Saturday, July 11, 2015

Mergers and Acquisitions!! The hobby most favored by billionaire "job creators"

Since the Occupy Wall Street movement started, Wall Street has been on the defensive, trying to justify their wealth by painting themselves as job creators. The bankers in Wall Street seem to think that what they do actually creates jobs. So what have they been up to lately?

There is a boom in mergers and acquisitions this year and the Financial Times in the UK has provided some interesting analysis on the trend. This boom is bigger than any of the previous waves of M/A activity (I'd use an ampersand, but Blogger messes that up). Average price per share in acquisitions and mergers are also much higher than before. But does all this activity create jobs?

Naked Capitalism has reported on the trend and offers a case study: Microsoft and their acquisition of Nokia. Here are the results in a nutshell:
"Beyond the insufferable corporate speak? The “standalone” business Microsoft bought for $7.2 billion a year and a half ago would essentially be shut down. The costs are ballooning. The tab for the Nokia acquisition and some other moves, with both waves combined, now lists 25,800 jobs axed and $10 billion down the drain."
This activity was picked up by Yves Smith, someone who has extensive experience in M/A and can attest to the surreal world of high finance. She happened to notice the original Microsoft story on Wolf Richter's website, Wolfstreet. So when you go to the case study link above, you'll see that there is some commentary by Yves followed by the article reprinted from Wolf Street. Wolf Richter and the story are described as follows:
"By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street."
The nugget in all of this is right here from Mr. Richter:
"Share repurchases, M&A, layoffs, and cost-cutting are easier to make happen for a CEO than inventing things and boosting sales organically, which is really hard."
I know that my post here meanders a bit, but I want to focus on that last point about the contrast between buying companies (that usually means buying the competition) and building and creating things to sell that add value to the lives of customers. You know, the people that are the source of revenue for the company.

When there is real competition, M/A goes out the window and really smart people work hard to create stuff that we can all use and want to buy or support (in the case of free products like Gmail and Blogger). When there is no competition or when money is easy, it's better to pad the compensation package with mergers and acquisitions. Is this the decision that the "job creators" are faced with?

We're currently in the early thrall of a worldwide wave of M/A activity. Microsoft, in their acquisition of Nokia lost $10 billion and cut 25,000 jobs. That's just *one* acquisition out of a sea of acquisitions. Steve Ballmer made a nice chunk of change from this activity. He made enough money that when he left Microsoft, he bought a basketball team for $2 billion. Did he create any jobs? Not many that I can see. I doubt he created enough jobs buying the LA Clippers to wash the 25,000 he lost at Microsoft.

What was the tax rate on the capital gains he made from his "job creating activity"? 15%. Sweet.

This is what we're facing when we go to work for a large corporation that is more focused on M/A than on creating products that customers want. This also begs the question we should be asking when we vote: Do we want to reward capital or labor?

As I've noted in previous blogs, capital hates labor. There seems to be some serious antipathy between capital and labor and it's not really necessary. There is currently a cooperative movement afoot in the US. You might not have heard about it because it seems small now. But the M/A boom we see now, with associated job losses will only increase the chance that the cooperative movement will become a sea change.

Most cooperatives go unnoticed. There are a few of them that are well known. Southwest Airlines is employee owned and is pretty close to a cooperative. Few of us know that South Airlines didn't layoff anyone after 9/11. They found work for their employees to do because they knew the work would pick up again. There is also WinCo Foods. Some of their long-time employees have $1 million saved in retirement due to their compensation planning that works for the employee, rather than just the CEO. You can find a list of employee owned companies here.

The current system is unsustainable and change is inevitable. Unfortunately, most of the changes that need to take place are in public policy. So when you look at the slate of candidates you get to choose from between now and next November, remember that some of them like labor and some like capital.

The lesson from Microsoft is that CEO's and financial engineers don't always know how to create jobs. A vote for capital is a vote for a repeat of that lesson.
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