Originally published at: http://boingboing.net/2016/12/21/companies-self-devouring-buy.html
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On NHK Newsline yesterday, there was a report on a Japanese bank buying out an American transportation company in the hope that the impending inflation of the Dollar would boost profits in relation to the deflating Yen and so be a hedge strategy. I wonder if other foreign entities will follow suit, raid the buyback-afflicted companies, and see there is no “there” there.
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What exactly is a buyback? The company owns itself - or does the stock just poof (creating a smaller number of total shares outstanding?)
Why is this advantageous? Doesn’t a company in general want more shares at a reasonable price point to dilute the opportunity for shareholder revolts and or hostile takeovers?
If you refuse to name your jurisdiction, why would the default be pay no taxes, I think it would be pay everyone taxes…
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Ok I deserved the smartass answer…
Here is a better question then…
Why, in the grand scheme of things, are companies like Apple that are sitting on so much cash - not being sued by investors for failure to pay dividends? Our entire current corporate culture is due to dodge suing ford to force them to pay dividends (thus creating the ‘companies only exist to make stockholders money’ argument real). How is it that these megaliths are allowed to horde so much cash these days without an investor revolt?
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Those costs don’t happen until the future, while the profits can be had today.
Also, despite what you will be taught in an economics class, a company is not an entity that can “want” anything. You would do better to think about what the managers and shareholders want, remembering that they can ride the company upwards and then detach themselves before any eventual consequences arrive.
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Yes, the stock just goes poof. Since each share represents a fraction of the entire company, the remaining shares will each represent a slightly larger fraction after the buyback.
It sounds like you might be assuming an adversarial relationship between the company and its shareholders, but that’s not really how the corporation is designed. Legally, corporations are owned by the shareholders, and management is supposed to represent their financial interests. This dumb setup means that money paid out to employees is “an expense” to be minimized, but money paid out to stockholders is “profit” and considered good.
Many corporations use some of their profits to pay dividends to shareholders. Stock buybacks are simply different way to return profits to shareholders. A stock buyback is generally better than a dividend if the company feels its stock is undervalued.
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The shares are re-absorbed by the company, and very simply speaking do go “poof.” The idea is to increase the value of the remaining outstanding shares (those available for sale or purchase on the public market) by reducing their supply. You’ll have fewer revolts by shareholders and fewer hostile takeovers by outsiders if the price of outstanding shares that the former hold and the latter want goes up.
As to why companies like Apple sit on so much cash, it’s because they’re so wildly successful that they don’t need to apply those funds to areas like R&D and new plants, etc. that are already well-funded. So they sit on the cash and funnel it into their own private investment funds (Apple’s is called Braeburn Capital, based in NV) or sometimes use it for mergers and acquisitions of other companies.
Shareholders don’t demand dividends with companies like Apple because they have to pay taxes on them, and would much rather have the price of the stock they’re confidently holding for the long term appreciate (e.g. due to buybacks) while they find ways to leverage their holdings.
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For whatever its worth, Apple started paying dividends again in 2012.
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Definitely worth noting. The interesting and relevant part of that the dividend payout was part of a housecleaning of the company’s domestic cash. This was when there was no chance that the “repatriation tax” for their much larger overseas holding would be repealed, a situation that’s now changed.
Apple also started a major stock buyback programme that year, which probably offset the short-term tax costs of shareholders who received the dividends.
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A more pertinent question is how do you pull trillions of dollars out of the economy and not cause a recession? The answer is: you don’t!
Poetic justice would be for the Treasury to hand out hundred dollar bills to the poor like party favors. This would cause some serious inflation, making those overseas dollars less valuable. Sorry Apple!
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We’ve had tax holidays on overseas cash in the past. 90-95% of repatriated dollars goes to special dividends and stock buybacks. Since the wealthiest 10% own the vast majority of stocks, they get the vast majority of the benefit. And these tactics won’t do much to create jobs or boost demand. Buybacks just increase the value of shares, they don’t put cash in anyone’s pocket. And the majority of the wealthy will just have any special dividends automatically re-invest in more shares. Come tax time they’ll pay their 15% (or less), the deficit will be slightly less that year, but that’s it. Going forward, that wealth will be locked up in the accounts of wealthy Americans rather than locked up on corporate balance sheets overseas.
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We could use some inflation, but rather than poetic justice I’d like some actual justice.
“Hey, Apple, you owe us taxes.”
“No, we don’t because we’ve been clever.”
“Okay, we value your headquarters at $XM so we’ll take that as a down payment through expropriation.”
Sure, it would send the economy into chaos, but that’s happening anyway. I mean, it’s a shame that America attempted to elect a strongman and they got a wimp instead (a very predictable shame).
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Hmmm I think I’ve been abusing that phrase.
No, it’s not a shame at all.
Yeah, I know, it’s probably better that he isn’t a strongman. I just feel for the people who voted for Trump. The people who supported Trump presumably did so overwhelmingly because they thought he was going to upend the system. Pretending electoral college votes represent the will of the people for a moment, the American people wanted 4 years chaos and retribution.
The whole time the election was going on people were trying to explain why people supported Trump. I think I understand a lot of different perspectives that led to a Trump vote. But the whole time I kept thinking: “Okay, so you look around and see your community literally dying and Clinton is actually promising more of the same, I get how you can’t vote for that.” But every time I had to append: “But you know he’s a con artist, right?”
Maybe there’s just nothing more sympathetic to me than a frustrated desire for vengeance.
But I realize that at this point if the only thing Trump does with the presidency is loots the coffers for a couple hundred billions dollars then we’ll probably have to count ourselves lucky (and I say “ourselves” on behalf of humanity, not just Americans).
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