January 2017Policy

"Repatriation" of overseas corporate cash -- clawback or backfire?

Some economists believe parts of Donald Trump's economic program, notably his promise to expand infrastructure spending, could be good for U.S. job creation and working-class incomes.  But his hopes of luring back corporate investments in factory production through a major tax holiday for U.S.-based multinationals with their profits parked overseas is unlikely to work, suggests New York Times business reporter Leslie Picker.  In fact, in an article in the Dec. 26 Times, Picker indicates that such a corporate tax holiday might even be counterproductive.

"Advisers of America's top corporate executives," Picker reports, say CEOs "are likely to use much of the estimated $2 trillion held overseas to acquire businesses in the United States, to buy back their own stock or to pay down debt," rather than boosting capital investments that actually create jobs.  Among the different potential uses for repatriated profits, an executive with Union Bank Switzerland (UBS) told Picker, "M&A" -- that is, mergers and acquisitions -- will probably be "fairly high on the list."

Increased M&A activity would be welcome news for investment bankers who earn high fees by advising corporations undergoing mergers, but might be bad news for "American workers who might get laid off as a result of cost cuts derived from combining two companies," Picker predicts.

She notes that a study by the Senate Permanent Subcommittee on Investigations a few year ago found that as a result of the last corporate tax holiday that Congress approved, back in 2004, the biggest 15 companies who repatriated money to this country returned some $150 billion to the U.S. economy in the abstract, but in the process eliminated nearly 21,000 jobs.

The remainder of Picker's fairly lengthy story in the Times focuses primarily on which U.S.-based corporations are likely to engage in enhanced M&A activity and how current uncertainty over the scope and nature of President-elect Trump's tax and economic policies is affecting their decisions.  Many big firms, Picker says, are currently delaying their deal-making while awaiting more information on what 2017 taxes will be.'

However, many of the investment advisors whom Picker interviewed seem optimistic. She quotes Avinash Mehrotra, with the M&A shareholder advisory group at Goldman Sachs, as saying, "The potential for these reforms, around reduced corporate tax rates and cash repatriation, to put more discretionary cash flow in the hands of companies is significant."  Corporate managers, Mehrotra said, face some "interesting choices" ahead regarding "acquisitions, longer-term capital investments, debt reduction and return of capital."

Perhaps coincidentally, the Dec. 27, 2016 Wall Street Journal carries a story by reporters Corrie Driebusch and Aaron Kuriloff that sees "surging" corporate buybacks of their own securities as helping to spark the current stock market boom on Wall Street.  Some skeptics had predicted that 2016 would signal an end to a spree in stock buybacks that has followed the resolution of the 2008 financial crisis, the Journal article states.  But "Corporate stock repurchases are on the upswing once again," with the total yearly buybacks for 2016, up through mid-December, being nearly two-thirds larger than the total for a year ago.

Trump's surprise election in November changed the dynamic, Driebusch and Kuriloff conclude, for it "has raised the prospect that tax cuts will put large sums in corporate coffers, which in turn will be deployed largely in repurchases. That money potentially could include the profits that U.S. companies stand to bring back from overseas under a widely expected repatriation-tax holiday."

They quote a recent Goldman Sachs forecast to the effect that companies belonging to the Standard and Poor's 500, which have an estimated $1 trillion in cash held overseas, will probably repatriate about $200 billion of that in 2017, and that about $150 million of this will be spent on corporate stock buybacks.  Their Journal story adds that corporate stock buybacks have been a key contributor to the eight-year rally on the stock market that has been underway since 2009, and that over those eight years members of the S&P 500 have spent nearly $3.25 trillion on such buybacks.

"Some analysts," Driebusch and Kuriloff note in passing, have expressed concerns that when corporations buy back their own stock to boost their share prices, rather than putting the money into long-term capital investments, they could be hurting growth in the real U.S. economy.

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