Multinational tax management is involved with the positioning of an international company abroad so that it avoids the highest tax rates that it is liable to pay in the countries that it operates within. This will minimize their total tax liability worldwide. They do this by allocating costs and revenues to different centers in different parts of the world where tax rate varies significantly. For example, Ireland has a tax rate of 12.5% which often attracts businesses to become incorporated in Ireland as opposed to the UK where it is now 24%. (However, is due to be reduced to 21% by April 2014 to reduce the gap between 'tax havens' so as to encourage businesses to remain within the UK and for new ones to be encouraged to incorporate here.
There have been a number of high profile cases recently of companies that have been avoiding tax by moving their costs and revenues abroad so as to report lower profits in the UK and as such reduce their liability.
Starbucks were recently discovered to have only payed £8.6m in tax over the last 14 years of trading within the UK, which caused public outrage. Since then they have agreed to voluntarily pay additional taxes. However, they are not the only companies that are doing this; Amazon and Google have also been criticised for this. George Osborne has recently spoken out against these firms and has demanded a crackdown on firms who "are not paying their fair share of tax". Many people have criticised him as these companies are using Subsidiaries or joint ventures to restructure transactions, ownership and/or re-position funds which are entirely legal options available to them. There are also a great number of people who believe they should be paying more tax. This implies the stakeholder theory of strategic management which involves the companies taking a bigger interest in society as a whole.
Using these methods, many individuals as well as multinational companies have avoided paying large amounts of tax in the UK. In a very controversial move by the HM Revenue & Customs (HMRC) a list of "tax dodgers" have been named and shamed. However, there were no large corporations on the list and in response the HMRC said they were working to close the loopholes that these corporations used to avoid paying large amounts of tax.
Accounting firms have also been criticised for offering tax advice that actually helps companies reduce their tax liability within the UK. This is threatening revenues within some of the biggest accounting firms in the industry who are currently doing nothing illegal.
The upcoming G20 summit will take a long look at closing the loopholes that multinational firms firms currently exploit to reduce their tax liability.
The reasons for these moves by multinational companies aren't always clear; many believe that a shareholder theory perspective can be used as they are trying to increase shareholder value the most by reporting the highest possible net profit. However, agency theory could also be applied as the higher the profits, the higher the reward for senior management.
Sunday, 24 February 2013
Sunday, 17 February 2013
Raising multinational finance
There are two methods of raising finance for multinational firms; debt and equity. Equity is sold to investors in the form of a share, or a number of shares in the company. When a company first starts to sell its shares in an Initial Public Offering (IPO) it becomes 'listed' on the stock exchange which it had applied to.
Debt finance is raised through the securing of Capital from a lender (eg. a bank) in return for a promise (either secured, or not) to repay the money borrowed at a later date and to pay interest in the interim period on a regular basis.
In recent news, the sale of Heinz to Warren Buffett's Berkshire Hathaway and the private equity firm 3G has used both share capital and debt finance to secure it. Shareholders are still to vote on the outcome of the sale but Berkshire Hathaway will be paying $12-13 billion in cash totaling $23 billion and the remaining balance will be raised through debt finance. Current share holders are going to be offered $72.50 per share which is a 20% premium to the current market share price, representing a significant return on investment for original shareholders.
The huge amount of debt to be taken on (c $5 billion) is a risk even considering that debt is one of the least risky forms of multinational finance. However, the finer points of the deal are still to be decided and this includes what kind of debt will be used and what it will be secured against (a figure this large will surely be secured against something, despite Berkshire Hathaway having an excellent credit rating from Moody's of Aa2).
During the Economic crisis, the number of mergers and acquisitions fell as the rate of borrowing went up and it become more difficult to raise equity finance as fewer investors were keen to spend their capital. But recently there has been a number of headline grabbing mergers, such as that between American Airlines and US Airways for $11 billion that will create the worlds largest airline. The other recent example of this was the proposed takeover of Dell by its founder, Michael Dell, for $24 billion. Closer to home, the UK's Virgin Media is to be bought by Liberty Global for $23.3 billion.
The US Airways and American Airlines merger has brought a lot of scrutiny on itself as it raises questions regarding the competition within the industry, particularly North America. However, this is a point for another post!
Debt finance is raised through the securing of Capital from a lender (eg. a bank) in return for a promise (either secured, or not) to repay the money borrowed at a later date and to pay interest in the interim period on a regular basis.
In recent news, the sale of Heinz to Warren Buffett's Berkshire Hathaway and the private equity firm 3G has used both share capital and debt finance to secure it. Shareholders are still to vote on the outcome of the sale but Berkshire Hathaway will be paying $12-13 billion in cash totaling $23 billion and the remaining balance will be raised through debt finance. Current share holders are going to be offered $72.50 per share which is a 20% premium to the current market share price, representing a significant return on investment for original shareholders.
The huge amount of debt to be taken on (c $5 billion) is a risk even considering that debt is one of the least risky forms of multinational finance. However, the finer points of the deal are still to be decided and this includes what kind of debt will be used and what it will be secured against (a figure this large will surely be secured against something, despite Berkshire Hathaway having an excellent credit rating from Moody's of Aa2).
During the Economic crisis, the number of mergers and acquisitions fell as the rate of borrowing went up and it become more difficult to raise equity finance as fewer investors were keen to spend their capital. But recently there has been a number of headline grabbing mergers, such as that between American Airlines and US Airways for $11 billion that will create the worlds largest airline. The other recent example of this was the proposed takeover of Dell by its founder, Michael Dell, for $24 billion. Closer to home, the UK's Virgin Media is to be bought by Liberty Global for $23.3 billion.
The US Airways and American Airlines merger has brought a lot of scrutiny on itself as it raises questions regarding the competition within the industry, particularly North America. However, this is a point for another post!
Sunday, 10 February 2013
International Stock Exchanges and Stock Market Efficiency
Fama (1970) identified 3 different forms of Stock Market efficiency; weak, semi-strong and strong. Weak form efficiency is considered to be the minimum required for a market to operate and the current share price is based only on the past performance of the share price of a company. Most stock exchanges operate at a higher level than this since there are no mechanical trading rules that can generate profits in excess of the average return.
Semi-strong form efficiency is based on past share price movements and all publicly available information and the market will react quickly and rationally to any new information. This is the category that most stock exchanges fall into as they can't make abnormal returns by studying the news as the share prices will already have been updated with all publicly available information. For example, on Friday 8th February, the share price of Moody's, a credit agency, fell 6.6% because of legal action being taken within the industry. This shows not only that as soon as news becomes publicly available there is a visible impact on a company but also that the company doesn't even need to be directly involved with the story but because it is working within the same industry the negative information also had an impact on Moody's. This is also despite the fact that the CEO stated that he had no knowledge of any impending legal action after one of their competitors (Standard & Poor) was sued by the US Government.
Kendal (1953) also had some theories that Fama built upon for his Forms of Efficiency. He stated that there was no systematic link between one price movement and the subsequent ones. This is evidenced by Moody's share price falling despite the announcement of a 66% net profit increase in the last quarter of 2012. (Considered good news!)
This also shows that the share price reflects all known information at all times.
Recently Boeing, the airplane manufacturer has encountered problems with the batteries on some of its new Dreamliner planes and has had to delay the delivery of many orders. This has had a negative impact on the share price of Boeing.
However, there are anomalies that have been discovered and subsequently solved due to the nature of the stock exchanges around the world and those stock brokers working in them.
For example, the time of day effect, which works in 2 ways. Before the weekend prices may increase as buyers want to have a good portfolio before the weekend and then on Monday morning the share prices tend to fall as they get rid of shares they decided they didn't need over the weekend. There was a time when if information came out at lunch time then the share price was not adjusted and it was possible to make abnormal gains because all the analysts would be out having lunch. This was easily solved by having staggered lunch breaks. However, many stock exchange workers now hardly ever leave their desks during the day until the market closes, so as to avoid missing any information.
The final form of efficiency is is Strong form efficiency. This implies that all information (public or not) is reflected in the share price. This implies that not even insider dealing would lead to abnormal gains, therefore markets can often be described as strong form inefficient. This leaves the market open to insider dealing but there is a serious threat of imprisonment for this behavior. There haven't been any recent examples of insider dealing but the Former CEO of Enron Jeff Skilling was a high profile example in the early naughties.
These forms of efficiency mean that abnormal gains can only be made by chance or through illegal means.
Semi-strong form efficiency is based on past share price movements and all publicly available information and the market will react quickly and rationally to any new information. This is the category that most stock exchanges fall into as they can't make abnormal returns by studying the news as the share prices will already have been updated with all publicly available information. For example, on Friday 8th February, the share price of Moody's, a credit agency, fell 6.6% because of legal action being taken within the industry. This shows not only that as soon as news becomes publicly available there is a visible impact on a company but also that the company doesn't even need to be directly involved with the story but because it is working within the same industry the negative information also had an impact on Moody's. This is also despite the fact that the CEO stated that he had no knowledge of any impending legal action after one of their competitors (Standard & Poor) was sued by the US Government.
Kendal (1953) also had some theories that Fama built upon for his Forms of Efficiency. He stated that there was no systematic link between one price movement and the subsequent ones. This is evidenced by Moody's share price falling despite the announcement of a 66% net profit increase in the last quarter of 2012. (Considered good news!)
This also shows that the share price reflects all known information at all times.
Recently Boeing, the airplane manufacturer has encountered problems with the batteries on some of its new Dreamliner planes and has had to delay the delivery of many orders. This has had a negative impact on the share price of Boeing.
However, there are anomalies that have been discovered and subsequently solved due to the nature of the stock exchanges around the world and those stock brokers working in them.
For example, the time of day effect, which works in 2 ways. Before the weekend prices may increase as buyers want to have a good portfolio before the weekend and then on Monday morning the share prices tend to fall as they get rid of shares they decided they didn't need over the weekend. There was a time when if information came out at lunch time then the share price was not adjusted and it was possible to make abnormal gains because all the analysts would be out having lunch. This was easily solved by having staggered lunch breaks. However, many stock exchange workers now hardly ever leave their desks during the day until the market closes, so as to avoid missing any information.
The final form of efficiency is is Strong form efficiency. This implies that all information (public or not) is reflected in the share price. This implies that not even insider dealing would lead to abnormal gains, therefore markets can often be described as strong form inefficient. This leaves the market open to insider dealing but there is a serious threat of imprisonment for this behavior. There haven't been any recent examples of insider dealing but the Former CEO of Enron Jeff Skilling was a high profile example in the early naughties.
These forms of efficiency mean that abnormal gains can only be made by chance or through illegal means.
Sunday, 3 February 2013
A recovery of shareholder wealth for Research in Motion?
Shareholder wealth maximization is considered the foremost strategy for modern companies to pursue. It requires a combination of long and short term goals but above all is to link the objectives of the management team of a company to that companies objectives. This will motivate the managers to do what is best for the company in the future, while not necessarily providing the company with many short term benefits. This avoids the risk of managers acting in their own interests (agency theory) and also utilizes share options reward schemes to create incentive's for management.
Research in Motion (RIM), the company behind Blackberry, was for many years a very successful global contender with its modern devices with high functionality that proved to be very popular among business' all over the world. However, in recent years it has had a number of failures that have caused the share price to fall through the floor. While the company still sells a large amount of devices (14.1 million last year) its failures are most often contributed to the management team.
The Co-CEO's Mike Lazaridis and Jim Balsillie have delayed release dates and have faced great public ridicule regarding the failures of the many services for up to three days at a time. Their share of the smartphone market has fallen (from 19% to 12% in 2011) and there is a growing number of people who would rather use their own smartphones for work and email rather than the company issued Blackberry. The release of the Blackberry Playbook tablet was an unmitigated disaster with serious design flaws which appeared to have been rushed off the production line to compete with the top shelf products already flooding the market. 500,000 models were shipped in the first quarter after the release but only 200,000 in the following quarter.
This string of failures by management have led to many questions regarding their competency to run the company. Have they lost sight of objectives to increase shareholder wealth or were those objectives even evident in the first place? More recently the share price of RIM took a hit after the 2012 summer riots throughout the UK which it was believed were organised using the Blackberry messenger service.
On January 22nd 2012, Thorsten Heins became the new CEO of RIM. This change at the top had been a long time coming and it came at a time when things for Blackberry were looking pretty dire; in the last year the share price had fallen by 70% and RIM was being badly beaten by competition from the Apple iPhone and Google's Android smartphones.
The questions now being asked are what kind of changes are required from RIM for it to start making a recovery? Market analyst's were calling for RIM to consider selling the handset production business and concentrate on what it was originally good at: the corporate customers.
In the last few weeks, RIM has changed its name to Blackberry and has presented it's newest product, the Blackberry Z10, to the market. This product is running the new operating system, Blackberry 10, which is either going to take back part of the market for Blackberry or doom it to further failures.
Thorsten Heins has obviously decided that it was in the companies best interests to keep producing Blackberry devices but it is yet to be seen whether this move will be successful. The innovation will no doubt impress shareholders but is it enough? Can it compete at the highest levels with the iPhone and android models that have come to dominate the smartphone markets? Has he done enough to safeguard the interests of shareholders in the long term? Only time will tell....
Research in Motion (RIM), the company behind Blackberry, was for many years a very successful global contender with its modern devices with high functionality that proved to be very popular among business' all over the world. However, in recent years it has had a number of failures that have caused the share price to fall through the floor. While the company still sells a large amount of devices (14.1 million last year) its failures are most often contributed to the management team.
The Co-CEO's Mike Lazaridis and Jim Balsillie have delayed release dates and have faced great public ridicule regarding the failures of the many services for up to three days at a time. Their share of the smartphone market has fallen (from 19% to 12% in 2011) and there is a growing number of people who would rather use their own smartphones for work and email rather than the company issued Blackberry. The release of the Blackberry Playbook tablet was an unmitigated disaster with serious design flaws which appeared to have been rushed off the production line to compete with the top shelf products already flooding the market. 500,000 models were shipped in the first quarter after the release but only 200,000 in the following quarter.
This string of failures by management have led to many questions regarding their competency to run the company. Have they lost sight of objectives to increase shareholder wealth or were those objectives even evident in the first place? More recently the share price of RIM took a hit after the 2012 summer riots throughout the UK which it was believed were organised using the Blackberry messenger service.
On January 22nd 2012, Thorsten Heins became the new CEO of RIM. This change at the top had been a long time coming and it came at a time when things for Blackberry were looking pretty dire; in the last year the share price had fallen by 70% and RIM was being badly beaten by competition from the Apple iPhone and Google's Android smartphones.
The questions now being asked are what kind of changes are required from RIM for it to start making a recovery? Market analyst's were calling for RIM to consider selling the handset production business and concentrate on what it was originally good at: the corporate customers.
In the last few weeks, RIM has changed its name to Blackberry and has presented it's newest product, the Blackberry Z10, to the market. This product is running the new operating system, Blackberry 10, which is either going to take back part of the market for Blackberry or doom it to further failures.
Thorsten Heins has obviously decided that it was in the companies best interests to keep producing Blackberry devices but it is yet to be seen whether this move will be successful. The innovation will no doubt impress shareholders but is it enough? Can it compete at the highest levels with the iPhone and android models that have come to dominate the smartphone markets? Has he done enough to safeguard the interests of shareholders in the long term? Only time will tell....
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