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Wednesday, 30 April 2014

“And now that we stashed billions of dollars away from the American Internal Revenue Service, what are we going to do with it?!” Clueless American multinationals reveal their innovational and moral vacuum. Shareholders beware!

This morning, I was attracted by two different articles from the same printed, Dutch newspaper De Telegraaf ( And by coincidence, both articles were about gargantuous American corporations and they both represented the same problem of endless wealth-without-a-purpose.

Both articles could be summarized as follows:
  • It is one thing to legally(!) hide money from the American Internal Revenue Service;
  • However, it is another thing to find useful purposes for this “dead cash”, without having to move it to American soil administratively, where it would be subject to taxing after all. 

Besides telling something about the unscrupulousness of 21st century tax avoidance, the articles gave also valuable insights in the distorting effects of the continuous, extremely low interest rates, which have been maintained during the last 10 years.

These interest rates have had an enormous influence on the cash flows and profitability of large corporations. And now these corporations are holding such massive stockpiles of cash, that they really are clueless about what to do with it.

The following article came from the paper version of De Telegraaf. That is why there is no link available, unfortunately:

Apple cuts every corner, in order to not pay taxes for the many dozens of billions of dollars, that the company keeps outside the United States. At this moment, the company’s ‘war chest’ contains $150 billion, collected from past profits, of which $130 billion is stashed outside the US.

Repatriation of this money would mean that 35% of taxes should be paid for every billion that is taken home. Nevertheless, Apple – the world’s most valuable corporation – needs now billions of dollars to fund a vast stock buy-back program; these billions are borrowed currently. Last weekend, the word was spread that Apple is planning to deploy a series of bonds to the tune of $17 billion.

Last week, Apple announced that it is planning to buy back $90 billion in stock, instead of the earlier announced $60 billion.

And the next article in De Telegraaf was about the pharmaceutical behemoth Pfizer, which is planning to take over British/Swedish pharmaceutical company AstraZeneca for a ‘petty’ $100 billion.

The stock rates of giant pharmaceuticals in Stockholm, London, New York and Zurich have been jumping up and down, during the last few days. Investors are hooked on a game of Monopoly, which reminds the objective viewer of the merger and takeover frenzy of 2007. 

Central question: which company will get the best combination of blockbusters in hands during the coming years, now the money to finance mergers and takeovers is so amply available.

“We have an excellent track record, when it comes to takeovers”, according to financial executive Frank D’Amelio of Pfizer, yesterday during an unplanned conference call.

D’Amelio exhausted himself, while emphasizing which economies of scale the combination with the British/Swedish AstraZeneca would yield. The fact that hours earlier the Europeans politely, but resolutely showed him the door, will undoubtedly have helped with the decision to organize this conference call.

The rationale behind the takeover bid is simple: both companies are strong in cardiovascular diseases, which makes that economies of scale will be achievable. Further, AstraZeneca owns more and better drugs against diabetes and vaccines against a number of European diseases. 

Last, but not least, Pfizer has a stash of $70 billion in cash at (among others) the Cayman Islands, which would be taxed when being spent in the United States. Spending this money in Europe, to fund a takeover, will keep the money away from the US Internal Revenue Service.

The CEO of Pfizer, Ian Read, wants to split up the new company after the takeover, using an alternative division model. Old and familiar drugs would end up in one company, while auspicious – often biomedical – drugs and innovations would be stored in the other subsidiary. Both subsidiaries would be legally established under one, British holding, enabling the company to make use of the favorable tax regime.

To the objective reader both articles are merciless testimonies upon:
  • The massive stockpiles of ‘dead’ cash which are held by these large corporations nowadays;
  • The ruthless tax avoidance of the same corporations, revealing these companies as greedy ‘Scrooge-esque’ spongers, which do seemingly EVERYTHING to avoid paying a single dollar in taxes;
  • At the same time, the blatant cluelessness of these very corporations about what to do with their money. 

One of my first articles in 2011 contained a few snips about a nowadays more topical-than-ever subject, which cannot be seen lose from the aforementioned articles about Apple and Pfizer: to which country do the large, multinational corporations pledge their allegiance?

Peter Atwater, the eminent Professor of Minyanville and one of the brightest macro-economical analysts I know, wrote a very interesting article about it yesterday: Pledging Allegiance: Multinationals in an Increasingly Nationalist World.

The article discussed the fact that multinationals like Shell, Anheuser-Busch and General Electric cannot be “stateless” anymore, but have to choose very cautiously the passport they will be carrying. “It’s not what your country can do for you, but it’s what you can do for your country”. Those are words from arguably the most famous statesman, John F. Kennedy and almost those same words were used by President Obama lately, when addressing the multinationals.

Apple, an all-American corporation with strong Californian ties and countless US customers, rather borrows $17 billion through a bond deployment, than that it pays taxes for (parts of) the $130 billion in non-American money that the company already owns. 

Their message: “Yes, we make usage of the whole American financial, societal and physical infrastructure, but we don’t want to spend a single dime on taxes. Get the funk out of here!!!”

And for what purpose does Apple want to use this borrowed money?! For a not $60, but $90(!) billion stock buy-back program! Isn’t it fantastic?!

In my – not so humble – opinion, this is the clearest message that Apple’s innovation is caught in a vacuum of which it can’t escape anymore: perished after the unfortunate death of Steve Jobs.

I’m not a particular fan of companies, which pay out excess dividends to their shareholders or enter into vast stock buyback programs. That can’t be much of a surprise for regular readers of this blog.

While such buy-back events and excess dividend payments always seem moments of great happiness for the shareholders, I think that it is in reality an ‘early warning signal’ about the company that performs such actions.

Of course, there is little wrong with a one-off party for the shareholders. These were after all the people, who had the faith to invest in your company and who enabled it to grow to something great. As a company, it is good to show your gratitude to your shareholders every now and then.

However, too often it happens that large dividend payments and stock buy-back programs point at a blatant lack of smarter, better yielding investments and long-term goals within a company. And consequently, to a lack of long-term vision within the executive management of such a company.

This very behaviour of Apple leaves me no other conclusion, than that Apple seems doomed to become an investors nightmare: a cash cow that might soon turn into a dog!

Pfizer, the company mentioned in the second article, shows that it suffers from the same problem, although the symptoms differ considerably.

The company holds $70 billion in “dead cash” at one of the world’s most infamous tax havens, but it is too greedy [this is my opinion(!) - EL] to pay taxes for it in the United States. This, in spite of the fact that Pfizer is an all-American company, which again uses the whole US infrastructure to its own benefit.

This United States tax “mill stone” allegedly forces Pfizer to spend all their offshore money on AstraZeneca; not that they need this European company in order to survive, or ‘because they are worth it?!’. No, they don't! 

Many people know by heart that such mega-mergers seldomly yield the economies-of-scale, which were promised in advance and often rather bring the total opposite: billions in lost money on company and ICT restructuring and structurally worse results for both companies than before.

No, the reason is simply that Pfizer doesn’t know what else to do with the money stashed away, as ‘bringing it home’ is impossible in their narrow-minded thought process. Pfizer won't use their money to invent new antibiotics that the world so desperately needs nowadays, or to invent a new drug against malaria which could save millions of lives. These drugs will not be cash cows and therefore they are not worth investing in. 

Instead, Pfizer wants to buy AstraZeneca! Really! And afterwards, the whole future ‘Two companies & One holding’ structure of “PfizerAstra” seems to be established only to further avoid taxes. And this tax avoidance is enabled by the narrowminded European countries, which are involved in a ‘tax race to the bottom’. 

Shareholders, draw your conclusions about these two companies. Take the cash and “sell, Mortimer,sell!!!”

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