Thursday, January 5, 2017

Trump Tax Cut = Gaming Capital


The Intercept reported on corporate plans should the Trump's repatriation tax break windfall materialize:

Executives are telling analysts at large banks that they are eager to take the money to increase dividends and stock buybacks as well as snap up competitors.
Those are common private equity underwriter (PEU) moves.  Increasing pay/benefits or adding jobs are not high on any list.

Cisco’s CFO Kelly Kramer told securities analyst:

First it would make changes to its debt structure, and then “we would have a blend of actions we can certainly take with our dividend as well as our share buyback, as well as leading flexibility for us to be able to do M&A and strategic investments.”
HP reported a similar interest:

When asked in an earnings call whether HP would use a Trump repatriation tax cut “for a dividend, or to raise the buyback,” the company’s CFO answered “yes” and then extolled the company’s “aggressive” policy on share repurchases.
 Other firms expressed:

CEO of the $2 billion Florida food service company Manitowoc, explained that “of course, we would like to use [it] for industry consolidation purposes” — i.e., buying other companies.

Agilent CEO Mike McMullen explained they’d use the money “for U.S.-based M&A” — that is, mergers and acquisitions — and “situations where we’ve been using debt, such as our share repurchases.”  

Corporations adopted PEU management methods to game quarterly results and maximize executive incentive pay.  Industry consolidation has not produced the benefits projected by expensive economic consultants, many hired by PEU firms.

Housing and PEU bubbles led to the 2008 financial crisis.  The aftermath led to and the eventual merging of housing and private equity, to the bane of many home renters

The last tax repatriation break for corporations, intended to boost employment, occurred in 2004.

Instead they used the money for stock buybacks and increased executive compensation, while the prime beneficiaries actually cut their U.S. payroll.
Private equity was in serious stealth growth mode in 2004.  That year Carlyle Group received $35 million from Texas Governor Rick Perry to add 3,000 Vought Aircraft Industries jobs.  By 2010 Vought's website showed the company reduced 35 jobs in Texas (for a public subsidy of $1 million per job cut).  Somehow Rick Perry took a 35 job cut and turned it into a 29,000 gain with his special economic development calculator.

Private equity underwriters will game the system to their advantage and politicians, like Rick Perry, will distort the most egregious behavior as success.

Oddly, if trillions in capital inflows are competing for corporate buyouts the next PEU bubble may be on its way, courtesy of a huge Trump tax break.