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There is a surge of mergers and acquisitions among televisionnetworks, entertainment, and internet-related companies since 2010.Some have been completed, some have been stopped by regulators, andothers are still in progress. How are these different from theAOL-Time Warner merger of the year 2000? Are the recent mergers andacquisitions likely to be successful? Why or why not?

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Bunny Greenfelder
Bunny GreenfelderLv2
28 Sep 2019

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Please read the article and answer these THREE questions:

1. Why are conditions currently favorable for firms to issue debt and pay out the proceeds to stockholders?

2. What are dangerous impacts of issuing additional debt mentioned in the article?

3. TransDigm used the proceeds of their debt issue to pay a one-time dividend while Intel used the proceeds to repurchase shares. How does a repurchase differ from a one-time dividend? Why do you think the two firms chose different approaches to distributing cash to shareholders?

___________

"Borrowing for Dividends Raises Worries" at the Wall Street Journal on 10/06/2009

Rock-bottom interest rates and thawed credit markets are emboldening some companies to use bond-sale proceeds to go on the offensive, even if that means rewarding shareholders at the expense of bondholders.

The nascent trend is controversial because corporate borrowers are sinking themselves deeper into debt to pay out special dividends, buy back stock or finance acquisitions. While such moves were all the rage during the credit boom, most corporate-bond offerings during the recession have been used to reduce debt or stockpile cash.

Eric Felder, global head of credit trading at Barclays Capital, says the lure of low rates and companies' stables of cash increases "the risk of non-bondholder friendly events."

Last week's sale of $425 million of bonds by aircraft-parts manufacturer TransDigm Group Inc. is one of the back-to-the-past corporate-bond deals causing concern among some analysts. More than $360 million of the proceeds will be used to pay a special cash dividend to shareholders and management of the Cleveland company.

The added debt increased TransDigm's borrowings to 4.3 times its earnings before interest and taxes, compared with 3.1 times before last week's deal. The expected dividend of $7.50 to $7.70 a share is equal to nearly all of the net income that TransDigm reported since the end of fiscal 2003, according to Moody's Investors Service.

Moody's said the dividend "illustrates the company's aggressive financial policy." Moody's gave the new debt a junk rating of B3, even though the ratings firm said TransDigm's "strong operating performance will enable the company to service the increased debt level."

Sean Maroney, director of investor relations at TransDigm, says the "stability of our business, high profit margins and consistent cash flow" give the company "the ability to support this level of leverage."

Borrowing from bondholders to pay shareholder dividends is "a hallmark of an earlier credit era," Jeffrey Rosenberg, head of credit strategy at Bank of America Merrill Lynch, wrote in a report Friday. Such deals were popular in 2003 and 2004, the last time the Federal Reserve lowered its benchmark interest rate to historically low levels, keeping it at 1% for more than a year.

Companies like Dex Media Inc. DEX -0.18% took on debt to pay dividends to its private-equity owners, including Carlyle Group and Welsh, Carson, Anderson & Stowe, before taking the companies public. Dex Media filed for bankruptcy earlier this year under a mountain of debt.

With the federal-funds rate at 0% for nine months now and confidence returning to the stock and debt markets, investors have been driven to take on more risk. That is flooding the corporate-bond market with cash. Investors poured $43 billion into investment-grade corporate-bond funds in the second quarter and nearly $40 billion in the third quarter -- almost double previous peak quarters, according to Lipper AMG Data Services.

The wave of buying drove down borrowing costs for the average highly rated corporation to about 5%, according to Merrill, a level not seen since 2005. In the heat of the crisis last October, such rates averaged 9%. Through the end of September, more than 1,000 high-rated companies borrowed a record $860 billion, according to Dealogic.

In July, Intel Corp. INTC 0.33% sold $1.75 billion of convertible bonds, planning to use $1.5 billion of the proceeds to buy back shares. A spokesman for Intel declined to comment.

The computer-chip giant has a strong credit rating of single-A, so it doesn't carry a burdensome debt load. Still, the deal raised eyebrows among some analysts and investors, who say floating debt to buy back stock could become more common as companies regain confidence.

And as merger-and-acquisition activity revs up, the cheaper cost of debt compared with equity is tempting companies to use bond sales as a deal-making war chest.

Analysts are watching Kraft Foods Inc. in anticipation that the company would finance its proposed purchase of U.K. chocolate, candy and chewing gum maker Cadbury PLC by raising tons of debt. Last month's unsolicited bid by Kraft was then valued at about $16.7 billion, but it could be weeks before Kraft submits a formal offer.

Three major credit-ratings agencies have warned Kraft that they could slash the company's debt ratings if the company reaches a deal agreement with Cadbury. At the current offering price, Kraft would need to shell out at least $6 billion in cash, much of it likely from the debt markets, according to corporate-bond research firm Gimme Credit.

"Kraft is committed to maintaining an investment-grade rating," a Kraft spokesman said, declining to comment further.

So far in 2009, returns to high-grade bond investors are 19%, according to Merrill. "We've seen a feeding frenzy" because of low interest rates, says Kathleen Gaffney, portfolio manager at Loomis, Sayles & Co. She sold some bonds recently to take profits from the rally. Loomis Sayles wants to have cash on the sidelines in case the Fed raises rates soon or Treasury bonds sell off.

Please read the article and answer these THREE questions:

1. Why are conditions currently favorable for firms to issue debt and pay out the proceeds to stockholders?

2. What are dangerous impacts of issuing additional debt mentioned in the article?

3. TransDigm used the proceeds of their debt issue to pay a one-time dividend while Intel used the proceeds to repurchase shares. How does a repurchase differ from a one-time dividend? Why do you think the two firms chose different approaches to distributing cash to shareholders?

___________ "Borrowing for Dividends Raises Worries" at the Wall Street Journal on 10/06/2009

Rock-bottom interest rates and thawed credit markets are emboldening some companies to use bond-sale proceeds to go on the offensive, even if that means rewarding shareholders at the expense of bondholders. The nascent trend is controversial because corporate borrowers are sinking themselves deeper into debt to pay out special dividends, buy back stock or finance acquisitions. While such moves were all the rage during the credit boom, most corporate-bond offerings during the recession have been used to reduce debt or stockpile cash.

Eric Felder, global head of credit trading at Barclays Capital, says the lure of low rates and companies' stables of cash increases "the risk of non-bondholder friendly events." Last week's sale of $425 million of bonds by aircraft-parts manufacturer TransDigm Group Inc. is one of the back-to-the-past corporate-bond deals causing concern among some analysts. More than $360 million of the proceeds will be used to pay a special cash dividend to shareholders and management of the Cleveland company. The added debt increased TransDigm's borrowings to 4.3 times its earnings before interest and taxes, compared with 3.1 times before last week's deal. The expected dividend of $7.50 to $7.70 a share is equal to nearly all of the net income that TransDigm reported since the end of fiscal 2003, according to Moody's Investors Service. Moody's said the dividend "illustrates the company's aggressive financial policy." Moody's gave the new debt a junk rating of B3, even though the ratings firm said TransDigm's "strong operating performance will enable the company to service the increased debt level." Sean Maroney, director of investor relations at TransDigm, says the "stability of our business, high profit margins and consistent cash flow" give the company "the ability to support this level of leverage." Borrowing from bondholders to pay shareholder dividends is "a hallmark of an earlier credit era," Jeffrey Rosenberg, head of credit strategy at Bank of America Merrill Lynch, wrote in a report Friday. Such deals were popular in 2003 and 2004, the last time the Federal Reserve lowered its benchmark interest rate to historically low levels, keeping it at 1% for more than a year.

Companies like Dex Media Inc. DEX -0.18% took on debt to pay dividends to its private-equity owners, including Carlyle Group and Welsh, Carson, Anderson & Stowe, before taking the companies public. Dex Media filed for bankruptcy earlier this year under a mountain of debt. With the federal-funds rate at 0% for nine months now and confidence returning to the stock and debt markets, investors have been driven to take on more risk. That is flooding the corporate-bond market with cash. Investors poured $43 billion into investment-grade corporate-bond funds in the second quarter and nearly $40 billion in the third quarter -- almost double previous peak quarters, according to Lipper AMG Data Services. The wave of buying drove down borrowing costs for the average highly rated corporation to about 5%, according to Merrill, a level not seen since 2005. In the heat of the crisis last October, such rates averaged 9%. Through the end of September, more than 1,000 high-rated companies borrowed a record $860 billion, according to Dealogic. In July, Intel Corp. INTC 0.33% sold $1.75 billion of convertible bonds, planning to use $1.5 billion of the proceeds to buy back shares. A spokesman for Intel declined to comment. The computer-chip giant has a strong credit rating of single-A, so it doesn't carry a burdensome debt load. Still, the deal raised eyebrows among some analysts and investors, who say floating debt to buy back stock could become more common as companies regain confidence. And as merger-and-acquisition activity revs up, the cheaper cost of debt compared with equity is tempting companies to use bond sales as a deal-making war chest. Analysts are watching Kraft Foods Inc. in anticipation that the company would finance its proposed purchase of U.K. chocolate, candy and chewing gum maker Cadbury PLC by raising tons of debt. Last month's unsolicited bid by Kraft was then valued at about $16.7 billion, but it could be weeks before Kraft submits a formal offer.

Three major credit-ratings agencies have warned Kraft that they could slash the company's debt ratings if the company reaches a deal agreement with Cadbury. At the current offering price, Kraft would need to shell out at least $6 billion in cash, much of it likely from the debt markets, according to corporate-bond research firm Gimme Credit. "Kraft is committed to maintaining an investment-grade rating," a Kraft spokesman said, declining to comment further. So far in 2009, returns to high-grade bond investors are 19%, according to Merrill. "We've seen a feeding frenzy" because of low interest rates, says Kathleen Gaffney, portfolio manager at Loomis, Sayles & Co. She sold some bonds recently to take profits from the rally. Loomis Sayles wants to have cash on the sidelines in case the Fed raises rates soon or Treasury bonds sell off.

TOPICS: Consumer Behavior, Taxation, Taxes SUMMARY: Taxes are an inevitable part of doing business. What's taxed, how it's taxed and rates affect many different kinds of companies. One issue for digital companies is the increasing push for state and local government who want to tax digital business. Sales tax in the past was applied to tangible goods, but many digital products replaced them. Examples include streaming music replacing CDs, streaming video services replacing DVDs and video games online replacing physical copies of gaming software. This significantly affects state sales tax revenue which nationally dropped from an inflation adjusted growth of 1.5% from 2004 to 2014 from 3.1% in the previous decade. Some states tax some of these items while others are considering legislation to do so. Companies are pushing back saying they provide a service not a product that someone buys with permanent ownership. For consumers, taxes would increase the price of these services. Given consumer preferences for digital instead of tangible goods, it's uncertain whether increasing taxes would reduce demand. CLASSROOM APPLICATION: Companies that provide streaming services face possible changes as state and local governments consider taxing streaming video subscriptions and cloud computing. State and local governments would like to make up revenue they lost now that consumers no longer buy as many tangible goods including CDs, DVDs and video games. Sales of these items are increasingly online or with a streaming service. The shrinking tax base caused by e-commerce initially occurred when individuals bought tangible goods from out-of-state companies. Now there is the additional threat to the tax base caused by shifting consumer behavior from tangibles to streaming services. Companies recognize they need to counter legislation. For example, Netflix fought a proposed Idaho law attempting to tax certain digital items. Companies should always be aware of the political environment that affects their business and customers. As for state and local governments, the issues they face with sales tax reflect how government too is affected by changes in technology and shifts in consumer behavior. QUESTIONS: 1. How would a tax on streaming content and cloud computing affect you financially? 2. What is meant by the term "tangible goods” within the context of music, movies, books and games? 3. Discuss what has been happening to state and local tax bases over time. 4. If one city, like Chicago, or a state like Illinois taxes digital services, how might that affect the overall business climate and economy. 5. Why might demand for streaming services continue even if new taxes raised prices?

States Eye Taxes on Streaming Entertainment and Cloud Computing

Decline in DVD and CD sales has taken a bite out of revenue in recent years

State tax officials are trying to catch up with fans of “Orange Is the New Black” and One Direction.

With sales of DVDs, videogames and traditional packaged software slumping for years, more state and local governments are eyeing technologies, such as streaming video subscriptions and cloud computing, to help make up for hundreds of millions of dollars or more in lost revenue.

Applying age-old sales taxes to the era of new media hasn’t been simple. States have long taxed tangible goods, but the broad array of new digital products often don’t fit the category. Some states are trying to use existing laws, while others are taking on the politically thorny task of rewriting tax rules.

The result is a patchwork of tax policies—and some new laws—for fast-growing slices of consumer and business sales. While taxes on digital entertainment and software represent only a sliver of the $271 billion that states collected in sales taxes last year, the issue highlights the challenge states and localities face as technologies rapidly shift.

“What’s so hard about digital goods is they move so fast there’s not the time for states to grasp them and figure out what to do,” said Diane Yetter, president of Yetter, a Chicago-based sales-tax consultancy.

Last month, Tennessee extended its 7% sales tax to software and digital games that are accessed remotely. Meanwhile, Chicago is one of the first cities to wade into taxing digital goods, requiring in the coming months local taxes on cloud computing and streaming entertainment.

But Alabama lawmakers recently shelved its own “ Netflix tax” after months of study, and Vermont ended an effort to levy taxes on cloud computing after finding the technology was more akin to a service than a tangible good.

The Netflix website is displayed on laptop computers in this arranged photograph in Washington, D.C., last year. Photo: Andrew Harrer/Bloomberg News

States and cities have struggled for decades with shrinking tax bases, often driven by the decades-long decline of manufacturing, but also the more recent rise in e-commerce, which is hard to police when individuals buy goods from out-of-state companies. Nationally, the average, inflation-adjusted growth rate for state sales-tax revenue was 1.5% between 2004 and 2014, down from 3.1% a decade earlier, according to Nelson A. Rockefeller Institute of Government at the State University of New York.

“There’s a concern when you have something that the state as a policy matter has clearly chosen to tax, but it starts not being taxed because of changes in technology,” said David Gerregano, deputy revenue commissioner of Tennessee, which expects to collect $11.3 million in the first year following its tax changes, providing some additional revenue for the state’s multibillion-dollar budget.

States still don’t have a handle on how much revenue they have lost from the decline of physical media, because they typically don’t track tax collections for specific items.

Annual U.S. spending on sales and rentals of DVD and Blu-ray discs have fallen to slightly more than $10 billion from a peak of $20.2 billion less than a decade ago, according to data from Digital Entertainment Group, a trade association. Sales of CDs have seen an even sharper decline, with data from the Recording Industry Association of America showing record-company shipments fell to $1.9 billion last year from $13.2 billion in 2000. Sales of videogames also have fallen steeply in recent years.

States have likely lost hundreds of millions of dollars a year in tax revenue from those three items, perhaps more than $1 billion. Not all states assess sales tax, and in the 45 states that do, rates range from less than 3% to more than 7%, when local taxes aren’t included.

As CD and DVD sales have fallen, first downloads and then streaming subscriptions have notched rapid growth. Netflix Inc., for instance, drew in $2.01 billion in sales in this year’s first half from its U.S. streaming video business. The company says its offerings are currently taxable in roughly half of U.S. states and certain municipalities.

Another fast-growing area that could bolster state coffers is cloud computing, an amorphous term that includes renting online computing storage and using remote Internet-connected servers for number crunching. Gartner Inc. projects the cloud-computing market in the U.S. will reach $115 billion next year, which includes business processing, infrastructure and security.

Idaho has moved cautiously on taxing cloud computing and streaming video. Two years ago, the state decided to exempt most cloud-based software from sales taxes, viewing it as a service. The following year, it exempted downloadable software, while taxing digital music, video, books and games, according to the state tax commission.

Netflix, which determined it had to collect sales taxes on subscriptions under the Idaho law, fought the law at the capitol in Boise. “Netflix unquestionably provides a service, not the sale or rental of digital products,” the company said in comments to the Idaho State Tax Commission.

Earlier this year, Idaho legislators passed a new law specifying that unless the consumer got a permanent right to the content, it wasn’t taxable, which exempts streaming services from the sales tax.

Meanwhile, Chicago is facing pushback from businesses for its effort to drum up about $12 million a year in taxes from various digital offerings. For now, the city has extended the period for businesses to come into compliance on cloud computing to the start of next year, and new exemptions are under discussion.

Asked about Chicago’s move, a Netflix spokeswoman said the company has “no broader policy beyond reviewing situations on a case-by-case basis.”

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