessinsider.com/fund-managers-hiring-virtual-wholesalers-sales-compensation-pay-blackrock-invesco-2021-8">Fund managers are swapping traveling salespeople for remote teams</a><a href="https://www.businessinsider.com/fund-managers-hiring-virtual-wholesalers-sales-compensation-pay-blackrock-invesco-2021-8"><div type="image" title="The Wall Street bull tempting suited hands with a one hundred dollar bill on a purple background" height="1800" width="2401" msid="85299753" hostid="261"></div></a>Asset managers like BlackRock and Invesco are changing the way they sell funds to advisors. Instead of hiring traveling salespeople, managers say they expect to fill more hybrid roles that mesh in-person and digital interactions. <a href="https://www.businessinsider.com/fund-managers-hiring-virtual-wholesalers-sales-compensation-pay-blackrock-invesco-2021-8">Here's how the shakeup is impacting pay and hiring.</a><a href="https://markets.businessinsider.com/news/stocks/china-tech-regulation-crackdown-tougher-legislation-key-industries-2021-8">China signals its tech crackdown isn't ending anytime soon</a><a href="https://markets.businessinsider.com/news/stocks/china-tech-regulation-crackdown-tougher-legislation-key-industries-2021-8"><div type="image" title="china crowd" height="2666" width="3555" msid="85299759" hostid="261"></div></a>China's tech crackdown will likely persist - and tougher rules will be implemented for other key industries - according to a five-year blueprint the country issued on Wednesday. <a href="https://markets.businessinsider.com/news/stocks/china-tech-regulation-crackdown-tougher-legislation-key-industries-2021-8">Here's what you can expect.</a><a href="https://www.businessinsider.com/covid-19-return-to-work-plans-delta-california-blackrock-jefferies-2021-8">LA County's pension fund just delayed its return-to-office plans</a><a href="https://www.businessinsider.com/covid-19-return-to-work-plans-delta-california-blackrock-jefferies-2021-8"><div type="image" title="GN Jane Tyska:Digital First Media:East Bay Times via Getty Images" height="3362" width="4483" msid="85299764" hostid="261"></div></a>The Los Angeles County Employees Retirement Association has pushed back its return-to-office date to October after two staffers contracted Covid-19. It's just the latest employer to delay its office reopening <a href="https://www.businessinsider.com/covid-19-return-to-work-plans-delta-california-blackrock-jefferies-2021-8">as the Delta variant throws a wrench in planning.</a>On our radar: <ul><li>A Dutch family that sold all their assets to buy bitcoin in 2017 say they're stashing their holdings in <a href="https://www.businessinsider.com/bitcoin-price-family-bought-at-900-hiding-it-around-world-2021-8">six secret locations around the world.</a></li><li>MBA grads are often warned not to take jobs in venture. <a href="https://www.businessinsider.com/young-vcs-say-their-mbas-helped-them-but-you-have-to-be-careful">Three young VCs tell us why they did it anyway.</a></li><li>Per the Wall Street Journal, Goldman Sachs and other major financial firms are funding a new program <a href="https://www.wsj.com/articles/goldman-sachs-other-financial-firms-back-program-to-diversify-wall-street-11628764200">to help diversify Wall Street.</a></li><li>A new invite-only app will let viewers trade stocks as they watch <keyword id="25455" type="ORGANIZATION" weightage="100" keywordseo="finance">finance</keyword> influencers livestream. <a href="https://www.businessinsider.com/tradingtv-is-a-new-livestreaming-app-focused-on-stock-trading-2021-8">Check out the Twitch-style platform.</a></li><li>The Wall Street Journal reported Jump Trading Group is building a team to execute stock orders for individual investors. <a href="https://www.wsj.com/articles/high-speed-trading-firm-jump-to-execute-retail-investors-stock-trades-11628760601">Here's why that matters.</a> </li><li>This year's epic surge in lumber sent cheese prices to a 15-month low. <a href="https://markets.businessinsider.com/news/commodities/lumber-cheese-price-today-cme-wood-barrel-box-real-estate-2021-08">We explain why. </a></li></ul>

Goldman nabs AWS exec - Wall Street all-in on cloud - China's indefinite crackdown

<div class="KonaFilter image-container display-table float_right"><div><div class="image">Oxford Said Business School</div></div></div>It seems totally normal - one pharmaceutical company wants to buy another pharmaceutical company. Dog bites man, the world turns on its axis, nothing to see here.
But the deal between Bill Ackman and drug-maker Valeant to buy its competitor, Allergan, the maker of Botox, isn't normal. It's a choice between two ways the pharmaceutical business model can go.
The difference is clear in two deals announced this week, the deal between <a href="http://online.wsj.com/news/articles/SB10001424052702304049904579516781336718684?mg=reno64-wsj">GlaxoSmithKline and Novartis</a>, and of course the $45 billion Ackman-Valeant deal.
In one model companies laser focus on certain segments of the industry that they've mastered to lead innovation. In another model - the Ackman Valeant model - companies become massive and chase innovation wherever they think they see it.
<a href="http://www.ft.com/cms/s/0/193748c8-ca44-11e3-bb92-00144feabdc0.html#axzz2zoCrhrXd">The FT's John Gapper</a> paints an ugly picture of the difference in a brutal op-ed.
Lets start with the good stuff first.
In case you missed it, GlaxoSmithKline and Novartis announced this week that they're doing an almost $25 billion deal in which they essentially swap some businesses so they can focus on what each company does best.
Glaxo will hand over its cancer drug unit, which plays to Novartis' prescription drug strength, Novartis will sell its vaccines business which better suits Glaxo. Together they will form a new consumer health venture as well.
Then there's the bad.
"If the entire industry adopted Valeant's approach, drug discovery would grind to a halt," says the FT piece's sub headline.
The Ackman-Valeant approach is to cut costs as much as possible, especially any expensive, early stage R&amp;D, and simply acquire innovation by acquiring companies with simple products that consumers understand (like Botox).
That is why, if Allergan is acquired, it's $1.1 billion R&amp;D budget will be cut by $900 million.
That is why Valeant's R&amp;D expense is only 3% when industry-wide expense R&amp;D is 19%.
It is also why Valeant's pre-tax return on capital is 8-10%, versus 25-30% for the industry.
The pharmaceutical industry grows, but at too slow a rate for ambitious Valeant CEO Michael Pearson. He wants to grow Valeant from a $40 billion company to a $150 billion company in 2016 by lagging innovation ever-so-slightly and giving the people what they want, not discovering what they need.
He and Ackman have both said they have a long term vision for the company and this deal, but Ackman's fund need only stick around for one year. In the pharmaceutical industry - an industry measured in decades - that is faster than the blink of an eye.
It is on that point that Gapper brings out the knives. From the FT:
In a presentation this week, Mr Ackman compared Mr Pearson to other managerial iconoclasts such as Warren Buffett, the investor, and Katharine Graham, former publisher of The Washington Post.
That analogy would work if Graham had fired most of the Post newsroom, including Bob Woodward and Carl Bernstein, who broke the Watergate scandal, and bought wire copy instead on the grounds that investigative journalism was a high-risk, low-return activity. In reality, she took a much longer-term view of investment in a business, as does Mr Buffett.
Valeant and Ackman will go into Allergan and cut jobs. On the flip side Novartis announced during its first quarter earnings release Thursday that it's creating them with a new unit called Novartis Business Services. It will employee 7,000 people.
Oh, and Novartis reported a 20% Q1 earnings jump.
Remember what your parents told you about short cuts, people.

The Financial Times Rips Bill Ackman's New Deal Apart

<div class="KonaFilter image-container display-table float_right"><div><div class="image on-image"></div></div></div>Stocks are back at all-time highs.&#xa0;After spending about a month trading just off record levels, the S&amp;P 500 powered back to an all-time high on Thursday and fractionally improved on this to end the week, <a href="http://www.businessinsider.com/closing-bell-may-15-2015-5">closing at 2,122.73 on Friday</a>.&#xa0;Meanwhile, economic data has continued to disappoint, with <a href="http://www.businessinsider.com/us-retail-sales-disappoint-2015-5">readings on retail sales in April</a> and <a href="http://www.businessinsider.com/umich-consumer-confidence-may-15-2015-5">consumer confidence in May</a> both disappointing this week, putting the spring economic recovery in doubt.The Atlanta Fed's GDPNow tracker, <a href="http://www.businessinsider.com/atlanta-fed-gdp-tracker-2015-4">which was spot-on</a> in predicting the initial reading 0.2% growth reading for first quarter GDP, <a href="https://www.frbatlanta.org/cqer/researchcq/gdpnow.cfm">now forecasts</a> that the economy is on pace to grow just 0.7% in the second quarter.Here's your Monday Scouting Report:Top StoriesThe spring economic recovery is in doubt. "Our forecast for GDP growth continues to slide," write Bank of America Merrill Lynch economists Michelle Meyer and Alex Lin. "We are now tracking -1.2% for 1Q and 2.5% for 2Q, implying 0.7% growth in the first half of the year. This is not the bounce we were hoping for."&#xa0;This past week, data on <a href="http://www.businessinsider.com/us-retail-sales-disappoint-2015-5">retail sales</a> and <a href="http://www.businessinsider.com/umich-consumer-confidence-may-15-2015-5">consumer confidence</a> disappointed, leading some in the market to throw the word "<a href="http://www.businessinsider.com/us-retail-sales-disappoint-2015-5">recession</a>" out there. The general softness in the economy has largely been attributed to the decline in oil prices and the rise of the US dollar, pressuring import and other prices as well as investment from the oil and gas industry. But the surprising absence so far this year has been the consumer.&#xa0;"The consumer was supposed to be the bright spot this year given the tailwinds of lower gasoline prices, healthier job growth, continued wealth gains and improving sentiment," Meyer and Lin write. "We have not yet seen this strength materialize, as core control retail sales have been essentially flat since last November."<div class="KonaFilter image-container display-table"><div><div class="image"></div></div></div> Meyer and Lin add: "Why the weakness? With a windfall of cash from lower gasoline prices, consumers are either being cautious, choosing to add a large portion to savings, or there is a longer lag to spending than we had expected. It could also be that consumers have learned from the crisis and have become more conservative about utilizing their wealth gains and managing debt."And <a href="http://www.businessinsider.com/tyler-cowen-nyt-economic-outlook-2015-5">writing in The New York Times this weekend</a>, economist Tyler Cowen asks if the repeated economic disappointments we've seen in the last several years are part of a larger economic reorientation that the US could be facing for years to come.&#xa0;Economic Calendar <ul><li>National Association of Homebuilders Housing Market Index (Mon): Kicking off a busy week of housing data will be the NAHB's Housing Market Index, <a href="http://www.businessinsider.com/nahb-housing-market-index-april-2015-2015-4">which rose to 56 in April</a> from a reading of 52 in March. In the April release, NAHB chief economist David Crowe said, "This uptick shows builders are feeling optimistic that the housing market will continue to strengthen throughout 2015." Expectations are for an improvement in May's reading to 57.&#xa0;</li><li>Housing Starts and Building Permits (Tues): After a deep plunge in February, housing starts rose 2% in March, and expectations are for Tuesday's report to show a 9.9% increase in starts during the first month of the second quarter. "We expect housing starts once again breached the psychologically important 1 million unit mark in April," Wells Fargo wrote in a note to clients. Expectations are for starts to rise to an annualized pace of 1.018 million, according to estimates from Bloomberg. Building permits are expected to rise 2.2% in April to an annualized pace of 1.065 million.</li><li>Minutes from the Federal Reserve's April 28-29 Meeting (Wed): "The Fed is in a bind," write economists at BNP Paribas. "On the one hand, the broad strokes of the medium-term outlook have not changed and, on this basis, moving rates away from the zero lower bound may soon be justified. On the other hand, numerous shocks have left the Fed more uncertain and possibly less confident in the growth outlook." BNP expects the minutes from the Federal Open Market Committee's latest meeting will reveal a "lengthy discussion" about the economic softness in the first quarter. On the labor front, BNP expects the discussion will be "succinct, but lacking enthusiasm." As for when the Fed might be compelled to raise rates, Bank of America Merrill Lynch's economics team writes: "Only a few members are likely to explicitly rule out a June hike in the April minutes, but data dependence should lead the Committee to be less certain of a near-term rate hike than at the March meeting. In light of recent Fed rhetoric, we do expect the minutes to reveal that the threshold for the first rate hike is relatively low."</li><li>Initial Jobless Claims (Thurs): Initial jobless claims are expected to rise to 270,000 from 264,000 the prior week. <a href="http://www.businessinsider.com/initial-jobless-claims-may-14-2015-5">Last Thursday's report</a>, however, revealed that the four-week moving average of initial jobless claims declined to the lowest level since April 2000. "The lower trend indicates that businesses have become more committed to their workers, which is consistent with a tightening labor market," Bank of America Merrill Lynch's economics team wrote.</li><li>Markit Economics Flash PMI (Thurs): &#xa0;Markit's initial reading on manufacturing activity in May is expected to show an uptick from April's final reading. Expectations are for the measure to come in at 54.5, up from 54.1 at the end of April. In April's final reading, Chris Williamson at Markit Economics said, "With manufacturing output growth slowing to the&#xa0;weakest seen so far this year and exports falling for&#xa0;the first time since November, the survey results&#xa0;raise worries that the dollar's appreciation is hurting&#xa0;the economy." In the last month, the dollar index has weakened by about 8%.</li><li>Philadelphia Federal Reserve Manufacturing Index (Thurs): The Philly Fed manufacturing index is expected to rise to 8 from a reading of 7.5 in April. In a note, Bank of America Merrill Lynch's economics team wrote, "The special questions in the last report noted that the stronger dollar only has a slightly negative impact on businesses, broadly speaking. However, domestic demand has also remained sluggish, limiting production, and we believe it is likely that we see more of the same in May."</li><li>Existing Home Sales (Thurs): Existing home sales rose 6.1% in March to an annualized rate of 5.2 million, and Thursday's number is expected to show a further improvement of 1% to a pace of 5.24 million in April. Pending home sales, which represent contracts signed but not yet closed, have risen in each of the last 3 months. "Supply constraints pose a threat to a strong spring home buying season, although inventories ticked up in March," write economists at Wells Fargo. "Despite this concern, we expect existing home sales posted a slight gain in April, rising to a 5.23 million seasonally adjusted annual rate."</li><li>Consumer Price Index (Fri): Inflation is expected to have remained muted in April. The consumer price index is expected to show a 0.1% increase month-on-month in April, while headline inflation is set to decline 0.2% from the prior year. "Core" inflation, which excludes more volatile items like food and energy, is expected to rise 0.2% on monthly basis in April, and 1.7% over the prior year. "Both important and producer prices were weak for April, suggesting that low inflation remains well entrenched," wrote Bank of America Merrill Lynch's economics team.&#xa0;</li></ul>Market CommentaryThe only thing left to earn in stocks may be the dividend. Writing in a note to clients over the weekend, David Kostin, chief US equity strategist at Goldman Sachs, said, "With the S&amp;P 500 trading at an all-time high, we expect its 2% dividend yield will be the sole contributor to total return during the next 12 months. The market will rise to 2150 by mid-year but fade after the Fed raises interest rates in September for the first time in nine years. Our year-end forecast is 2100 and our 12-month target equals 2125."Kostin notes that 165 S&amp;P 500 firms have raised dividends so far this year, with Apple and Exxon serving as major contributors to this growth.&#xa0;"The historical relationship between the cyclically-adjusted P/E multiple (currently 23.4x) and forward equity returns suggest the prospective 10- year annualized total return for the S&amp;P 500 will be 5%. Dividend levels implied by the swap market suggest that 46% of the total return during the next ten years will be derived from dividends, and 54% from price gain."For more insight about the middle market, visit <a href="https://urldefense.proofpoint.com/v1/url?u=http://mid-marketpulse.com&amp;k=S62Tl7vLGjW6AAK5ZFwEoQ%3D%3D%0A&amp;r=%2B2sEypbBAnV2mc5PLhBR08ZBMT%2BquZZGjxd0T7NNaP4%3D%0A&amp;m=UtLLChRIkxZLioNs9a5IxKFS7RONkU%2FjCuvoQ68P2Hw%3D%0A&amp;s=28acf971eb6ce00a636a9e28c206665a00dc8a6b849c5fbdd6236e929e9008ce" target="_blank">mid-marketpulse.com</a>. <div class="margin-top"> <h3>NOW WATCH: <a href="http://www.businessinsider.com/invest-warren-buffett-berkshire-hathaway-2015-2">How to invest like Warren Buffett</a></h3> <div> <div> <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="s3M3ZhbDpuxZm0OsRtnfcALpwlLIe4o6" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div> </div> </div> </div>

Here's your complete preview of this week's big economic events

Restaurant Brands International CEO Daniel Schwartz.Daniel Schwartz had spent a decade working his way up the corporate ladder on Wall Street when he decided to test his skills in a different trade: cooking burgers and cleaning toilets at a Burger King restaurant in Miami."It was a disaster," Schwartz said of his time working the Burger King drive-thru. "For the life of me, I could not make a good-looking ice-cream cone."Getting better at making ice-cream cones, though, wasn't really the point. The investment-banking analyst turned private-equity whiz kid had just been named CEO of the fast-food chain, the second biggest burger company in the world.Schwartz, a self-described millennial, had never worked in a restaurant before, let alone run a company. At 32, he was one of the youngest major restaurant CEOs in history.So he rolled up his sleeves and got to work in Burger King's kitchens, to find out why the fast-food chain's sales were essentially unchanged while chains like Chipotle and Panera were notching double-digit growth.For months, Schwartz split his time between the corporate offices and the restaurant kitchens where he would work the broiler, assemble sandwiches, and take customer orders. He even scrubbed toilets and washed the floors.Schwartz sat down with Business Insider on Friday for his first media interview since becoming CEO. He said he had one big takeaway from that early experience in restaurants: that Burger King's menu was out of control."It was so confusing - like really confusing in terms of which sauces need to go on which burgers, which toppings go where - and it was leading to worse order accuracy and a lot of waste, too," he said.That's why one of Schwartz's first moves as CEO was to simplify the menu by stripping it of dozens of products. He also launched a more rigorous process for selecting and rolling out new product launches."Our menu had gotten really complicated," Schwartz said. "We were doing way too much innovation and way too many limited-time offers."Schwartz also took a hatchet to corporate expenses by slashing executive perks - a hallmark of Burger King's owner, private-equity firm 3G Capital, where Schwartz is a partner.At the same time, Schwartz negotiated deals with restaurant operators in Brazil, China, Russia, and other international markets, which helped grow the number of Burger Kings worldwide by 21% to 16,768 in four years.Suddenly same-store sales started growing - after years of stagnation.Then 3G Capital executed a deal to buy Canadian coffee chain Tim Hortons in 2014 and created a new parent company, <a href="http://markets.businessinsider.com/stock/QSR-Quote">Restaurant Brands International</a>, to oversee the two brands with Schwartz at the helm.This year, the company added Popeye's Louisiana Kitchen to Restaurant Brands' portfolio in a $1.8 billion deal.When Schwartz took over Burger King, its market value was estimated to be around $9 billion. Restaurant Brands is now the third largest fast-food company in the world by market share, according to Euromonitor, and it's valued at $27 billion. Within the last year, its stock price has soared by more than 35%.Schwartz, now 36, is sitting at the top, earning more than $6 million in annual compensation.<h2>How a Wall Street whiz kid landed at the helm of Burger King</h2>Burger KingSchwartz grew up on Long Island, in New York, and assumed until college that he would follow in his father's footsteps and become a dentist, or perhaps a doctor like his uncles.In high school, he split his time between his classes, playing basketball, and tutoring math to other students - a job he got by advertising his services through a paid ad in the local newspaper. He enrolled in Cornell University in the fall of 1997 with the expectation that he would study medicine there, until a Finance 101 course sent him down another path.Inspired by his class, he started reading a number of business books in his free time and took a particular interest in the surge of private equity buyouts in the 1980s. He landed several internships in finance and after college, he got a job working in mergers and acquisitions at Credit Suisse.It was there that Schwartz got what he says is one of the best pieces of advice he ever received."Someone said to me, 'You have to work really, really hard to put yourself in a position to get lucky,'" Schwartz recalled.In 2005 when he was 24, Schwartz got lucky. He was hired by 3G Capital, a Brazilian investment firm that has made a reputation for itself by building the massive beer conglomerate Anheuser-Busch InBev. It is also the preferred investment partner of billionaire Warren Buffett.Schwartz worked hard, long hours and rose quickly through the ranks at 3G. After a few years, was promoted to partner and not long after that, when 3G was looking to buy a company in the US, he was tasked with finding potential acquisitions."I came across Burger King, and my theory was that the value of the brand was much bigger than the value of the business," he said. "It was the second largest fast-food chain in the world with $14 billion in system sales and it was operating in 80 countries and it's total value was only a few billion dollars compared to McDonald's," which had a market cap of around $60 billion at the time.After the buyout, Schwartz asked if he could help run the fast-food company, and he became its chief financial officer. He admits he was a little terrified."I was 30 and never worked in a company [operationally] so I was certainly not comfortable at first," Schwartz said.It seems like Schwartz got comfortable pretty quickly. In less than three years, he was promoted to CEO.<h2>Cutting the fat</h2>When Schwartz wasn't dressing burgers or shrinking Burger King's menu in his first couple months as CEO, he was weeding out and axing corporate perks.He sold Burger King's corporate jet, put an end to a $1 million annual party at a chateau in Italy, and did away with lavish offices that employees called "Mahogany Row.""Our office is across the street from the airport," Schwartz said of Burger King's headquarters in Miami. "I said, 'Do we really need a corporate jet? No. We can fly commercial.'"<a href="http://markets.businessinsider.com/stock/qsr-Quote">Markets Insider</a>Restaurant Brands International's stock price.Little was safe from Schwartz's cuts - even pencils and pens.He said he capped an "endless stream of office supplies" flowing into the home office."We found closets and closets of office supplies - enough for three years," Schwartz said.He also reduced Burger King's corporate headcount from 38,884 to 1,200, largely by refranchising restaurants, meaning many of those workers now report to franchise owners. By refranchising restaurants, or selling company-owned restaurants to franchisees, he effectively pushed costs for remodels onto operators (though Burger King says it still helps franchisees pay some of those costs). The company owned more than 1,300 restaurants in 2010. Now it owns just 71.Schwartz got a crash course in corporate cost-cutting at 3G Capital, which has a distinguished track record of buying companies, <a href="http://fortune.com/2015/03/25/3g-capital-heinz-kraft-buffett/">implementing aggressive cost cuts</a>, and in turn, delivering strong returns to shareholders.The company orchestrated one of the biggest corporate takeovers in history when it formed the world's biggest beer maker, Anheuser-Busch InBev, in 2015. 3G also formed the world's fifth largest food and beverage company that year with its merger of Kraft Foods and Heinz.Schwartz says his cost-cutting approach stems from 3G's "ownership culture," or the mentality that employees should "always put the business before themselves" and in that vein, treat the company's money as if it's their own.To get his employees accustomed to that idea, Schwartz says he spent a lot of time explaining his methodology during visits to the corporate offices. He also started requiring corporate employees to spend a couple days a year working in the company's restaurants, like he did when he first started at Burger King, and he created quick avenues for advancement for subscribers to his philosophy. <h2>'You only learn by walking around'</h2>Schwartz's home is in Miami with his wife and two young daughters, ages 2 and 4, but he spends most of his time traveling."I literally live on American Airlines' 737 commercial airplane," Schwartz said.When Schwartz travels, he typically wears the same uniform everywhere he goes, which features a denim shirt embroidered with the Burger King insignia. When he's in Canada, he swaps out his Burger King shirts for a similar set bearing Tim Hortons' name. He plans to add a Popeye's shirt to the rotation soon.His travels take him to Burger King's US headquarters in Miami, Tim Hortons' home office in Toronto, the companies' international offices in Switzerland and Singapore, and to other countless cities around the world for meetings with the company's franchise partners."I believe in MWA - management by walking around - so I spend as much time as possible traveling and visiting franchise partners," Schwartz says. "You only learn by walking around and meeting people."YouTubeHe says most of the cost cuts he implemented at Burger King were carried out in his first year as CEO, and since then he's been almost solely focused on growing the business through new restaurant openings.When 3G bought Burger King, it had roughly $14 billion in annual sales and was growing by about 150 new restaurants a year. Last year, the company's total sales had grown to $18.2 billion and it opened 735 new Burger King restaurants worldwide. He has increased the rate of restaurant upgrades, bringing the number of renovations from 10% of total restaurants five years ago to more than 60% today.And after slimming down the menu, the company started rolling out new product launches again through what Schwartz says is a more measured approach. The strategy has been successful, with limited-time items like Chicken Fries and Mac N' Cheetos helping to boost sales.Burger King has also started to close the gap with its No. 1 competitor, McDonald's, in terms of per-restaurant sales, and in doing so nearly doubled franchisees' profits, according to Schwartz. Burger King's sales per unit have grown from $1.1 million to $1.3 million during his tenure. McDonald's is still far ahead, however, with $2.5 million in sales per unit.Schwartz said Burger King will eventually close that gap."We feel like we are just getting started," he said. <h3>NOW WATCH: <a href="http://www.businessinsider.com/walmart-built-a-giant-vending-machine-for-groceries-online-2017-6">Walmart built a giant vending machine for groceries</a></h3> Please enable Javascript to watch this video

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