The Law and Other Anomalies

The devil is always in the details when it comes to taxes, and the assumption that companies will just look at the cash that is sitting overseas, and may choose to repatriate it onshore and pay 10% (under the Trump plan) and pocket the other 90% or send it out to shareholders is, shall we say, a large cart before a questionable horse.

First, Trump’s plan is mandatory; whether you bring the money on-shore or leave it off-shore, you pay the tax.

Second this is a tax on past profits, not cash.  What if the company has spent a large part of past profits?  It will owe a tax and will have to fund it with on-shore cash. Or borrowing?

Third, there is a fear that companies will use the extra cash to intensify acquisitions, which may drive up target value and in any event may not increase jobs.

Fourth, there are other plans on the table for this; Speaker Ryan’s plan differs in material ways.  Whose plan, or what hybrid, gets adopted.

Finally, and this has long fascinated me: when the Republican Congress which is always budget-sensitive runs into a combination of proposed tax cuts and increased military and infra-structure spending, what happens?

Will Congress roll over and build deficit?  Will they reduce tax cuts?  Will they cut spending?  If they cut spending, where? Not military; not infrastructure….Cost to borrow will go up also.   How much can be cut from social programs before voters get disturbed?

It just may be that the repatriation of offshore profits will be viewed by the administration as a needed revenue pop and thus increase the likelihood of its adoption in some form.

As with much this coming business season, stay tuned.  But get it out of your head that all US companies with international operations are about to be awash in free cash; it depends.

At the Boston breakfast meeting this week of the Association for Corporate Growth, venture capital fund managers discussed how they do business, and the impact of the presidential election. The answer: there will be changes in the business environment, but it is necessary to continue to evaluate investments based on fundamentals, as usual.

Dana Callow of Millennia Partners and Deepak Sindwani of WaveCrest Growth Partners agreed on fundamentals in selecting companies: you need to take a macro view, look for markets which are growing, have a reasonably long time line, and do not get distracted by inevitable changes in the world as you move forward in building great companies. If you build great companies, the money will follow.

The speakers were primarily focused above the seed/A-round of investing. Deepak’s fund is for “growth capital” for firms with revenues and EBITDA. Callow, whose fund focuses on healthcare, will invest with companies with zero to five million dollars of EBITDA, tending toward the lower end of the range, but clearly above the seed/A-round level.

The impact of the election?

For Deepak, whose investments are primarily in the B to B software space, his companies are most affected by “high end” immigration, corporate tax and trade. He speculated that the first two issues would be resolved favorably but trade was a “wild card.” He did not think that companies of less than $50 million dollars of sales would be substantially affected by the election in any event.

Dana similarly seemed unconcerned by the election, noting that the Affordable Care Act was destined for substantial re-write even in a Democratic administration, and that simplification of the approval process in the FDA would be a benefit.

Other significant takeaways include the following:

The investment focus has to be in a robust and growing vertical; Dana for example wants a space to be highly competitive, and looks for “forty or fifty companies” or else he thinks it is likely the wrong vertical.

Best IRR has come from funds with $250 million to $350 million dollars to invest. First time funds tend to be the most successful.

While seed money has mushroomed in the Boston market, A-rounds have become difficult. Growth capital at the low end is also difficult, but easier at the high end. Capital is generally available in the buy-out space.

Family offices are a significant support for raising funds. Family offices tend to be long term investors, and co-investors, and are favored by fund managers.

Finally, there was substantial emphasis on the quality of the CEO. You need to be in a company for the long run. The world will change, and you need a quality CEO to respond; some investment funds have venture partners whom they place on company boards or as advisors to assist in these responses, and they may even share in the fund’s carried interest.

Those reading newspapers know that Mary Jo White, Chair of the Securities and Exchange Commission, resigned effective in January. What does this foretell for financial reporting of publicly-held companies?

This subject was discussed at the Tuesday morning meeting of the National Association of Corporate Directors/New England, where an expert panel chaired by Ted Buyniski of Radford (comp consultants) explored — or at least attempted to look into — the future.

Simply put: Trump promised to repeal the Dodd-Frank Act; several financial reporting provisions of that Act already are in force by SEC Rule (say-on-pay, say-on-golden parachutes, committee independence, independence of consultants).

Perhaps the most maligned, disclosure of the ratio of a CEO’s pay to the median pay of all company employees, also has been finalized, and is effective for the 2018 proxy season. Also, there are pending proposed rules, covering pay-for-performance disclosure, anti-hedging policy, and clawback from executives.

So what happens next? Will a new Trump-designated SEC chair and Republican majority (three of the five seats goes to the ruling party) put a hold on enforcement of prior disclosure provisions? Will they scotch anything that is pending? Who will be the new chair? (The named leading candidate, commission member Michael Piwowar, is known for his numerous, literate dissents from prior SEC regulatory pronouncements, and his course of action is reasonably predictable.)

As is true with much of the American governance infrastructure, we will have to wait and see. But nary a good word was said by the panel about the pay ratio disclosure requirement (roundly criticized in this space previously), and I wouldn’t bet a plug nickel that ratio disclosure survives for long.

For the broader implications of pay disparity, which the Congress attempted to address by requiring pay ratio disclosure, see a following post.

Each year for the past seven years, the MassChallenge program has accepted approximately 128 emerging companies in many industries, which become resident in the MassChallenge incubator (now in South Boston). For each of the last seven years, our firm has been a primary sponsor. Various firm partners, myself included, have mentored many companies. At last night’s award ceremonies, $1,500,000 in monetary awards were distributed to all kinds of businesses from high-tech to beauty aids to a vegan restaurant (hopefully soon to be a chain).

Although based in Boston (now with branches in Newton, London and Israel by the way), MassChallenge attracts an international cadre of emerging companies. The three largest cash award winners included a German company with U.S. operations in Houston, a South Korean company, and a Cambridge start-up that analyzes satellite imagery for commercial purposes.

Innovation is everywhere and some of the world’s largest companies, including those which you might not think would be interested in making investments and supporting emerging companies, were represented at the award ceremony, hosting tables or speaking from the stage. For example, I was seated at the table sponsored by State Farm, the insurance company. I learned that, in several cities, State Farm has representatives of its Innovation Office, and 90 persons are active in seeking  emerging companies for possible investment. The insurance industry is being disrupted, we were told, and it is necessary for any large enterprise to adapt to and become a part of the new economy.