TIME Fast Food

Outrage Over Burger King’s Merger Is Totally Misdirected

A sign stands outside a Burger King restaurant on Nov. 1, 2006 in San Francisco.
Justin Sullivan—Getty Images

The bottom line is it's a solid deal

Outrage is a useful tool in a democracy, but not when it’s directed at the wrong target or ignores the facts. As the criticism of Burger King’s so-called ‘tax inversion’ deal with Canadian fast-casual restaurant and coffee chain Tim Hortons heats up in the political arena, several facts are being blatantly ignored. While it may be ideologically satisfying to label the merger as being unpatriotic because it will deprive the U.S. Treasury of tax dollars, it is also an overblown criticism.

Consider how shareholders of public corporations get taxed. Unlike investors in private companies who get taxed once on their pass-through income, public investors get a double hit.

To take a simple example, for every dollar that a public company makes in income, it has to pay 35% in federal income taxes as well as more in state and local taxes – let’s call it another 5%. The remaining 60 cents are then distributed as dividends to shareholders. Of that 60 cents, the shareholders now have to pay personal taxes in the average range of 20% to 39.6% depending on how long they have held the stock. Again, taking state and local taxes into account, in aggregate then, most shareholders pay somewhere between 55% and 67% in taxes on their investment in a public company.

This analysis, of course, ignores tax loopholes that large public companies are able to take advantage of but such loopholes rarely yield more than a 5-10% benefit, which still leaves shareholders paying an average of 50% in taxes.

Even those who believe in progressive taxation would be hard pressed to agree with this tax scheme. True, shareholders may also achieve gains through the appreciation of their stock, which is not taxed twice, but that is meant to be a bonus to incentivize people to invest, not to be an offset against dividend income. The latter could make tax incentives for investing a zero-sum game, which makes no sense.

From a political standpoint, it may be beneficial to demand that American companies not repatriate abroad for tax reasons, but the merger of Burger King with Tim Hortons has a lot more to do with the tight margins in the burger joint business and the more robust margins in the fast-casual restaurant and coffee chain trades. As Burger King struggles with hyper competition from McDonalds, Chipotle, and Starbucks, it needs to explore expansionary opportunities. The fact that Tim Hortons happens to be in Canada – in this case, at least – is incidental.

Moreover, the likely tax savings for Burger King by a tax inversion would only be around $3.4 million this year, given that Canada’s total corporate tax rate is 26.5% and Burger King paid an actual tax rate of only 27.5% last year, which would not be a lot for a company with more than $1 billion in top-line revenues and $340 million in profits on a run-rate basis for 2014. To put it another way, If the management of Burger King agreed to an $11 billion merger simply because of $3.4 million of cost savings, it would be bad management indeed. However, that is not the case here and all signs, when rationally examined, point to the fact that this deal is important for Burger King’s future growth, which will also benefit its employees, shareholders, and customers.

Questioning mergers based on anti-competitive factors is fine, but questioning the wisdom of patently good corporate deals simply because there are ancillary tax benefits is silly. It distracts from larger issues like labor relations and the pressures of global competition on the American economy, while doing nothing to benefit the discussion about tax reform.

This particular example has no real meat, except perhaps in the press.

Sanjay Sanghoee is a political and business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, as well as at hedge fund Ramius. Sanghoee sits on the Board of Davidson Media Group, a mid-market radio station operator. He has an MBA from Columbia Business School and is also the author of two thriller novels. Follow him @sanghoee.

TIME mergers

Mega-Mergers Are Killing Innovation

The latest mega-merger in the telecommunications sector, that of AT&T and DirecTV, would be the fourth largest in history, and it comes only months after the nation’s largest cable operator Comcast announced that it was buying Time Warner Cable, the second largest cable operator. Nor is telecommunications the only sector to see such acquisitiveness. Microsoft purchased the devices and services business of Nokia for $7.2 billion late last year, Google snapped up Nest for $3.2 billion in January, and Facebook bought WhatsApp for $19 billion in February.

Such consolidation can be good for consumers as bigger companies have the resources to innovate and provide new products and services which might otherwise never materialize. However, the vertical integration of the telecommunications and technology sectors can also restrict innovation due to decreased competition and the limitation of research to specific technologies that support existing business lines.

Take, for example, the acquisition of WhatsApp. Facebook’s primary reason for acquiring the company is to utilize the chat technology on its social media platform to bolster its existing messaging application, which currently lags WhatsApp in the smartphone market. Beyond that, Facebook will no doubt try to leverage WhatsApp’s own user base, currently more than half a billion, to promote its social media offering. But either way, the integration of Facebook with WhatsApp is the main goal and driver of value instead of some trailblazing technological development in the chat space itself.

Similarly, Comcast’s acquisition of Time Warner Cable enables the company to enter complementary markets without actually having to build new infrastructure in those markets or to innovate in any way. Such plug-and-play growth engenders laziness and deprives the U.S. of necessary infrastructure improvement and development. The U.S. is currently ranked a pitiable 35th in the world in broadband capacity according to the World Economic Forum, with even smaller nations outpacing us in cutting edge telecommunications.

Even when it comes to ‘pure’ or fundamental science that can form the basis of future technology, the relentless drive for commercialization limits its destiny to whatever fuels profits in the short term and can impede future research that does not support that. True, third parties could conduct research for other applications but the ironclad patents that major corporations hold on their technology can make such efforts unprofitable. In other words, the acquisition of promising technologies by major corporations can actually limit them by forcing them along proscribed lines in the future.

Some of the greatest scientific discoveries that have fueled mankind’s advancement were made in the vacuum of human curiosity without the profit motive that has now become the norm. Today, unless the process of discovery is sponsored by some major corporation or has an obvious application to industry at the outset, there is little motive to pursue it. Even research institutions, which have historically been neutral havens for such discoveries, now require corporate money to survive and are bound by corporate rules. This is a loss for the spirit of innovation that drives human achievement.

That is not to say that all acquisitions are bad or that our biggest companies don’t move us forward technologically, but if the pace of consolidation by major players continues, it could shrink the playing field to such a degree that innovation will become the sole domain of a handful of companies who, for the most part, will only finance targeted research that promotes their own bottom line, and use patents to prevent others from advancing that technology in other directions. That may be a win for commerce but not necessarily for the type of unexpected discoveries that could improve our world in the future.

Sanjay Sanghoee is a political and business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, as well as at hedge fund Ramius. Sanghoee sits on the Board of Davidson Media Group, a mid-market radio station operator. He has an MBA from Columbia Business School and is also the author of two thriller novels. Follow him @sanghoee.

TIME Federal Reserve

Even If Janet Yellen Is Wrong About the Economy, She Is Right About Fed Policy

Janet Yellen makes her first appearance before Congress as the chair of the Federal Reserve
J.M. Eddin—MCT/Getty Images

Janet Yellen’s first testimony on Capitol Hill was a resounding success. She was poised, confident in her decisions, and clear about her intentions at the Federal Reserve. But it was not so much what she said as what was behind it that makes it a tour-de-force performance and shows us that our monetary policy is in the hands of a capable leader.

After some initial tumult, the market has come to accept the scaling back of the Fed’s bond-buying program and can even see the many benefits of a taper: higher interest rates will discourage excessive borrowing, prevent the formation of new asset bubbles, and stabilize our economic growth at a realistic level that is fueled by real value creation and not the availability of cheap money.

Of course, if the economy really is weaker than anticipated – as the recent jobs report, which showed that only 113,000 jobs were added to the US economy in January, might indicate, then the contraction of money supply could slow down the recovery and reverse the trend of declining unemployment. In her testimony, Yellen expressed confidence about the economy but acknowledged that unemployment is still high and that a large number of people have been unemployed for an extended period of time.

And yet she opted to stick with the taper. There are two very good reasons for this.

What Yellen recognizes is that the most powerful tool in the Fed’s toolbox is its credibility. In order for monetary policy to work at all, it is imperative that the markets believe what the Chairman of the Fed says, and be able to rely on the guidance that the Fed gives to price securities. Any wavering by the Fed can lead to mispricing of both stocks and bonds and create volatility. That is precisely what happened late last year when Yellen’s predecessor, Ben Bernanke, flip-flopped on the taper. He first indicated that he would and then, after the markets plummeted, changed his mind. It led to immense confusion, which was probably good for day traders and arbitrageurs, but a disaster for regular investors, who require visibility and reliability.

Yellen knows that even if she has to reverse course later this year, she is better off doing it in response to undeniable market conditions (when a reversal will be expected anyway) than doing it on a whim now, which would damage the Fed’s credibility in the eyes of investors and make its future guidance ineffective.

A sudden easing of monetary policy now would also cause over-exuberance in the stock market as the anticipation of cheaper capital fuels a buying spree, and create a bubble. Moreover, a drop in interest rates will not automatically spur lending by banks, who were hesitant to lend even in 2013 when the Fed stimulus was in full swing. This casts serious doubt on whether our economy, and consequently the job market, would actually benefit from a reversal of the Fed’s taper at all.

Only time will tell whether Yellen’s assessment of the current state of our economy is correct, but she is definitely right about policy.

Sanjay Sanghoee is a political and business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, as well as at hedge fund Ramius. Sanghoee sits on the Board of Davidson Media Group, a mid-market radio station operator, and has an MBA from Columbia Business School. He is also the author of two thriller novels.

TIME

Why Shareholder Value Should Not Be the Only Goal of Public Companies

Twitter employees sit in a cafeteria at the company's headquarters in San Francisco, Oct. 4, 2013.
Robert Galbraith / Reuters

Carl Icahn’s bid to force online auction giant eBay to spin-off its payment processing business, PayPal, and eBay’s resistance to the idea once again highlights the disconnect that often exists between company shareholders and management.

It is widely accepted that companies should have only one goal, which is to maximize returns for investors. This works well for small and mid-size privately held businesses where senior managers often hold major ownership stakes and so the company’s interests are perfectly aligned with investor returns. It also works well for private equity sponsored deals where the investors play an ongoing and thoughtful role in the management of the company.

For large enterprises, however, and particularly public companies, the reverse can be true.

Contrary to popular belief, shareholders do not always hold a preferred claim to a company’s profits or assets. The rights of debt holders, employees, retirees, and even some large customers can supersede those of equity holders at different times and circumstances (such as bankruptcies). What this means is that CEOs tasked with running a company should focus as much on the preservation and growth of the business as on the maximization of shareholder wealth. In the free market system and in the long-term, the two will automatically coincide, even if in the short-term they diverge.

Unfortunately, executives at major companies today are under pressure to maximize returns for investors every quarter, or for activist shareholders looking to cash in quickly on some perceived opportunity, which can lead to hasty business decisions, poor strategic planning, and acquisitions or divestitures that backfire later. More importantly, they are compensated based on short-term price performance rather than long-term business feasibility, which can misalign the interests of both management and current shareholders with the true welfare of the company.

That is not to say that CEOs and Boards prioritize equity holders over other stakeholders and the best interests of the company in every case but the obsession with shareholder value can sometimes compromise a company’s innovation and strategic direction in favor of immediate profits. Recent examples of such myopic decisions include Blockbuster’s lost opportunity to transition to digital (thanks to Carl Icahn) and JCPenney’s failed makeover as a substitute for business strategy (thanks to Bill Ackman).

Another point to remember is that shareholders in public companies do not assume the liability of true owners. The legal structure of public companies and business insurance policies shield equity holders from the bulk of corporate liability, including from indebtedness and legal problems. This weakens shareholders’ claims to pure ownership of the company – since assets and liabilities should theoretically be two sides of the same coin. Conversely, lenders arguably could lose a lot more from poor performance and employees often have their entire livelihood invested in a company and so those stakeholders have at least some claim to ‘ownership’ as well.

Realistically, of course, we live in a capitalist society and our individual prosperity depends on it. Stakeholder capitalism, good as it sounds, is not necessarily the panacea for corporate woes nor any more fair than our existing system. The right and productive way to look at it is for companies to simply recognize the fact that nobody has a 100 percent entitlement to the rewards of a successful business, and to balance out the needs of different constituencies with the long term needs of the company itself.

Financial prosperity in the long-term depends upon many things, including risk-taking and strategy, and not just on meeting quarterly earnings projections, and if management needs to make decisions that prioritize the former over the latter, that is simply good business practice.

Sanjay Sanghoee is a political and business commentator. He has worked at investment banks Lazard Freres and Dresdner, as well as at mutli-strategy hedge fund Ramius Cowen. He has appeared on CNBC’s Closing Bell, MSNBC’s The Cycle, TheStreet.com, and HuffPost Live on business topics. He is also the author of two thriller novels.

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