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Microsoft's $40 Billion On Hand
eMilkshake writes "CNN/Money magazine report here that Microsoft has more liquid reserves than 'Ford, ExxonMobil and Wal-Mart have combined' and 'enough to buy the entire airline industry -- twice. Or all the gold in Fort Knox, four times over. It is enough to buy 23 space shuttles or every major professional baseball, basketball, football and hockey team in America.' This is thanks to (according to WinInfo Update) the fact that 'Microsoft handles its investments with an inhouse software application called--seriously--the Catastrophe Hedging Program 2.5.' I wonder what I would do with $40 billion?"
That's the theory. I'm sure the MS lawyers have a more profitable reality. Personally I've always thought it was a stupid law: it punishes companies that build themselves a solid shelter for the rainy times.
Miko O'Sullivan
It's not even close to tax evasion. Ta evasion is illegal. Tax avoidance through compliance with the code and regulations is just being smart.
Companies are pretty much free to retain their earnings for reinvestment. There are some limitations on this general rule, but generally it is kosher (there's an old case - Dodge v. Ford Motor Co. - 204 Mich. 459, 170 N.W. 668 (1919))- in which the Dodge brothers sued Henry Ford for, among other things, retaining too much cash and not paying dividends).
There are also a number of tax cases where C corporations (whose dividends are taxable if distributed to shareholders) have been nagged by the IRS to declare dividends. The theory is that the retention of the cash has no real business purpose and it is being done solely for the avoidance of taxes. This is one way the Service can enforce what is called the "business purpose" doctrine.
Microsoft has answered claims such as you raised before, and it is a non-issue now. Especially in today's world of hyper-leveraged balance sheets collapsing, there is no way that Microsoft's war chest will be questioned by the IRS.
Lots of petrified grits
Personal holding companies are targeted at people who seek to incorporate their personal lives (in a nutshell). Someone like Sarah Jessica Parker could conceivably create SJP Inc. and avoid paying payroll taxes to herself on what would otherwise be wages. She could also distribute shares to her friends and family (kids) in an effort to shuffle income off her return (personal holding companies pre-dated the kiddie tax, so at one point the PHC was necessary to prevent this sort of thing).
In any case, it is absolutely clear that MS is not a PHC.
Guac-foo.
Lots of petrified grits
Dividends are stupid. If Microsoft decides it has more cash than it needs and wants to provide shareholder value with the money (possibly with the federal government threatening to tax the "excess" cash reserve), then a stock buy back makes much more sense than a dividend. In theory, both provide the same value to the shareholders, but a stock buyback provides capital gains instead of income.
So even if the government decided to enforce the tax on "excess" cash reserves, there would be no need for a dividend.
Actually it's not illegal, it depends on the company. Some shareholders may force the issue in particular companies but there is no law stating that dividends must be paid out. Some companies never pay out dividends (Sun, Cisco, Microsoft, etc are all examples of this). The trend in the past 20 years has been to decrease the dividends given out or to not give one out at all. Microsoft uses stock splits to basically pay out a stock dividend to their shareholders...
Say what you will about his business practices, Bill (with, I'm sure, some conscience prodding from his wife) is doing some good stuff with his money. More than you'd ever see Ellison or McNealy do with their coin (if they had as much as he does, that is).
Hell, Ellison would do something loony like buy Costa Rica and turn it into the Federated Republic of Oracle, complete with its own airforce and navy.
Now that I mention it, that'd be sorta cool.
Ralph Nader pointed out that the money is a sort of a n "illegal tax shelter" for very rich people such as Billie Boy, Paul Allen, and Steve Ballmer.
/., Microsoft can do no right, so perhaps I should be unsurprised by this story. Rather than bashing them, why not download the CLR and C# source for FreeBSD and have a play with that?
Honestly, you Slashbots. One the one hand, Enron are bad because they used accounting tricks and pretended to have billions of dollars that they didn't. Microsoft, perhaps surprisingly, eschew fancy creative accounting, and have real cash money, which they invest in, among other things, T-bills, just like Grandma.
Let's put $40B into perspective. That's about a quarter of the shareholder value lost by Vodafone since it's peak. That's less than the value that Juniper or AOL/TW lost in a year. That's less than Marconi were forced to write off. It's a fraction of what Cisco or GE are worth. In other words, in an industry as volatile as high tech, it's only prudent to keep a lot of hard cash on hand - it's called "Catastrophe Hedging" for a reason.
If it were illegal, the Govt. would have busted them. The name Arthur Andersen was impeccable, far more so than Microsoft, but when the broke the rules, they were taken out in short order.
On
Stock splits are NOT dividends. When a stock splits, they take away every share of stock you own, and give you 2 (or 3), each sort half as much. The net is zero. Investers don't like shares of stock going much over 100/share because it becomes difficult to deal with. Check out BRK though for a counter example of that.
Dividends are different. Companies don't like to pay them because investors don't like them anymore. They are taxed twice from some points of view. They come out of earnings, so the company pays income tax on dividends, and then the investor pays taxes on the dividend. (Unless you are investing in a tax free account like an IRA) Thus most investors prefer their companies to take the dividend money and invest it in growing the company. A company has two choices for spending profit, they can give it to the owners, or they can build the buisness.
Because its a little more complex than simply handing over money to the airline industry. The majority of the 'bailout' money is in loan guarantees. The airlines don't have anywhere near enough cash on hand to purchase new planes. They need to borrow from banks, just like normal people borrow for a mortgage. Given the current climet banks now see these as risky. The government has stepped in and guaranteed these loans, similar to guaranteed student loans. That money is only to be used if an airline goes belly up.
I dislike giving money to coporations as much as everyone else, but this is a much bigger issue. It's not about keeping the CEOs of Boeing fat dumb and happy, it boils down to keeping an entire economy from crashing down into a major recession.
All companies have to pay out dividends eventually, otherwise the price of the share would be zero (since the price of the share is basically the net present value of the the stream of expected dividends).
The price of a stock in theory is the present value of the discounted future cash flows you receive from the stock (i.e. dividends) plus the present value of what you can sell the stock when you are done holding it. MS should never have to pay out a dividend and it shouldn't make a difference in its stock. Look at zero-coupon bonds.. they behave basically the same way.
DrLunch.com The site that tells you what's for lunch!
So is it the infamous Keynesian "invisible hand" run amok that created this?
That would be Adam Smith's Invisible hand.
"The new wave is not value-added; it's garbage-subtracted" - Esther Dyson, Dec 1994
The classic example of wealth is a man stranded on an island. He must attend to his basic needs (hunting/foraging mostly) for most of his day, but can set aside a little spare food. In this most primitive scenario, the stored food (we'll pretend for the moment that it won't rot) is his wealth.
He can consume his wealth unproductively (by taking a day off) or by saving up food and then using the time he would be hunting to, say, make a better spear. If he invests his spare time into productivity, he can hunt faster, and generate more 'wealth'. Once he has stored up enough food to, say, not hunt for a month... maybe he can build a farm and increase his productivity again. Note that currency is not involved here in any way.
In a more complex example, you have a barter system, where each citizen specializes into something. People working exclusively on one job become better at it than generalists. This allows the society to create more goods per hour worked (productivity again). People can trade their goods for other goods. In very general terms, the cobbler can work a week on shoes, and then sell those shoes for enough food to eat for two weeks. The farmer who buys the shoes can focus on farming and can, in a week, generate enough food to feed himself and, say, three other people. He can trade his food for the goods they produce. The overall standard of living rises sharply.
The next development is some sort of currency. In the Austrian school of economics (which seems much more intelligent than other sorts I've looked into), money is simply the most marketable commodity... the one thing that people, in general, will be most likely to accept. On our world, that happened to be gold and silver. This was a HUGE advancement because it allowed the storage of wealth in a way that did not decompose. If someone worked for a long time, they could store up enough money to invest into large things that made big changes in productivity. This also made the process of trade itself much faster, because people didn't have to spend time finding someone who wanted their chicken in exchange for shoes.
The next major development was 'token' money, where gold and silver were stored in a vault someplace (which is convenient, because they are heavy) and lighter, smaller coins, or pieces of paper, were issued to indicate ownership of a portion of the gold.
This is where things start to get complex. The use of tokens to represent gold allowed the issuers of tokens to play games they had never been able to do before. Someone must have thought... 'gee, I have 1000 ounces of gold in my treasury, I could probably issue 1100 tokens, because they're not going to want to withdraw all their money at once.' This was a VERY BIG DEAL, because for the first time, 'currency' (tokens) became DIFFERENT FROM wealth (the most marketable commodity).
Over time, the amount of gold held in reserve became less and less. This resulted in huge multipliers in the amount of currency circulating. If you have a 10% reserve ratio, for every ounce of gold you take in, you can issue tokens for 10 ounces of gold. Our banks presently are required to hold something like 3% reserves, which means that currency is multiplied by 33 1/3 times.
Now we're getting into an area where I understand less, and where even experts disagree, so take what I say from here as partially fact and partially opinion. The above is pretty much all solid fact, but it gets murky from here.
The rise of fractional reserve banking was a huge change in economics, but it has been a mixed blessing. It allows the economy to expand at a much faster rate in good times, but when things go bad, it appears to make contractions much worse. When bankers see that the sun is shining, they tend to lend more, thus creating more currency (and the APPEARANCE OF WEALTH), but they *do not* create wealth in so doing. In essence, they themselves are borrowing against future production. By issuing new debt, they allow things to be built that otherwise could not have been afforded. This devalues the currency to some degree, and also tends to encourage the building of things that are marginally profitable. The bigger the boom, the more demand is magnified, and the more things are built that cannot be sustained in lean times. (malinvestment)
Eventually, either due to the malinvestment or due to other outside shocks (wars, for instance), times start to get harder. The banks become worried and lend less. The lowered availability of money removes currency from the market, making it more precious. This tends to make people spend less, and increases the risk of defaults on other loans, which in turn reduces the money supply even more. Thus, just like the boom was magnified, so is the bust. Businesses that would be perfectly profitable in 'normal' times can and do fail in 'busts', which destroys yet more wealth.
Eventually things start to look rosy again, the bankers do more lending, and another boom cycle ensues. The overall heights of the booms and busts are limited, primarily by the percentages required in fractional reserve banking. The commodity underneath the tokens restrains the worst of the potential excess; it keeps the economy on relatively honest footing.
Overall, it appears that fractional reserve banking seems to have more benefits than drawbacks. It also makes the bankers one hell of a lot of money (wealth, not currency!), so they have pushed hard for the practice to continue.
However, there has been a major change, quite recently by economic standards:
In 1971, Nixon took us off the gold standard. This set off a confidence crisis in the dollar, and the 1970s were a very unpleasant time. It is probably no coincidence that personal income peaked in the early 1970s, and has been on a steady slide downhill ever since.
What replaced gold? Nothing. Literally. The Federal Reserve could now create bank reserves by waving their hands. There was no limit on the amount of currency they could create; there was no fundamental check-and-balance there. The 1970s were a very un-fun time in the economy.
Starting in about 1980, Volcker restored confidence in the dollar by restoring the Fed to fiscal prudence. He did this by reducing the money supply growth rates to reasonable figures and by jacking up interest rates to the moon. Throughout the 80s, we had a pretty stable currency.
However, starting in the early 90s, the Greenspan Fed has been wildly profuse in its generation of currency. Anytime we have had a problem, it has just opened the spigots and let the money flow. Note that this is not related in ANY WAY WHATOSOEVER to actual wealth. It is just currency.
Because we were globalizing for the first time, there was an endless appetite for dollars overseas. This let Greenspan print money like mad without seeing many signs of inflation. (which is generally considered to be consumer prices going up, but this is a bad definition.) Instead of CPI gains, the inflation went into the stock market and, now, into real estate. This kind of inflation is seductive and terrible; it does enormous damage to an economy, while everyone LOVES IT and wants it to CONTINUE.
In essence, by taking us off the gold standard, Nixon has removed one of the fundamental checks on the power of the banks. As a result, the boom we had was titanic, extraordinary -- the biggest boom in the history of the world.
Likely outcome of the bust left as an exercise for the reader.