Company's avoiding tax, is it damaging the country’s economy?

With the view of maximising shareholder wealth, controlling a company’s outgoings is surely one way to do this?  In a multinational company the management of tax payments is one strategic decision that is looked in to, and with the content this issue has in recent news it is evidently done.  Despite being beneficial to the company involved, but judging by the amount of protests against it, it is not accepted or seen as being ethical by the general public.

This process involves looking into the structure and strategies of the organisations in order to minimise its exposure to tax.  The introduction of the ‘Double Taxation Treaty’ between two countries does enable this and prevent a company being taxed twice on the same profit.   For example, having a subsidiary in a country with a tax rate of 20%, you would be taxed on the 20% then when brought over to the U.K you would only be taxed the remaining 8% of the U.K. 28% tax rate.  However the new U.K. option suggested by the Government is if you are taxed in one country and bring it back to the U.K you will not be taxed at all in this country. 

Suspected examples of this involve the like; Boots, Topshop (Arcadia Group) and Vodafone.  Boots were expected of moving entities over the Switzerland to take advantage of their lower tax rates.  However, they responded by saying that “If we had registered in Switzerland purely for tax reasons there are many other countries that we could have considered.", for example the likes of the Cayman Islands who have a 0% tax rate.

Regarding Topshop, with Sir Phillip Green, the figure head of the group, his wife and owner of the Arcadia Group is a resident of the ‘tax haven’ Monaco, which has flared the confrontation, since in previous years this has allowed her to receive around the £1billion mark in dividends (BBC News).   This company faced further scrutiny when Sir Phillip Green was appointed as an advisor to the Government regarding the efficiency of the Public Sector; The Guardian reported the public’s outrage regarding this appointment, since the possibility that a proportion of the U.K’s debt could be paid back If it wasn’t for the likes of Arcadia exploiting the loop holes within taxation law.

This is the issue that is causing disruption amongst the public.  This is because during the current financial crisis within the U.K. the public are facing pay freezes, inflation increases and even job cuts to pay back the countries debt.  Whilst this is happening, large corporations are moving operations abroad to take advantage of lower tax rates and then not paying any to this country, contributing to  the tax gap being estimated to be £120bn, £25bn being due to tax avoidance (BBC News).

Surely, the actions of companies although not illegal can be seen as unethical when corporations are dodging tax in the country that they make most money?  Do they not have a moral duty or are they just capitalising on the options available to them?

Week 3 Blog - Merging two stock exchanges, opportunity or threat?

Currently there are several options open to a company when wanting to raise finance or even invest its earnings into another.  One of the most popular is selling its shares on a stock exchange.  This is a secure method; legally you don’t have to repay the investment, and although it is encouraged to pay dividends it is again not a legal obligation.  There is the opportunity to gain information about the market you are in but also other markets you may want to venture in to, through the use of stock brokers.

But the question that arises is, if those benefits still exist to the same extent when two of the biggest stock exchanges merge?  Having high exposure in the news this week is the merger between the New York Stock Exchange and the Deutsche Boerse.  Although it will give the company’s listed on these exchanges a greater scope of investment both outgoing and incoming, it does not however have the same benefit for the smaller-mid size companies since, as found by Yahoo Finance that the larger companies tend to stick to those they are familiar with.

The control of the merge does however stay with the Deutsche Boerse since they will own 60%, leaving the New York Exchange with the remaining 40%.  The Wall Street Journal does question the impact that this merge will have on the so called ‘leadership role’ the New York Exchange holds within the world finance, and therefore puts forward  the recommendation that the merger holds the New York Exchange name first, and the German second. Is this not just all about reputation and who thinks who is better?  As the BBC News suggest that it is essentially the Deutsche Boerse leading the merge and so therefore not a merge of equals, so by right the name should have German first?

The merger does mean that each has to operate in such a way that sticks to the regulations of both countries, and potentially making dealings more complicated.  But what will make companies continue to operate on the exchanges and continue investment in the exchanges? Such advantages include; lower trading costs, greater access to investments and share values rising as thought by Yahoo Finance.

However, with the ‘experts’ suggesting that this merge will be a long process and a bit of a slog, I guess it will just take time to see if such benefits do exist and if the merger of the two is truly an opportunity or a threat?!

What role do Technical Analysts play in the share price of a company in an efficient market?

In a ‘efficient’ stock market, like  the New York or London stock exchange, when new information arrives about one of its companies, their share prices are meant to alter quickly and rationally.  Kendal felt that the role of a Technical Analyst, the so call ‘experts’ in determining these share price is irrelevant.
The basis for his judgement is due to a study conducted into the systematic link theory of the Technical Analysts; by looking into past share price movements you are able to predict the future ones.  Kendal’s opinion is that share prices move like ‘a stumbling drunken man’, in that you don’t know the way they will move, left or right. The information one has received is no indication of they are going to move. Since share prices are based upon the current and new information, the analysts are unable to predict the future movements since they can’t foresee the information coming out.

When looking at it with Kendal’s point of view, you can understand his belief that Technical Analysts are irrelevant, however the fact that these positions are still around and are earning around the £80k mark, they are obviously still highly valued aren’t they?  Secondly, there are several articles from the likes of BBC news, relating to share price movements in companies like Morgan Stanley and Goldman Sachs. These articles include statements about how analysts reported that they expected profits to be higher or sales to be higher than what they actually were.

Figure 1 – Goldman Sachs share price

The pattern occurred for Goldman Sachs, where it was reported by its analysts at CitiGroup, that profits were expected to fall by 38%, with its poorest performance being in its major areas of investment banking.

Figure 2 – Morgan Stanley Share Price

In Morgan Stanley’s case, on the 19th January it was announced that profits were below that of expected, again by analysts. Figure two showing that its share price fell accordingly on this day, despite being an improvement on the previous year. The movements of both Morgan Stanley and Goldman Sachs could in one way be seen as expected in an efficient stock market, in the sense that the share prices reacted quickly.

However the question can arise to whether, mostly in the Morgan Stanley case that the fall and ultimately the decisions by its shareholders to sell were rational? Since the profits still rose, but not as much as the analysts expected, it is clear even to this day, that surely the Technical Analysts do play an important part in determining the decisions and ultimately the actions made my shareholders to buy or sell, don’t they?

Week 1 Blog: Sanofi-aventis continue to expand

It has been reported this week in the Wall street Journal that Sanofi-aventis (SA), 7^th leading pharmaceutical company, continue to pursue its interest in Genzyme, a smaller firm who focus more on rare diseases.

There have been previous meetings between the companies in July and August 2010 to discuss the takeover.  Chris Viehbacher (SA CEO) commented on this that “attempts to reach a mutually agreed transaction have been blocked at every turn”. This been said, SA are valuing Genzyme at $18.5bn, working at out $69 per share, where as since August 2010 Genzyme share price has been operating at above $70, $72 at the start if this year. Although in one sense SA are protecting its own shareholders in the sense that they don’t want to over value Genzyme and pay more than necessary.  With Genzyme operating above $70, is SA not undervaluing Genzyme’s capabilities and the investments its shareholders have put in?

SA’s interest in Genzyme came about partially because several of its patents due to expire, this combined with the realisation that it is facing heavy competition from its market leaders, and challenges with the health care industry in the U.S, with the Government Health Care reform.  This prompted the restructuring of its Research and Development section in 2009, to ensure that its resources (capital, employees and plants) are allocated to those areas that can create growth opportunities, to develop outside of its usual areas of; Diabetes, Atrial Fibrillation and Oncology (Fierce Biotech 2011).  BBC news found that this resulted 1700 employees loosing their jobs, despite this potentially having negative effects on the society’s surrounding these sites, and could create uncertainty for those employees left with SA, it was a necessary action if SA want pursue its growth objectives to ensure a larger return on the investments made.

With the new direction of SA, Genzyme is an excellent takeover prospect with its expertise in rare diseases. With the Financial Times reporting the take over is currently in the due diligence stage, this involves an investigation into the business to asses; assets, capabilities and prospects, prior to signing a contract.  This investigation brought to light a problem SA have with one of the products Genzyme have in development. This regards the drug Lemtrada, a multiple sclerosis drug.  SA evaluating the successfulness of this drug feels it isn’t going to be as rewarding as Genzyme do.  With this in mind, they are going to extend the planning horizon of this drug and propose a Contingent Value Right (CVR). This is used to bridge the gap between the two views of the company’s ‘value’.  However, analysts have found this not to be popular with shareholders, mostly because it has created lawsuits when the parties involved can’t agree if the success rate or milestones reached were adequate enough.  This been said, SA have agreed to future payments if Lemtrada is more successful than originally thought, but how the success of the drug is going to be measured has not been mentioned.

The situation with SA and Genzyme is a perfect example of the problems when evaluating ‘value’, as to each individual value is measured differently.  With the likes of SA, should a companies decision be focused on meeting the needs of the shareholders, who essentially are the owners of the company, or to focus on the other stakeholders who may be equally or more affected by the decisions made?