On Stock Buy-backs and In(per)versions

CORPORATISM, per The Urban Dictionary

A politico-economic system in which most power is held by large corporations,
often mistakenly called capitalism. This is the current governing system of most of the world.

usage: Man, that ain’t capitalism. Look at all advantages the big multinationals get. Subsidies and all that shit. What you got is some motherfucking corporatism

Dilbert Stock Splits

Are corporate managers stupid, bad investors or cunning? You be the judge.

The question comes to mind because, with the market high and valuations stretched, corporate stock buy-backs are going at a record pace. This happened during the top in 2006-07. When stocks were on the bargain table in ’08-’09, corporations sat on their hands (Birinyi Assoc., March 2014). We know it is typical of ordinary investors to be most apt to buy at tops, but wouldn’t you expect these guys to know their companies well enough to buy low and sell high?

Corporate stock buy-backs, often as not, are done with borrowed money. The buy-back reduces the number of shares outstanding and adds debt to the balance sheet. The rationale managers use for this strategy is called “enhancing shareholder value.” Really? Earnings do look better when spread between fewer shares. So short term, the perception of greater share value may run the already extended stock price up a bit, but who benefits?

1) Managers will be able to exercise their stock options profitably, and 2) their banksters will generate millions in advisory fees, commissions for executing the stock purchases, and loan underwriting fees.

Shareholders get nada. When the stock (inevitably) collapses, they are stuck with a company loaded with unnecessary debt. If the primary constituency of corporate management is the shareholder,  we have to come down with the view that managers are shrewdly getting away with murder.

On the evidence, corporate managers these days spend more time on financial legerdemain than on their basic business. Inversions are a current enthusiasm. Under certain circumstances, a company can restructure itself and have its headquarters in another nation without altering any of  its operations. If you are out of the market, buy-backs might not concern you. On the other hand, inversions should bother hell out of you.

Inversions are a huge tax dodge*. Walgreen’s, for example is about to become a Swiss corporation. Without altering any of its operations, it pays Swiss taxes, which are at a lower rate than in the U. S. There are certainly a lot of apologists who will say U. S. corporate tax rates are too high. Nevertheless, the result is that a company will continue to benefit from U. S. Government provided services (infrastructure, national security, due process, etc.) while shifting the tax burden for those services onto others–you and me. It is estimated that the revenue lost to the IRS will exceed $20 billion over the next 10 years (WSJ, July 14).

We should not be surprised that  the provenance of this scurrilous financial ploy is the Wall Street banking industry. They are the guys  who generate millions in fees from their advice and help in executing the tactic.

 Is there anything, you might ask, that can alter the culture of greed and self-interest that pervades the cohort entrusted with the management of our most important enterprises?

There is–a bear market. History tells us that the more nefarious the corporate culture, the bigger the bear. One is coming to your neighborhood soon.

Cheers,

Rod

*Copy and paste this link in your browser for more on corporate inversions:

http://www.nytimes.com/2014/07/28/opinion/paul-krugman-tax-avoidance-du-jour-inversion.html

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