America's CEOs and hedge-funds are starving the nation's corporations to death


#1

[Read the post]


#2

file under DUH?


#3

But for employees who depend on the company for jobs

You mean the parasites? This is the new America, and 1955 it ain’t. It’s been made explicitly clear what America thinks of it’s laborers. Ask any of the millions working 60-70 hours a week at 2 or more jobs for minimum wage just to keep body and soul together.

On a less hyperbolic note: Does anyone else feel like the days of having long-term job stability are over? That it’s pretty much a gig economy now?


#4

I agree that companies too often take cash out, but a “stock buyback” is not some nefarious thing. It is economically indistinguishable from a dividend where the stock holder has an option to either (a) take the dividend - at ordinary income tax rates - or (b) reinvest the stock into the company, except that it saves the trouble of the long(er) term investor of buying more stock.


#5

Not yet. There are still a huge number of jobs that require way too much specialized and longitudinal knowledge for them to be filled with temps, although the trend is clearly to chip away at that as much as possible.

I say that as someone who has worked exclusively at short-term contracts since 1990.


#6

The laser focus on share price to the exclusion of everything else is what happens when there is no way to earn a reasonable rate on savings anywhere other than in the equities market.

I’m looking at YOU, Federal Reserve.


#7

Roger That!


#8

Back in the 1980s I had shares of Duquesne Light, the electric utility in Pittsburgh. One day they announced a plan to skip one dividend and invest all the money in the city infrastructure. My broker called me in a panic, saying “Sell! Sell! The price has plummeted!” To me it sounded like a pretty good investment, so I doubled up my shares. It paid off very nicely in just a few months.

Balancing dividend payout against other goals is not yet illegal.


#9

It’s not just a feeling.


#10

They can’t keep the economy going in any other way. It’s not long-term viable, but I suppose they think something will turn up, or at least before the Collapse they’ll be able to escape to the Caymans.


#11

Obligatory crosslink:


#12

Actually, it’s not economically indistinguishable from a dividend. A dividend comes in the form of a check. A stock buyback may or may not increase your share price, but you have to sell shares to get the money, and there are strong incentives not to sell shares. So the economic effect is actually quite different. If you buy a stock in order to get dividends, your behavior will be much different than if you buy a stock to sell it later.


#13

“Serving customers, creating innovative new products, employing workers, taking care of the environment … are NOT the objectives of firms.”

And it hasn’t been for a really, really long time.
I’ve been working in corporate America for 31 years, mostly for big companies. When I worked for medium or smaller ones, they were eventually scooped up, hollowed out and stripped of any vestige of creativity. It’s not like any of these places were unprofitable. That’s irrelevant.
Missions statements are the exact opposite of the mission of the officers of the companies, only posters on the wall.
CEO’s are no longer the people that built up the business. They are temporary place-holders and figure heads that go on CNBC and answer Jim Cramer’s questions. Their success or failure means nothing - either way they will extract a whole ton of money and walk away, or position the company to be sold and go on to the next.
When I moved here in 2001, I worked for a medium sized pharma company that had been bought by a big one not long before, but was operating independently. When the big one decided to make it all one company, they laid people off, outsourced, hollowed out the R&D. I quit while I still had a job and moved on.
Next company was also medium sized and was bought by a bigger one in the midwest. They followed the same pattern. It was a cash cow division, making a TON of money for them, so of course what they did was squeeze it harder, buy up other companies out here and squeezed them. When they were done, they spun off those firms and it became one good sized one.
Next, the old CEO retired, a new one came in and it became clear right away that he immediately was positioning the place to be sold.
I quit and moved on before the inevitable, and sure enough, the place was sold.
Prior to the buyout, all different layers of shared services stuff had been outsourced including in sourcing, development, HR and the service desk.
After the buyout, they have since laid off a ton more in different areas. I’m in IT and know people still on the inside. 80 percent of the infrastructure people were given walking papers that will start next year - admittedly with a decent severance - and they will outsource all of that to a third party. People given walking papers will have a chance to work for the outsource firm, but the only “guarantee” is for 12 months, and your salary will be frozen.
So yea, who suffers. Customers. Employees. The community. The nation. This is pure and simple an extraction of wealth in one direction. And yet people STILL to this day are concerned with welfare queens.


#14

This is related (some vicious positive feedback I suspect) to the idea of the superstar CEO and “management” as an expertise independent of a real working knowledge of what a company actually DOES…


#15

Yup. When the value of the company to its shareholders became divorced from what the company actually does, this was a foregone conclusion. Note the rise of the MBA in the same time frame.


#16

If one splits a stock 3:1, the market often takes that as a signal that it’s a good buy, but 10 shares at 300 are the same as 30 shares at 100. The market will often give the 100 a bounce because the stock is “cheaper” – but there’s no economic difference.

As to stock dividends, the form of payment - cash, check, whatever doesn’t matter.

If I have NewCo, with 100 shareholders, each holding 100 shares and I want to distribute 100 dollars in dividends - and let’s say there’s a total value to the company of $10,000, in some mix assets including a reasonable amount of cash.

NewCo could declare a 1 cent / share dividend and all that money goes out, a buck a throw, to each of the shareholder. Or, NewCo could declare that I am willing to buy 100 shares back at $1 each. If Shareholder No. 1 takes the share buyback and no one else wants in, the stock is now 99 shareholders, each holding 100 shares, but those shares now have one cent fewer in cash backing each of them up.

If all the shareholders accept the tender for a buyback, each sells one share for $1 - the company has dropped its total book value by $100 and the company has functionally had a 100:99 split.

But, also, If one shareholder takes $100, the company has dropped its total book value by $100 and the company has functionally had a 100:99 stock split.

If there’s a dividend at a penny a share, the book value is down by $100 and there’s no stock split, but stock splits don’t matter as an economic matter.

There’s nothing in the underlying economics that says the shares should be worth more at one minute before the dividend than one minute after.

The behavior of investors are different – some want dividends, some want to sell, but the event here is the same and, in fact, it’s quite a bit more efficient as it allows different shareholders to have different preferences related to the same security. Yes, the market might take signal that something else is afoot, but the baseline economics are indistinguishable.

Happy to hear a counterargument – but economics and the market are only proxies for one another – and an economic conclusion doesn’t answer all the market questions.


#17

It’s not just an unintended artifact of fiance.

It’s just old fashioned bust out -like in that Elmore Leonard book where the brothers get behind on loans from the mob & they take over their business - rack up tons of purchases that disappear & walk off with all the assets in two weeks leaving behind a bankrupt shell.

The mob’s business model moved to Wall Street a long time ago.


#18

Currently, in the US:
Ordinary dividends are taxed at normal income tax rates (up to 39.6%).
Share repurchases become capital gains and can then be taxed at the preferred long term capital gains rate (15%).

This is a big difference for wealthy investors.
Doesn’t matter nearly as much for regular people who’s marginal income tax rate is lower and have many investments in retirement accounts that pay neither tax.
It is also true that share repurchases are better for owners of options to buy at a fixed price, eg upper management, than dividends.


#19

Exactly! Carly Fiorina was the first big one - completely disconnected from the company, acted like she was some sort of rock star/celebrity, etc…
She and people like her set that stage for these dopes and the way they expect the whole world to genuflect in their general direction.


#20

Nah, there was Michael Capellas at Compaq at roughly the same time (1999 on). You know - he of the rock star front cover (complete with electric guitar) on BusinessWeek.