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HOW AND WHY CORPORATE CASH HOARDING MUST END – PART I

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HOW AND WHY CORPORATE CASH HOARDING MUST END – PART I

S&P 500 corporations continue to grow cash and short-term holdings abroad, strugglewith tax-efficient repatriation and apply short-sighted views to surplus investment, Kisandka Moses asks, what must be done to bring an end to practice of cash hoarding.

cash & liquidityWhen asked to define their central purpose within a corporate entity, the vast majority of treasurers would most likely refer to their roles as central to the ‘purveying and optimization of corporate funds’.

By the end of last year, the largest 500 corporations listed on either NASDAQ or the New York Stock Exchange had stashed approximately $2.4 trillion in foreign subsidiaries and bank accounts, according to an analysis of corporate financial statements by the research group Citizens for Tax Justice.

Of late, corporate and retail reactions to adverse economic conditions have been near identical. Most notably, residents of Switzerland responded to the introduction of negative interest rates with a large-scale cash withdrawal from domestic banks; essentially stashing salaries, savings and inheritance funds at home under the mattress or in safe-deposits boxes. Similarly, after the Bank of Japan announced negative interest rates on some reserves, Japanese private security firm Secom cashed in on heighted demand from tense savers on cash deposit boxes which saw shares increase by 5.3% in a single week.

With Apple accumulating by far the largest hoard of cash at nearly US$200 billion, Google’s parent company  Alphabet holding over $80 billion in global bank accounts and short-term investments and General Motors maintaining nearly half of its value in cash; politicians, institutional investors and even ordinary citizens of the U.S. have expressed exasperation at the unwavering practice.

The roots of the corporate practice extend further with hoarding having increased significantly since the mid-to-late 1990s before briefly dipping during the global financial crisis and picking back up thereafter.

Largely confined to MNC’s across the technology, pharmaceutical, telecommunication industries, the post-2008 recession produced a precautionary preoccupation from the CFO-Treasurer dynamic to re energise efforts into monitoring rising profits made everywhere but the USA. In optimal circumstances, the overseas cash would then most likely be used as a cushion to gain first-mover advantages – think research and development or mergers and acquisitions.

Yield-seeking corporates bemoan short-sighted investment policies 

Putting capital conservative theory aside; with regional cash pools and treasury shared service centres used to centralize regional revenues and ultra-short intercompany loans relied upon to funnel across monies generated overseas, one may ask what led to a record $1.9 trillion of U.S. corporate profits languishing abroad. To add insult to injury, a wave of cash conservatism has also spread to the very institutions designed to re-invest corporate cash.The Bank of America Merrill Lynch’s February Global Fund Manager Survey revealed that,

‘…the average cash balances of the 198 [investment firms] surveyed was as high as 5.6 per cent, at their highest point since November 2001 in the wake of the dotcom bubble burst, global energy giant Enron’s collapse and the September 11 attacks’[1].

Essentially, investment managers are treading carefully and protecting fund performance by taking profits and moving from illiquid options to cash assets.  Reactionary advice from Ian Spreadbury, a senior portfolio manager for the second largest fund group, Fidelity Investors prompted institutional investors to re-prioritize liquid investments with a heady warning to preserve cash in saving accounts. He also advised investors to re-allocate surplus to physical currencies to guard against systemic economic risk[2].

Essentially year-on-year growth of foreign corporate cash hoards is also partly a product of short-sighted investment policy as multi-nationals opt for a “hands-off” approach to no-yield, low-risk options for surplus reinvestment.

Panama Papers’ leak and crackdown on inversions spark fresh U.S. repatriation row

Conservative re-investment is far from the only cause of hoarding as the pains of U.S. cash repatriation for most multinationals headquartered in the U.S. as the fall out from global tax avoidance discourse reveals.

In the wake of an unprecedented leak of 11.5m files from the database of an offshore Panamanian law firm, Mossack Fonseca dubbed ‘Panama Papers’ in April, the row over cross-border tax avoidance intensified. The leak revealed how wealthy investors, high-powered entertainers and politically-exposed-persons sought out both the fast-growing economy as a tax-haven and the law-firm to help set-up shell companies and offshore accounts to shield wealth and avoid domestic taxes.

Tax-efficient repatriation has long been a challenging responsibility for the U.S-based corporate treasury-tax duo as the statutory corporate tax rate progressed to 35% on incomes over $18.3bn.

Unsurprisingly, the comparatively high rates have led to a variety of tax-avoidance strategies gaining popularity in recent decades with the latest row over corporate inversions sending shockwaves through corporate M&A, treasury and FP&A departments alike.

Under current rules, U.S. companies can relocate their headquarters abroad if they can acquire a foreign company and transfer more than 20% of their shares to foreign owners with the Obama administration pledging to raise the share threshold to over 50%. The term corporate inversion refers to the prominent tax loophole and practice of big multi-national corporations either merging with or acquiring foreign businesses located in a country with a lower-tax rate, moving headquarters and saving billions on domestic taxes.

In just under two decades, over 40 publicly-traded U.S. have become “expatriated entities’” following high-profile tax inversions; most notably, AbbVie’s planned $54bn acquisition of Ireland’s Shire and Burger King Worldwide’s merger with Canadian headquartered Tim Hortons Inc.

By some strange political osmosis, opposing fractions appear united on the ‘tax-clampdown’. If the forthcoming President of the United States is sought from the centre-left’s Democratic Party, then we can expect a path of tough corporate tax reform to continue with Hillary Clinton proposing an ‘exit tax’ policy to deter U.S. corporates from relocation. Bernie Sanders is pledging to end loopholes altogether by requiring firms to pay taxes on offshore profits.

Such is the media fever and law-maker outrage surrounding corporate tax avoidance that Republican presidential front runner and business tycoon Donald Trump has joined the fore in outlining plans to introduce a ‘repatriation tax holiday’. Trump’s manifesto outlines plans for a one-time deemed repatriation of corporate cash held overseas at a 10% tax rate and followed by an end to the deferral of taxes on corporate income earned abroad.

The largest pharmaceutical merger in history valued at $160bn which was set to take place between U.S. giant Pfizer and Ireland’s Allergan was scrapped this month amid a crackdown on “serial inverters“ led by the Obama administration and US Treasury Department.

U.S. multinationals continue to flee corporate America in droves seeking tax shelters in Dublin, London and Zurich. With a planned merger between Tyco International and Johnson Controls underway, Coca-Cola Enterprises set to move its headquarters from Atlanta, Georgia to Central London after a mega-merger between CCEAG and Coca-Cola Iberian Partners and the $49.9bn purchase of Ireland’s Covidien by U.S-based Medtronic on the horizon; inversions are essentially the “symptoms of bad tax policy”[3].

In response to Bernie Sanders’ scathing attack on General Electric’s operations abroad, Jeff Immelt, Chairman and CEO at General Electric, responded with a 641-word tirade on the social networking site LinkedIn defending the ethics of global business growth and laying the fault for cash hoarding, inversions and the like at the door of tax lawmakers;

Immelt stated, “…US companies continue to wrestle with an outdated and complex tax code that puts them at a distinct competitive disadvantage…the U.S. tax system has not been updated in 30 years and isn’t designed for today’s economy which is why we support comprehensive tax reform – even if it raises our tax rate”[4].

It is no wonder that under the premise of a 35% repatriation cost on honest corporate revenues, that multinationals have opted to stash the cash instead and law-makers must act now to reform an ancient tax-code – even if a greater percentage of tax on profits is the underlying goal.

Written by Kisandka Moses, Treasury Lead, FinTech Connect

1Desloires, V, ‘Cash highest since 2001, signals ‘buy’: Bank of America Merrill Lynch’, The Sydney Morning Herald, http://www.smh.com.au/business/markets/cash-highest-since-2001-singals-buy-bank-of-america-merrill-lynch-20160217-gmx1cr.html (February 18th, 2016)

2Oxlade, A, ‘It’s time to hold physical cash, says one of Britain’s most senior fund managers’, The Telegraph, http://www.telegraph.co.uk/finance/personalfinance/investing/11686199/Its-time-to-hold-physical-cash-says-one-of-Britains-most-senior-fund-managers.html, (June 20th, 2015)

3Winegarden, W, ‘Corporate Inversions Are The Symptoms, Bad Tax Policy Is The Disease’, Forbes, http://www.forbes.com/sites/econostats/2016/03/08/corporate-inversions-are-the-symptoms-bad-tax-policy-is-the-disease/#665ddf1814ce (March 8th 2016)

[4]Immelt, J, ‘Bernie Sanders says we’re destroying the moral fabric of America. He’s wrong’, Linkedin, https://www.linkedin.com/pulse/facts-matter-jeff-immelt?trk=hp-feed-article-title-comment (April 6th 2016)

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Robinhood plans confidential IPO filing as soon as March – Bloomberg News

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Robinhood plans confidential IPO filing as soon as March - Bloomberg News 1

(Reuters) – Online brokerage Robinhood, at the centre of this year’s retail trading frenzy, is planning to file confidentially for an initial public offering as soon as March, Bloomberg News reported late on Friday, citing sources.

The California-based brokerage has held talks in the past week with underwriters about moving forward with a filing within weeks, Bloomberg said.

Robinhood did not immediately respond to a request for comment.

Reuters reported last year that Robinhood has picked Goldman Sachs Group Inc to lead preparations for an initial public offering which could value it at more than $20 billion.

Robinhood was at the heart of a mania that gripped retail investors in late January following calls on Reddit thread WallStreetBets to trade certain stocks that were being heavily shorted by hedge funds.

The online brokerage tapped around $3.4 billion in funding after its finances were strained due to the massive trading in shares of companies such as GameStop Corp.

(Reporting by Ann Maria Shibu in Bengaluru; editing by Richard Pullin)

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Analysis: How idled car factories super-charged a push for U.S. chip subsidies

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Analysis: How idled car factories super-charged a push for U.S. chip subsidies 2

By Stephen Nellis

(Reuters) – When President Joe Biden on Wednesday stood at a lectern holding a microchip and pledged to support $37 billion in federal subsidies for American semiconductor manufacturing, it marked a political breakthrough that happened much more quickly than industry insiders had expected.

For years, chip industry executives and U.S. government officials have been concerned about the slow drift of costly chip factories to Taiwan and Korea. While major American companies such as Qualcomm Inc and Nvidia Corp dominate their fields, they depend on factories abroad to build the chips they design.

As tensions with China heated up last year, U.S. lawmakers authorized manufacturing subsidies as part of an annual military spending bill due to concerns that depending on foreign factories for advanced chips posed national security risks. Yet funding for the subsidies was not guaranteed.

Then came the auto-chip crunch. Ford Motor Co said a lack of chips could slash a fifth of its first-quarter production and General Motors Co cut output across North America.

“It brings home very clearly the message that the semiconductor is really a critical component in a lot of the end products we take for granted,” said Mike Rosa, head of strategic and technical marketing for a group within semiconductor manufacturing toolmaker Applied Materials Inc that sells tools to automotive chip factories.

Within weeks, automakers joined chip companies calling for chip factory subsidies, and U.S. Senate Majority Leader Chuck Schumer and President Biden both pledged to fight for funding.

Industry backers now aim to be part of a package of legislation to counter China that Schumer hopes to bring to the Senate floor this spring. Still, all agree it will do little to solve the immediate auto-chip problem.

Headlines about idled car plants resonated with the public that had shrugged off abstract warnings in the past, said Jim Lewis, a senior fellow at the Center for Strategic and International Studies. Lawmakers, already worried that a promised infrastructure bill will not materialize this year, decided to push for quick solution.

“Nobody wants to be seen as soft on China. No one wants to tell the Ford workers in their district, ‘Sorry, can’t help,'” Lewis said. “It was one of those moments where everything aligned.”

The package includes matching funds for state and local chip-plant subsidies, a provision likely to heat up competition among states including Texas and Arizona to host big new chip plants that can cost as much as $20 billion.

The subsidies could benefit a factory in Arizona proposed by Taiwan Semiconductor Manufacturing Co and one in Texas eyed by Samsung Electronics Co Ltd, even though those factories would be geared toward high-end chips for smartphones and laptops, rather than simpler auto chips. And those factories would not come on line until 2023 or 2024, according to plans disclosed by the companies, the world’s two largest chip manufacturers.

In the longer term, a raft of U.S. companies are also poised to benefit. Any chipmakers that build factories will source many tools from American companies such as Applied, Lam Research Corp and KLA Corp.

Intel Corp, Micron Technology Inc and GlobalFoundries – which already have U.S. factory networks – will also likely benefit.

Smaller, specialty chip factories also could benefit.

“The recent chip shortage in the automotive industry has highlighted the need to strengthen the microelectronics supply chain in the U.S.,” said Thomas Sonderman, chief executive of SkyWater Technology, a Minnesota-based chipmaker that makes automotive and defense chips. “We believe that SkyWater is uniquely positioned due to our differentiated business model and status as a U.S.- owned and U.S.- operated pure play semiconductor contract manufacturer.”

Even with subsidies, the U.S. companies still must compete with low-cost Asian vendors over the long run, and the immediate auto chip troubles will probably persist.

Surya Iyer, a vice president at Minnesota-based Polar Semiconductor, which makes chips for automakers, said his factory is booked beyond capacity and has started to speed some orders up while slowing others down, to meet automakers’ needs as best it can.

“We are expecting this level of demand to continue at least for the next 12 months, maybe even longer,” he said.

(This story has been refiled to add attribution to quote in paragraph 9, add dropped words in paragraphs 10 and 17)

(Reporting by Stephen Nellis and Hyunjoo Jin in San Francisco and Alexandra Alper in Washington. Editing by Jonathan Weber and David Gregorio)

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Atlantia disappointed with CDP bid for unit, continues talks

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Atlantia disappointed with CDP bid for unit, continues talks 3

By Francesca Landini and Stephen Jewkes

MILAN (Reuters) – Italy’s Atlantia said on Friday an offer by a consortium of investors led by state lender CDP for its 88% stake in Autostrade per l’Italia fell short of the mark and asked its top managers to see if the bid could be sweetened.

“The offer falls below expectations,” the Italian infrastructure group said in a statement, adding it had mandated the chief executive and the chairman to assess “the potential for the necessary substantial improvements” to the bid.

Italian state lender CDP, together with co-investors Macquarie and Blackstone, has presented a proposal valuing all of Autostrade per l’Italia at 9.1 billion euros ($11 billion).

The consortium also requested Atlantia guarantee up to 700 million euros in potential damage claims and another roughly 800 million euros for a pending legal case, making the bid less attractive than previously expected.

One source said the consortium estimated overall pending legal claims against Autostrade at 3 billion to 4 billion euros, adding the 700 million euro cap did not mean the amount would be detracted from the offer price from the start.

Earlier on Friday Atlantia’s minority investors TCI and Spinecap had called on Atlantia’s board to reject the offer, saying it undervalued the asset.

“No deal is better than a bad deal, especially a bad deal and a wrong price,” TCI Advisory Services partner Jonathan Amouyal said in a emailed comment to Reuters.

TCI, which holds an indirect stake of around 10% in Atlantia, repeated that the value for 100% of Autostrade should be no less than 12.5 billion euros.

The board will hold a further meeting in order to take a final decision on the offer in due time, Atlantia said.

The negotiations between Atlantia and the CDP-led consortium are part of an effort to end a political dispute over Autostrade’s motorway concession triggered by the collapse of a motorway bridge run by the unit.

(GRAPHIC – Atlantia share performance: https://fingfx.thomsonreuters.com/gfx/mkt/qzjpqggjdpx/image-1614331237501.png)

The bid expires on March 16, but the deadline could be extended in case Atlantia calls an extraordinary shareholders meeting (EGM) on the issue, according to one source with knowledge of the matter.

Shares in the group ended down 0,7%, after recovering some losses, as investors waited for the decision of the board.

Atlantia, which is controlled by the Benetton family, owns 88% of Autostrade, with Germany’s Allianz and funds DIF, EDF Invest and China’s Silk Road Fund holding the rest.

The group also kept open an alternative plan to demerge and sell its stake in Autostrade per l’Italia unit and called an EGM on March 29 to extend to end-July a deadline for offers for the demerged stake.

(Additional reporting by Stefano Bernabei, editing by Louise Heavens and Steve Orlofsky)

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