March Fourth Quarter Investor Letter Third Point

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March Fourth Quarter Investor Letter Third Point Powered By Docstoc
						
	
	
	
                                                                                   March	13,	2012	
	
Fourth	Quarter	2011	Investor	Letter	
	
Review	and	Outlook	
	
After	a	succession	of	“tail	events”	–	the	Arab	Spring,	Japanese	earthquake	and	tsunami,	US	
debt	downgrade,	floods	in	Thailand,	and	Europe’s	debt	crisis	–	and	the	resultant	extreme	
volatility	in	trading	conditions	last	year,	2012	has	been	downright	tranquil	thus	far.			
	
Economic	 growth	 globally	 has	 picked	 up	 and	 is	 running	 ahead	 of	 expectations.	 	 In	 the	
United	States,	we	have	shifted	from	a	middling	minor	recessionary	to	a	moderate	growth	
environment.	 	 In	 Europe,	 the	 LTRO	 mechanism	 has	 taken	 the	 risks	 of	 chaos,	 credit	
contraction,	 and	 domino	 default	 off	 the	 table	 for	 the	 near‐term	 and	 expectations	 have	
moved	upward	swiftly	from	a	deep	recession	to	a	welcomed	flat	line.		In	China,	fears	of	a	
hard	 landing	 have	 been	 replaced	 with	 confidence	 that	 the	 government	 transition	 will	 be	
well‐orchestrated	and	growth	will	remain	robust.		The	year	of	the	Dragon	is	off	to	a	bullish	
start	 everywhere,	 and	 we	 see	 favorable	 sentiment	 and	 positive	 conditions	 continuing	 for	
the	time	being.			
	
For	Third	Point,	the	start	of	this	year	has	created	one	especially	welcome	dynamic:	a	fall	in	
correlations.	 	 For	 the	 first	 time	 in	 nearly	 a	 year,	 single	 name	 stock	 picking	 is	 being	
rewarded.	 	 We	 have	 steadily	 increased	 capital	 invested	 in	 event‐driven	 situations	 in	
equities,	 corporate	 credit	 and	 mortgages.	 	 Today,	 our	 long	 exposure	 is	 ~120%	 and	 our	
gross	exposure	is	~170%.		Our	equity	beta	is	40%,	the	highest	it	has	been	since	July	2011.		
While	we	are	generally	more	constructive	and	finding	many	interesting	situations,	we	are	
focused	 equally	 on	 shorts	 and	 longs	 and	 building	 an	 all‐weather	 portfolio	 amidst	 the	
feeding	 frenzy.	 	 Although	 general	 market	 conditions	 are	 favorable,	 we	 have	 not	 simply	
strapped	 ourselves	 onto	 a	 raging	 bull;	 our	 main	 focus	 remains	 disciplined	 buying	 and	
selling,	prudent	risk	management,	and	thoughtful	portfolio	construction.	
	
Notwithstanding	 economic	 data	 in	 the	 US,	 Europe,	 China	 and	 emerging	 markets	 which	
suggest	a	“risk‐on”	portfolio,	we	are	carefully	monitoring	political	and	policy	developments	
around	the	world	which	could	have	a	significant	impact	on	our	more	constructive	outlook.	
	

                                                 1	
Starting	 at	 home,	 recent	 economic	 data	 has	 trended	 upwards.	 	 U.S.	 data	 in	
services/manufacturing,	PMIs,	auto	sales	and	employment	mostly	surprised	to	the	upside	
in	 January	 and	 again	 in	 February.	 	 There	 is	 a	 growing	 perception	 that	 two	 of	 the	 most	
significant	drags	on	US	growth	–	housing	and	jobs	–	are	starting	to	turn	the	corner.	
	
Perhaps	 this	 should	 be	 unsurprising,	 since	 in	 a	 Presidential	 election	 year	 economic	
indicators	 often	 seem	 to	 trend	 in	 the	 right	 direction	 for	 the	 incumbent.	 	 For	 this	 reason,	
while	we	are	constructive	in	the	near‐term	based	on	these	tailwinds,	we	see	the	potential	
for	a	dangerous	2013	and	beyond.		Regardless	of	one’s	political	beliefs,	it	is	hard	to	deny	
that	the	unabated	policies	of	a	second	Obama	Administration	would	lead	the	country	down	
an	unsustainable	path	of	exploding	deficits	and	marginal	private	sector	growth.		While	our	
concerns	about	a	second	Obama	term	are	muted	by	the	fact	that	much	of	his	agenda	will	be	
stymied	 by	 a	 Republican	 House	 and	 most	 likely	 a	 Republican	 Senate,	 gridlock	 is	 not	 an	
effective	 way	 to	 run	 the	 country.	 	 It	 is,	 however,	 preferable	 to	 out‐of‐control	 entitlement	
spending	 and	 deficits	 which	 would	 result	 from	 another	 Obama	 administration	 in	 which	
both	 houses	 of	 Congress	 are	 under	 his	 control.	 	 Sadly,	 concerns	 about	 tax	 increases,	
haphazard	 regulation,	 and	 further	 redistributive	 policies	 will	 hold	 private	 capital	 and	
market	participants	in	check	for	as	long	as	Mr.	Obama	remains	President.	
	
Europe,	 on	 the	 other	 hand,	 is	 healing,	 with	 elections	 in	 France	 posing	 the	 next	 potential	
landmine	 to	 an	 otherwise	 more	 “rosy”	 outlook.	 	 The	 Greek	 PSI	 exchange	 last	 week	 –	
essentially	an	orderly	default	of	government	debt	to	private	investors	–	was	absorbed	by	
the	 markets.		 Bondholders	 forgave	 more	 than	 €100	 billion	 on	 their	 Greek	 government	
investments,	 completing	 the	 largest	 sovereign	 debt	 restructuring	 in	 history	 and	 moving	
worries	about	Greece	to	the	back	burner	for	the	moment.		It	is	interesting	to	note	just	how	
much	Europe	is	starting	to	look	like	the	“United	States	of	Europe”.		The	EU	is	demanding	
change	in	fiscal	policies	in	various	countries	and	Chancellor	Merkel	is	offering	to	campaign	
with	 President	 Sarkozy	 as	 if	 she	 is	 a	 Governor	 lending	 a	 helping	 hand	 in	 a	 neighboring	
state’s	 election.	 	 While	 Europe	 is	 slowly	 moving	 towards	 a	 “fiscal	 compact,”	 the	 French	
elections	 are	 a	 particularly	 important	 event	 because	 Sarkozy’s	 challenger	 Hollande	 has	
argued	 that	 he	 will	 not	 honor	 the	 deal	 signed	 in	 Brussels	 should	 he	 become	 President.		
Meanwhile,	Italy,	Portugal	and	Spain	are	implementing	helpful	austerity	measures,	but	it	is	
imperative	that	some	growth	initiatives	be	adopted	or	the	governments’	reform	plans	will	
likely	stall.				
	
This	is	not	an	environment	for	rose‐colored	glasses.		Our	portfolio	is	structured	to	reflect	
the	unfortunate,	ongoing	reality	of	decaying	Western	democracies	staving	off	catastrophe	
with	 Advil	 and	 bandages	 when	 multiple,	 complex	 surgeries	 are	 the	 only	 way	 to	 save	 the	
patient	in	the	long‐term.	
	
                                                   2	
	
Quarterly	Results	
	
Set	 forth	 below	 are	 our	 results	 through	 December	 31,	 2011	 and	 performance	 to	 date	 for	
2012.	
	
                                         Third	Point	
	                                         Offshore	          S&P	500	    HFRI	

2011	Fourth	Quarter	                         ‐0.1%	           11.8%	     1.6%	

2011	Performance		                           0.0%	             2.1%	     ‐3.3%	
2012	YTD	Performance	                        4.9%	             9.0%	     4.6%	
(through	February	29,	2012)
Annualized	Return	Since	
                                            17.5%*	            5.8%*	    9.1%*	
Inception	
*	Returns	from	inception,	December	1996,	through	February	29,	2012.			
	
The	top	five	winners	for	the	Fourth	Quarter	2011	were	Yahoo!	Inc,	Delphi	Corp,	Sara	Lee	
Corp,	Williams	Cos	Inc,	and	Short	A.		The	top	five	losers	for	the	period	were	Genel	Energy	
Plc,	Technicolor,	Short	B,	Gold,	and	HollyFrontier	Corp.	
	
Firm	assets	under	management	at	December	31,	2011	were	$7.5	billion.		AUM	grew	to	$8.9	
billion	at	February	29,	2012.		The	increase	in	assets	was	primarily	due	to	the	closing	of	the	
Third	Point	Reinsurance	Limited	transaction	in	late	December,	which	is	discussed	further	
below.	 	 The	 funds	 remain	 closed	 to	 new	 investors	 with	 limited	 exceptions	 as	 discussed	
previously.	
	
Select	Portfolio	Positions	
	
Since	 most	of	 our	 investors	 heard	 an	 extensive	 review	 of	 our	 Q4	 and	 2011	 results	 at	 our	
Annual	Investor	Presentation	in	mid‐January,	we	have	included	summaries	of	more	recent	
positions	in	this	letter.		For	those	of	you	who	were	unable	to	attend	the	Presentation,	video	
of	the	event	is	available	on	our	private	Investor	Website,	and	the	slide	deck	is	also	available	
for	your	review.		Please	contact	Investor	Relations	for	further	details.	
	
During	 our	 Investor	 Presentation,	 we	 discussed	 areas	 we	 thought	 were	 ripe	 for	 certain	
types	 of	 event‐driven	 opportunities.	 	 As	 forecast,	 we	 have	 found	 a	 number	 of	 interesting	
situations	 in	 two	 of	 these	 areas	 specifically	 in	 recent	 months:	 forced	 selling	 and	 hidden	
growth	stories.			
	
Forced	Selling	
                                                                  3	
	
We	 articulated	 particular	 interest	 in	 situations	 where	 we	 see	 forced	 selling.	 	 This	 is	 a	
simple	 concept	 that	 has	 been	 a	 successful	 part	 of	 our	 event‐driven	 framework	 since	 our	
earliest	 days.	 	 Sellers	 forced	 to	 dispose	 of	 low‐conviction	 positions	 for	 technical	 or	
sentimental	 reasons	 create	 a	 dynamic	 favoring	 the	 buyer.	 	 When	 this	 sort	 of	 selling	
happens	 due	 to	 non‐fundamental	 driven	 pressures	 and	 prices	 rationalize	 fairly	 quickly,	
these	cheap	purchases	can	have	especially	compelling	IRR’s.		A	few	recent	examples	of	this	
applied	framework	are	positions	in	Unicredit,	Skyworks,	and	EksportFinans.	
	
Long	Position:	Unicredit	
One	 of	 the	 questions	 we	 have	 been	 asked	 most	 frequently	 by	 investors	 over	 the	 past	 18	
months	 is	 whether	 European	 bank‐related	 investments	 were	 as	 compelling	 to	 us	 as	 they	
seemed	 to	 be	 to	 other	 managers,	 some	 of	 which	 even	 raised	 funds	 to	 capitalize	 on	 the	
supposedly	 massive	 opportunities	 originating	 due	 to	 stressed	 conditions	 in	 Europe.	 	 We	
bided	 our	 time	 and	 having	 dry	 powder	 proved	 fruitful	 in	 January	 when	 we	 were	 able	 to	
capitalize	on	an	extraordinary	special	situation.	
	
Unicredit	(UCG)	is	one	of	Italy’s	largest	commercial	banks	with	additional	retail	operations	
throughout	 Central	 and	 Eastern	 Europe.		 The	 EBA	 bank	 stress	 tests	 conducted	 in	 Q4	
revealed	UCG’s	need	to	raise	€7.5	billion	of	capital	by	June	30,	2012	to	reach	the	minimum	
9%	threshold	required	under	Basel	III.		In	November	2011,	UCG	announced	a	€7.5	billion	
rights	 offering	 with	 pricing	 to	 be	 determined	 in	 early	 2012.		 Demand	 from	 UCG’s	
shareholder	base	to	underwrite	the	deal	was	weak	however,	given	that	nearly	25%	of	its	
shareholders	 (mainly	 Italian	 foundations	 and	 the	 Libyan	 Central	 Bank)	 lacked	 additional	
capital.		 This	 prompted	 the	 consortium	 of	 banks	 underwriting	 the	 deal	 to	 price	 the	 new	
shares	at	a	~60%	discount,	nearly	2x	that	of	similar	transactions	and	more	than	doubling	
the	shares	outstanding.			
	
The	 deal	 was	 announced	 on	 the	 first	 trading	 day	 of	 2012	 in	 thin	 markets	 due	 to	 arcane	
regulatory	 requirements	 in	 some	 eastern	 European	 countries	 where	 UCG	 operates.		 The	
offering’s	 extreme	 discount	 and	 fears	 of	 indiscriminate	 selling	 by	 underwriters	 shocked	
thinly‐staffed	trading	desks	across	Europe	and	drove	the	stock	down	by	~50%.		Panicked	
selling	 nearly	 forced	 the	 stock	 through	 the	 rights	 price,	 meaning	 the	 market	 temporarily	
deemed	the	rights	close	to	worthless.	
	
The	 technical	 pressures	 and	 forced	 selling	 naturally	 caught	 our	 attention.		 The	 enormous	
time	 we	 have	invested	 as	a	 team	in	attempting	 to	 understand	 the	 broader	 impacts	 of	 the	
ECB’s	recently	announced	three‐year	LTRO	also	proved	critical.		The	ECB’s	latest	attempt	to	
support	 ailing	 banks	 generated	 little	 fanfare	 when	 initiated	 in	 December	 2011	 but	
appeared	to	us	as	a	potential	game‐changer	for	Euro	area	risk	premia.		Based	on	our	belief	
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that	 the	 LTRO	 would	 significantly	 compress	 risk	 premia,	 particularly	 in	 Italian	 sovereign	
yields,	we	began	buying	UCG	rights.		These	rights,	on	a	converted	basis,	allowed	us	to	create	
the	stock	at	10%	discount	to	prevailing	market	levels	and	~0.25x	tangible	common	equity.		
This	 multiple	 implied	 nearly	 a	 25%	 cost	 of	 equity	 for	 a	 bank	 in	 the	 upper	 quartile	 of	
capitalization	 versus	 its	 peers,	 with	 adequate	 liquidity	 for	 the	 foreseeable	 future,	 and	
domiciled	in	a	sovereign	with	collapsing	credit	spreads.		Furthermore,	at	our	entry	prices	
we	were	largely	covered	by	UCG’s	stakes	in	publicly	traded	Russian	and	Turkish	banks	and	
effectively	getting	its	Central	European	assets	for	free.			
	
As	 expected,	 Italian	 sovereign	 yields	 compressed	 and	 attracted	 attention	 to	 UCG’s	
meaningfully	 depressed	 valuation.		 The	 rights	 closed	 their	 discount	 to	 the	 shares	 and	 it	
became	clear	underwriters	would	not	be	forced	to	hold	unwanted	stock.		UCG	quickly	re‐
rated	to	0.5x	price	to	tangible	common	equity,	enabling	us	to	double	our	money	in	less	than	
one	 month.		 At	 the	 current	 valuation,	 investors	 need	 to	 be	 confident	 in	 management’s	
operational	restructuring	plan.		This	was	not	a	bet	we	were	willing	to	take,	and	so	we	have	
fully	exited	our	position	with	a	significant	gain.										
    	
Long	Equity	Position:	Skyworks	Solutions	
Skyworks	 Solutions	 is	 a	 leading	 provider	 of	 radio	 frequency	 (RF)	 semiconductors	 for	
wireless	 devices.			 The	 Company	 is	 levered	 to	 the	 growth	 in	 connected	 devices	 such	 as	
cellphones,	 tablets,	 and	 consumer	 electronics,	 and	 in	 connection	 options	 per	 device	
(cellular	 2G,	 3G,	 4G,	 WiFi,	 Bluetooth).	 The	 growth	 in	 wireless	 devices	 and	 forms	 of	
connectivity	is	further	amplified	by	the	proliferation	of	new	wireless	spectrum	bands	used	
in	 carrier	 networks	 (e.g.	 700MHz,	 800MHz,	 1900MHz,	 2100MHz,	 and	 2500MHz).		These	
trends	have	resulted	in	a	surge	of	RF	semiconductor	content	in	wireless	devices.	
	
During	late	2011,	Skyworks’	shares	sold	off	aggressively	due	to	market	share	shifts	within	
the	 iPhone	 4S.	 	 By	 focusing	 exclusively	 on	 the	 Apple	 story,	 the	 markets	 missed	 the	
company’s	growing	success	outside	of	Apple	products	and	the	secular	trends	noted	above.			
Tax‐loss	selling	moved	the	share	price	from	$22	to	$14,	and	we	capitalized	on	the	sell‐off	to	
build	 a	 partially	 hedged	 position	 in	 December.	 	 Skyworks	 was	 trading	 at	 a	 steep	 P/E	
discount	to	the	semiconductor	space	and	more	specifically	its	RF	peers	RFMD	and	TQNT.		
With	solid	4Q	results	and	1Q	guidance,	continued	4G	device	traction,	a	window	to	regain	
share	 within	 iPhone	 5	 in	 2Q/3Q,	 and	 the	 recovery	 in	 semiconductor	 shares,	 we	 believed	
Skyworks	was	poised	to	re‐rate	back	toward	peer	P/E	multiples,	which	would	imply	nearly	
$30	per	share.		Our	thesis	came	to	fruition	quickly,	and	we	exited	the	position	in	the	mid‐
$20’s	for	a	tidy	gain	early	in	March.	
	
	
Long	Credit	Position:	EksportFinans	
                                                  5	
At	the	Investor	Day,	we	discussed	our	position	in	EXPT,	a	quasi‐governmental	Norwegian	
institution	created	to	lend	capital	for	private	infrastructure	projects	primarily	in	the	global	
oil	 and	 gas	 industry.	 	 The	 government	 announced	 that	 EksportFinans	 would	 be	 wound	
down	 and	 a	 new	 wholly‐government	 owned	 institution	 would	 be	 created	 in	 its	 place	 to	
provide	this	export	financing.		Moody’s	and	S&P,	which	had	previously	treated	this	credit	as	
essentially	 government	 paper,	 interpreted	 this	 statement	 to	 mean	 that	 the	 government	
would	 not	 continue	 to	 backstop	 the	 outstanding	 loans	 and	 downgraded	 EXPT	 by	 seven	
notches,	from	AA	to	BB+.	
	
Panic	ensued	among	the	traditional	holders	of	the	paper	–	primarily	pensions	and	others	–	
and	forced	selling	caused	the	bonds	to	trade	off	15‐20	points,	as	shown	on	the	chart	below:	
	




                                                                                            	
	
We	saw	this	downgrade	as	an	immediate	opportunity	and	sent	one	of	our	credit	analysts	to	
Norway	to	meet	with	government	officials	and	traditional	holders	of	these	loans.		Working	
in	our	favor	was	the	Thanksgiving	holiday,	and	an	analyst	happy	to	give	up	his	turkey	and	
football	to	build	a	$500	million	position	in	a	relatively	low‐risk,	high	return	credit	situation	
over	just	a	few	days.			
	
Since	 we	 initiated	 the	 position,	 EXPT	 has	 performed	 as	 we	 expected.	 	 Before	 the	
government’s	announcement,	the	bonds	were	trading	at	~115.		We	purchased	most	of	our	
                                               6	
position	after	they	plunged	to	~85,	and	spreads	have	since	narrowed	so	the	paper	is	in	the	
mid‐90’s	today.		We	expect	the	spreads	to	further	condense	towards	their	pre‐crisis	levels	
in	the	near‐term	and	so	continue	to	own	our	position.	
	
Hidden	Growth		
	
We	also	spent	time	at	the	Investor	Presentation	discussing	another	approach	we	believe	is	
fruitful	 in	 this	 macroeconomic	 environment:	 paying	 fair	 multiples	 for	 “hidden”	 growth	
rather	 than	 cheap	 multiples	 for	 stagnation.	 	 This	 approach	 has	 led	 us	 to	 revisit	 certain	
emerging	 markets	 with	 renewed	 energy.	 	 While	 we	 have	 tended	 to	 gravitate	 towards	
cyclical	equity	names	in	the	past,	we	believe	we	need	to	have	more	balance	in	our	portfolio	
in	a	year	which	will	continue	to	be	turbulent	from	a	macroeconomic	perspective.		A	focus	
on	 companies	 benefitting	 from	 hidden	 growth	 should	 help	 add	 this	 balance,	 ultimately	
dampening	volatility	while	increasing	overall	profit.	
 
Long	Equity:	Abercrombie	&	Fitch	
We	began	purchasing	shares	of	Abercrombie	&	Fitch	(ANF)	in	January	after	the	stock	price	
declined	 by	 nearly	 half	 over	 the	 past	 few	 months.	 	 Abercrombie	 &	 Fitch	 was	 attractive	
because	 we	 believe	 we	 paid	 roughly	 10x	 cy12	 EPS	 (ex	 $7	 net	 cash)	 for	 a	 business	 that	
should	grow	earnings	at	a	double	digit	rate	for	at	least	the	next	few	years.		That	growth	will	
come	 from	 recovering	 US	 profitability	 and	 from	 continued	 growth	 of	 the	 company's	 high	
margin	online	(2009‐11	CAGR	+38%)	and	international	businesses	(2009‐11	CAGR	+70%).		
	
In	the	US,	management	is	aggressively	right‐sizing	the	store	base	and	plans	to	close	another	
20%	of	its	stores	by	2015.		US	profitability	should	rebound	as	the	competitive	environment	
improves	 after	 a	 highly	 promotional	 holiday	 season	 and	 as	 average	 unit	 costs	 decline,	 in	
part	due	to	lower	cotton	prices.		Outside	the	United	States,	the	company	is	opening	highly	
profitable	stores	in	Europe	and	Asia	where	the	brand	appeals	to	a	wider	customer	base	and	
the	company	is	able	to	charge	a	premium	price.		While	it	is	difficult	to	know	how	overseas	
profitability	 will	 trend	 over	 time,	 we	 think	 it	 is	 far	 too	 early	 to	 write	 off	 the	 potentially	
lucrative	 international	 growth	 story	 and	 believe	 our	 entry	 point	 provides	 a	 sufficient	
margin	of	safety	if	we	are	wrong.		
	
Long	Equity:	Volkswagen	
Volkswagen	(“VW”)	is	a	long‐term	holding	that	we	initiated	in	the	spring	of	2010.		VW	is	
valued	by	the	market	as	a	low‐quality,	cyclical	stock	at	less	than	7x		forward	earnings.		We	
have	 a	 differentiated	 view	 on	 VW’s	 earnings	 as	 we	 believe	 the	 market	 continues	 to	
underestimate	two	of	VW’s	secular	earnings	drivers.		First,	VW’s	ongoing	shift	to	a	modular	
production	 system	 is	 driving	 structural	 margin	 expansion.	 	 Second,	 as	 we	 have	 explained	
previously,	VW	sells	more	than	half	its	units	in	emerging	markets	with	a	particularly	strong	
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presence	in	China	and	Brazil.		These	two	drivers	are	contributing	~20%	to	“through‐the‐
cycle”	compounded	annual	earnings	growth	from	2008	to	2013	earnings.			
	
VW’s	 pending	 acquisition	 of	 Porsche’s	 operating	 business	 remains	 a	 key	 catalyst	 for	 the	
stock.		We	suspect	that	VW	may	find	a	way	to	acquire	the	remaining	51%	stake	in	the	next	
12	months,	which	should	be	more	than	10%	accretive	to	VW. 
	
Long	Credit:	Ally	Financial	
As	 our	 investors	 know,	 our	 Credit	 team	 has	 spent	 a	 significant	 portion	 of	 the	 past	 three	
years	investing	in	the	auto	industry.		Ally	Financial,	formerly	known	as	GMAC,	is	the	world’s	
largest	auto	finance	company	and	a	rapidly	growing	online	savings	bank	with	~$30	billion	
in	deposits.		Ally	received	government	support	during	the	financial	crisis	largely	due	to	its	
efforts	 to	 support	 its	 failing	 mortgage	 subsidiary,	 ResCap,	 which	 remains	 one	 of	 the	 five	
largest	mortgage	servicers	in	the	US.		As	a	result	of	the	capital	injection,	the	US	Treasury	
now	 owns	 ~75%	 of	 Ally,	 diluting	 the	 stakes	 of	 its	 former	 owners,	 Cerberus	 Capital	
Management	and	GM,	and	giving	Ally	a	robust	11%	Tier	1	Common	Ratio	under	Basel	III.			
	
Given	its	strong	capital	metrics	and	ample	liquidity,	Ally’s	debt	structure	traded	in	line	with	
more	 highly	 rated	 competitors	 like	 Ford	 Motor	 Credit	 for	 most	 of	 2011	 and	 maintained	
fairly	tight	spreads	in	its	long‐dated	bonds	and	non‐UST	preferred	shares.		However,	Ally	
was	 not	 spared	 when	 global	 credit	 spreads	 widened	 during	 the	 August	 sell‐off.		
Simultaneously,	 fears	 began	 to	 mount	 over	 Ally’s	 mortgage‐related	 liabilities	 from	
wrongful	 foreclosures,	 representation	 and	 warranty	 breaches,	 and	 securities	 law	 fraud	
suits	 associated	 with	 its	 pre‐crisis	 sale	 of	 mortgage‐backed	 securities.		 The	 majority	 of	
these	 potential	 liabilities	 originated	 from	 the	 ResCap	 subsidiary,	 and	 although	 Ally	 has	
repeatedly	stated	its	belief	that	any	liability	for	these	issues	can	be	ring	fenced	at	ResCap,	
uncertainty	remains.		This	combination	of	rising	global	credit	risk	premiums	and	mortgage	
liabilities	 fears	 dramatically	 widened	 Ally’s	 spread	 to	 Ford	 Motor	 Credit	 and	 significantly	
increased	the	spreads	on	its	long‐dated	bonds	and	preferred	equity.			
	
We	began	initiating	our	position	in	Ally’s	long‐dated	bonds	and	preferred	shares	during	the	
fourth	 quarter	 because	 we	 believed	 that	 the	 mortgage‐related	 liabilities	 would	 be	
contained	at	ResCap	or	if	not,	that	they	would	not	be	large	enough	to	significantly	impair	
Ally’s	 capital	 or	 credit	 position.		 We	 also	 believed	 that	 2012	 would	 provide	 a	 meaningful	
resolution	of	these	liabilities	such	that	Ally	debt	could	be	upgraded.		Furthermore,	all	of	our	
securities	were	purchased	at	large	discounts	to	par	and	carry	between	8.0	–	8.5%	current	
pay	coupons,	providing	significant	downside	protection.			
	
Ally’s	credit	spreads	have	started	to	normalize	in	2012	and	the	company	recently	achieved	
the	first	milestone	in	resolving	mortgage‐related	liabilities	via	the	widely	publicized	State	
                                                   8	
Attorney	Generals’	Settlement.		Despite	returns	of	between	10%	‐	25%	so	far	this	year,	we	
continue	 to	 hold	 our	 securities	 as	 we	 expect	 full	 clarity	 (if	 not	 resolution)	 of	 mortgage	
liabilities	 and	 a	 potential	 eventual	 upgrade	 to	 an	 investment	 grade	 rating	 could	 drive	
additional	total	returns	of	15	–	35%.	
	
Long	Equity:	Yahoo!	–	The	Case	for	Alibaba	
As	 investors	 are	 aware,	 we	 established	 a	 sizeable	 position	 in	 Yahoo	 following	 a	 difficult	
operational	and	strategic	stretch	during	the	waning	days	of	CEO	Carol	Bartz’s	tenure	that	
culminated	in	a	significant	sell‐off	in	the	shares	in	August.		Initially,	we	were	attracted	to	
the	 company	 simply	 by	 its	 significant	 discount	 to	 intrinsic	 value.	 	 In	 September,	 we	
announced	publicly	that	we	had	accumulated	5.2%	of	the	shares	of	the	company	and	laid	
out	our	case	for	why	the	valuation	was	depressed.		While	the	travails	of	“core	Yahoo”	grab	
all	the	headlines,	core	Yahoo	forms	only	a	modest	portion	of	the	Company’s	actual	value	(a	
mere	$1.50	per	share,	trading	at	~$14.49	as	of	03/12/12).		The	after‐tax	value	of	Yahoo’s	
Asian	assets	–	Alibaba	and	Yahoo!	Japan	–	currently	constitutes	$11	per	share	of	its	value	
(76%),	with	an	additional	$2	per	share	of	net	cash.				
	
Central	to	our	investment	thesis	is	the	hidden	jewel	in	the	Asian	asset	portfolio,	and	indeed	
in	Yahoo	itself:	Yahoo’s	40%	stake	in	Alibaba	Group,	the	dominant	e‐commerce	platform	in	
China.		According	to	iResearch,	Alibaba	currently	has	49%	of	the	B2B	e‐commerce	market	
(four	 times	 greater	 than	 its	 nearest	 competitor),	 90%	 of	 the	 C2C	 e‐commerce	 market	
(analogous	 to	 Ebay),	 and	 53%	 of	 the	 B2C	 e‐commerce	 market	 (analogous	 to	 Amazon)	 in	
2011.	 	 It	 has	 complemented	 these	 core	 commerce	 positions	 with	 the	 leading	 online	
payment	 platform,	 Alipay,	 with	 49%	 market	 share,	 and	 also	 holds	 the	 #2	 share	 of	 the	
Chinese	 online	 ad	 market	 (17%,	 behind	 Baidu	 at	 28%).	 	 Particularly	 exciting	 is	 Alibaba’s	
share	 of	 China’s	 rapidly	 growing	 B2C	 market	 represented	 by	 Taobao	 Mall,	 or	 Tmall	
(recently	renamed	Tian	Mao).					
	
According	to	iResearch,	China	had	187	million	online	shoppers	in	2011,	compared	to	170	
million	 in	 the	 U.S.	 	 As	 Boston	 Consulting	 Group	 noted	 in	 its	 November	 2011	 report,	 “The	
World’s	Next	E‐Commerce	Superpower”,	e‐commerce	transaction	value	in	China	is	likely	to	
overtake	the	U.S.	by	2015,	helped	by	conditions	that	mirror	the	U.S.	and	in	some	ways	favor	
e‐commerce	 in	 China.	 	 A	 combination	 of	 broad	 product	 assortments	 and	 lower	 prices	
mirror	the	U.S.,	while	e‐commerce	in	China	benefits	from	the	fixed	price	certainty	missing	
in	 China’s	 traditional	 retail	 culture	 (where	 haggling	 is	 common),	 from	 relatively	 lower	
shipping	costs	than	in	the	U.S.,	and	from	the	limited	geographic	reach	of	brick‐and‐mortar	
chains.	 	 The	 Boston	 Consulting	 Group	 report	 highlights	 “The	 Taobao	 Phenomenon”	 and	
notes	more	products	were	purchased	on	Taobao	in	2010	than	at	China’s	top‐five	brick	and	
mortar	retailers	combined.															
	
                                                   9	
The	scale	and	velocity	of	China’s	e‐commerce	opportunity,	when	combined	with	Alibaba’s	
dominant	position,	make	for	a	very	compelling	story.		As	it	moves	toward	an	IPO,	Alibaba	
should	quickly	take	its	place	amongst	China’s	online	leaders	–	Tencent	($47	billion	market	
cap),	and	Baidu	($48	billion	market	cap).		A	November	2011	report	on	Softbank	by	UBS’s	
Makio	Inui,	the	product	of	extensive	research	into	Alibaba	Group	and	a	detailed	valuation,	
placed	 a	 $63	 billion	 value	 on	 Alibaba	 Group,	 which	 would	 imply	 just	 over	 $13	per	 Yahoo	
share	after	tax.		It	appears	that	while	2012	will	be	the	year	of	Facebook,	2013	could	very	
well	be	the	year	of	Alibaba	as	it	moves	toward	a	listing.	
	
At	the	reported	$35	billion	valuation	ascribed	to	the	October	2011	purchase	of	employee	
shares	 by	 Silver	 Lake,	 Temasek	 and	 Yunfeng	 (an	 affiliate	 of	 CEO	 Jack	 Ma),	 Yahoo’s	 stake	
was	 worth	 ~$7.60	 per	 share	 after	 tax.	 	 That	 implies	 Yahoo’s	 stake	 has	 grown	 at	 a	
compounded	 rate	 of	 55%	 per	 annum	 since	 its	 investment	 in	 October	 2005,	 and	 it	 is	
significant	that	the	majority	of	Yahoo’s	value	is	now	driven	by	its	Alibaba	stake.		Clearly,	as	
evidenced	above,	we	see	tremendous	upside	in	just	the	Alibaba	piece	of	the	Yahoo	puzzle.	
	
While	the	media	has	covered	the	drama	surrounding	the	negotiations	with	Mr.	Ma	in	some	
detail,	Wall	Street	has	continued	to	neglect	the	underlying	Alibaba	valuation	story	and	the	
press	 makes	 too	 little	 of	 it.	 	 Certainly	 there	 is	 some	 compelling	 reason	 why	 Mr.	 Ma	 is	 so	
interested	in	repurchasing	Yahoo’s	stake!		We	share	his	excitement	and	enthusiasm	for	the	
Alibaba	opportunity,	and	we	respect	and	appreciate	the	dominant	and	dynamic	franchise	
he	has	built	amongst	the	world’s	largest	base	of	Internet	users.			
	
Over	the	last	six	months	we	have	witnessed	the	Board	of	Directors’	“strategic	review”	that	
has	 to	 date	 resulted	 in	 the	 hiring	of	 a	 new	CEO,	 Scott	 Thompson,	 the	 resignation	 of	 Jerry	
Yang,	and	the	pending	exit	of	Board	Chairman	Roy	Bostock	and	three	other	Directors.		In	
mid‐February	we	announced	that	we	intend	to	run	our	own	slate	of	Directors	for	the	Yahoo	
board	during	this	proxy	season.		We	stated	our	intention	to	nominate	well‐known	leaders	
in	the	media	space	Jeff	Zucker	and	Michael	Wolf,	restructuring	guru	Harry	Wilson,	and	Dan	
himself	 to	 the	 Board.	 	 We	 are	 glad	 Yahoo	 has	 played	 a	 critical	 role	 in	 Alibaba’s	 early	
development	and	hope	new	leadership	at	Yahoo	can	chart	a	new	course	for	the	company’s	
relationship	with	Mr.	Ma	and	Alibaba.				
	
Third	Point	Reinsurance	Limited	
	
During	 the	 Fourth	 Quarter	 of	 2011,	 we	 achieved	 a	 critical	 firm	 milestone	 by	 closing	 the	
Third	 Point	 Reinsurance	 Limited	 (“TP	 Re”)	 transaction.	 	 TP	 Re	 opened	 for	 business	 on	
January	3rd,	led	by	CEO	John	Berger	and	his	elite	team.		With	~$800M	of	equity,	TP	Re	has	
already	underwritten	its	first	reinsurance	contracts	and	met	other	significant	operational	
markers.	
                                                    10	
	
One	 reason	 we	 started	 TP	 Re	 was	 to	 bolster	 our	 already	 significant	 percentage	 of	
“permanent”	 assets	 under	 management.	 	 Including	 employee	 capital,	 our	 London‐listed,	
closed‐end	TPOIL	fund,	and	TP	Re,	over	20%	of	our	AUM	is	now	considered	“permanent".		
We	believe	this	asset	mix	gives	us	an	edge	in	investing	by	providing	us	with	one	of	the	most	
stable	asset	bases	in	the	world.	
	
Thank	you	for	your	partnership.	
	
Sincerely,	
Third	Point	LLC	
_____________________	
	
The	performance	data	presented	represents	that	of	Third	Point	Offshore	Fund,	Ltd.		All	P&L	or	performance	results	are	based	on	the	net	asset	value	of	fee‐paying	investors	only	and	
are	presented	net	of	management	fees,	brokerage	commissions,	administrative	expenses,	and	accrued	performance	allocation,	if	any,	and	include	the	reinvestment	of	all	dividends,	
interest,	 and	 capital	 gains.	 	 The	 performance	 above	 represents	 fund‐level	 returns,	 and	 is	 not	 an	 estimate	 of	 any	 specific	 investor’s	 actual	 performance,	 which	 may	 be	 materially	
different	from	such	performance	depending	on	numerous	factors.		All	performance	results	are	estimates	and	should	not	be	regarded	as	final	until	audited	financial	statements	are	
issued.		Exposure	data	represents	that	of	Third	Point	Offshore	Master	Fund	L.P.		
	
While	the	performances	of	the	Funds	have	been	compared	here	with	the	performance	of	well‐known	and	widely	recognized	indices,	the	indices	have	not	been	selected	to	represent	an	
appropriate	benchmark	for	the	Funds	whose	holdings,	performance	and	volatility	may	differ	significantly	from	the	securities	that	comprise	the	index.		Investors	cannot	invest	directly	
in	indices	(although	one	can	invest	in	an	index	fund	designed	to	closely	track	such	index).	
	
Past	performance	is	not	necessarily	indicative	of	future	results.		All	information	provided	herein	is	for	informational	purposes	only	and	should	not	be	deemed	as	a	recommendation	to	
buy	or	sell	securities.		All	investments	involve	risk	including	the	loss	of	principal.		This	transmission	is	confidential	and	may	not	be	redistributed	without	the	express	written	consent	of	
Third	Point	LLC	and	does	not	constitute	an	offer	to	sell	or	the	solicitation	of	an	offer	to	purchase	any	security	or	investment	product.		Any	such	offer	or	solicitation	may	only	be	made	
by	means	of	delivery	of	an	approved	confidential	offering	memorandum.	
	
Information	 provided	 herein,	 or	 otherwise	 provided	 with	 respect	 to	 a	 potential	 investment	 in	 the	 Funds,	 may	 constitute	 non‐public	 information	 regarding	 Third	 Point	 Offshore	
Investors	 Limited,	 a	 feeder	 fund	 listed	 on	 the	 London	 Stock	 Exchange,	 and	 accordingly	 dealing	 or	 trading	 in	 the	 shares	 of	 that	 fund	 on	 the	 basis	 of	 such	 information	 may	 violate	
securities	laws	in	the	United	Kingdom	and	elsewhere.	




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