June 8, 2021

Market recap

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Top Story

The Uphill Battle For a Global Minimum Tax Rate

Countries Get More Tax Authority

The Group of Seven nations, a club of wealthy democracies, agreed over the weekend to impose a minimum corporate tax rate on multinational companies. Next comes implementing the proposal, which may prove to be a tricky task. Simply put, G7 members are watching the US to see what a divided Congress does before acting more broadly.

The deal, heralded by Treasury Secretary Janet Yellen as an embrace of multilateralism, requires multinational firms to pay at least 15% in taxes. Countries would also have more authority to tax large tech companies which rake in billions of dollars but pay limited taxes in many of the countries they operate in.

The proposal does not only mark a big shift in long running negotiations about how and where companies should be taxed. If implemented, a tax floor may also help cash-strapped countries recover quicker from the pandemic-induced recession.

All Eyes on US Congress

For the new global tax rate to go into effect, it requires at least one country to go first, which many appear reluctant to do. Some tax professionals think it may take at least 18 months for a law to be enacted in each country. Once legislation is signed, it will likely still take an additional six months until countries reap the benefits of the global tax floor.

The speed of implementation depends largely on the US Congress. Passage could easily get derailed given Democrats have only a slim majority in the House and the Senate is evenly split. That may delay implementation as other countries sit on the sidelines until the US Congress acts.

Tech Companies the Target

The tax change will impact companies that do business globally and have profit margins of 10% or more. For example, big technology firms like Amazon (AMZN), Facebook (FB), Apple (AAPL), and Google (GOOGL) are among the ones who could be affected by the changes.

With that said, if digital service taxes were removed as part of the implementation of a tax floor, that may benefit the Silicon Valley giants. Many including Alphabet and Facebook technically report effective tax rates around the 15% minimum and have championed a more streamlined filing process for their international operations. The patchwork of national taxes can be operationally costly.

As for next steps, investors, executives, and foreign leaders alike will be keeping their eyes on Congress. Discussions among US lawmakers will likely make or break this novel proposal.

Use Your Money to Work for You

The 50/30/20 budgeting guideline can help you prioritize spending, saving, and paying down debt. The principle allows you to focus on the proportion of your money going to different priorities compared to tracking every dollar you spend. The idea is to focus on spending about 50% of your money on needs, 30% on wants, and 20% on saving and paying down debt.

Financial educator Ro$$ Mac shares tips on budgeting, including how to use the 50/30/20 rule to keep your money working for you.


Megadeals Making a Comeback

Medline Valued at $34 Billion

In the latest sign that 2021 is shaping up to be the year of megadeals, Medline Industries is being sold by way of a leveraged buyout to a group of private equity firms including Blackstone Group (BX), Carlyle Group (CG), and Helllman & Friedman. The transaction values the target company at roughly $34 billion including debt. It is the largest leveraged buyout since the financial crisis of 2007 and 2008.

This year has been an active one for mergers and acquisitions as pandemic restrictions start to ease and the economy rebounds. The value of US deals so far in 2021 stands at $1.24 trillion and shows no signs of slowing. Private equity firms, flush with cash, are looking to invest this capital, venturing back into the mega-buyout market after a lull.

Deploying Dry Powder

The acquisition of Medline Industries follows closely on the heels of other recent tie-ups. Just last month there was the blockbuster $53 billion merger between Discovery (DISCB) and AT&T's (T) Warner Media division. Only a few days after that announcement, Canadian National Railway (CNI) outbid Canadian Pacific Railway (CP) to buy Kansas City Southern (KSU) in a roughly $30 billion deal.

PE firms are sitting on $1.6 trillion in "dry powder" or investor commitments. Based on fund terms, including lifecycle and returns, PE firms know they need to put this money to work. Megadeals are one way to get cash out the door, quickly.

The sale of Medline began just two months earlier and attracted a small group of big buyout players. Bidders were partly lured by the size of the deal as it presented the ability to put a large amount of capital to work without the threat of strategic bidders. Blackstone, Carlyle, and Hellman were able to outbid Brookfield Asset Management's PE unit for Medline.

Environment Rife for More Deals

Prior to the financial crisis, leveraged buyouts were more popular than they are today. From 2005 to 2007, PE firms engaged in 18 buyout deals with a total value of $10 billion or more. They all but disappeared following the Great Recession of 2008, with many of the targets either performing poorly or ultimately filing for bankruptcy.

Since that frenzied time, there have been only 11 LBOs including Medline. There have been rumblings of increased activity in recent months with both Toshiba (TOSYY) and Royal KPN (KKPNY) named as targets, but Medline is the first successful acquisition. With low interest rates and aggressive financing options available, the environment is ripe for more megadeals heading into the second half of the year.

Companies Continue to Delay Supplier Payments

Macy’s, Mondelez Benefit

Macy’s (M) and Mondelez International (MDLZ) are among the companies continuing to take advantage of pandemic terms when it comes to paying their suppliers. That is freeing up cash they can use to put back into their operations.

In the first quarter, large US companies took 58 days on average to pay suppliers. That is up from 55 days in the first quarter a year ago. For 2020, it took businesses an average of 62 days to pay suppliers, which is a 7.6% increase year-over-year.

Preserving cash flow has become a major goal during the pandemic, particularly for retailers which are having a hard time forecasting demand. Chief Financial Officers’ cash flow management efforts have resulted in cash balances at companies increasing 14% in the first three months of the year.

Cash Flow Increases

For Macy’s, delaying payments to suppliers enabled the retailer to increase the cash on its balance sheet in the first quarter by 18% to $1.8 billion. The department store operator took 163 days to pay its bills in Q1—up from 134 days a year earlier. Macy’s struggled during the pandemic like other retailers and is in the process of shuttering stores and laying off workers.

Meanwhile, consumer foods maker Mondelez said the prolonged pandemic-induced payable process has helped it improve the cash on its balance sheet. In the first quarter it took the company about 130 days to pay its suppliers—up from 122 days in the first quarter of 2020.

Divergent Strategies

Delaying suppliers can backfire in certain circumstances, which is why not all companies have taken this approach. Defense contractor Lockheed Martin (LMT) and semiconductor company Micron Technology (MU) opted to pay suppliers early to ensure their vendors stay afloat. Lockheed paid its suppliers in 12 days in the first quarter, which is down from 21 days a year earlier. Meanwhile Micron cut its days payable outstanding to 37 from 45.

The takeaway is that from global shortages to payment schedules, the COVID-19 pandemic will have long-lasting impacts on supply chain dynamics. In this instance, there is a divergence between companies like Macy’s and Mondelez which are trying to make longer payment cycles the new norm. Others, however, are opting for quicker turnaround times. Investors will be analyzing different strategies as they evaluate CFOs and ultimately the stock performance of individual companies.

Not-So-Breaking News

  • Google (GOOGL) agreed to pay French regulators a €220 million ($270 million) fine over its behavior in the online advertising market. France’s competition authority said the internet search giant abused its dominant position. Google also has to change how it runs that business.
  • QTS Realty Trust (QTS) is being sold to Blackstone Group (BX) for $6.7 billion. Blackstone is paying $78 per share for the data center operator, marking a 21% premium from QTS’ closing stock price Friday. The pandemic has increased demand for cloud computing services, which has been a boon for data centers.
  • NIO (NIO), a Chinese electric vehicle maker, is rolling out a new line of high-end EVs. Codenamed Gemini, the electric vehicles are expected to launch in 2022. NIO wants to take on Tesla (TSLA), Audi (VWAGY), and BMW (BMWYY) in the high-end EV market. Speculation had been swirling that NIO would release an entry-level electric car instead.
  • Tesla (TSLA) canceled the Model S Plaid Plus, its priciest version of its flagship EV car. In a Tweet, CEO Elon Musk said there was “no need” for the Plaid Plus because the existing Plaid Model S is good enough. The Plaid Plus was supposed to give drivers 1,100 horsepower, acceleration from 0 to 60 mph in under two seconds, and go 520 miles on a single charge.
  • Amazon’s (AMZN) Jeff Bezos plans to fly to space next month on Blue Origin’s first passenger flight. Bezos founded the space company in 2000. The launch is scheduled to take place July 20. Bezos’ brother Mark is joining him on the space adventure.
  • Because payment history makes up 35% of your credit score, budgeting and making payments on time is crucial. Get back to basics with How to Make a Monthly Budget.

Financial Planner Tip of the Day

“One way to build credit is to display a history of responsible borrowing. For that reason, you may want to place monthly bills and other expenses on your credit card—being sure to pay the bill in full each month by the due date.”

Brian Walsh, CFP® at SoFi

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