This morning, I was attracted by two different articles
from the same printed, Dutch newspaper De Telegraaf (www.telegraaf.nl). 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.
A
few weeks ago, I
already wrote in this article:
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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