Disaster?

Rana Foroohar a assistant managing editor at TIME, the magazine’s economics columnist, and the author of Makers and Takers: The Rise of Finance and the Fall of American Business, has a Time article about bad moves in the software industry:

You know something is deeply wrong in our market system when a company like Microsoft, which has a hundred billion dollars in cash sitting in bank accounts (much of it offshore), decides it needs to borrow billions to fund its acquisition of the social networking platform LinkedIn.
The deal highlights one crucial way in which our market system is no longer serving the real economy. Why would a cash-rich firm like Microsoft go into debt and cause ratings agency Moody’s to put it on a possible downgrade list? Because it will save around nine billion dollars in US taxes by doing so. Debt is tax deductible, and borrowing will save Microsoft money relative to bringing overseas cash back home and paying the corporate tax rate on it.
There are so many dysfunctional things here, it’s hard to know where to begin. As I’ve often written, I find it rich that tech companies in particular try to avoid paying their fare share of US taxes, given that the Federal government funded so many of the things that make them wealthy. But an even bigger issue is the way in which our tax system rewards debt over equity. Super-low interest rates make it cheap for companies to borrow. (Low rates are themselves a reaction to the financial crisis, and unlikely to rise much very soon given that the economy is still so weak. Watch this week’s Fed meeting for more.) Then, our tax code makes it easy for firms to write that debt off their tax burden. Jason Furman, the head of the National Economic Council, has estimated that the many ways in which companies can tax advantage of tax-subsidized debt loopholes make corporate debt about 42% cheaper than corporate equity.
Microsoft certainly isn’t alone in taking advantage of this phenomenon. US companies have issued a record amount of debt in recent years, even as they also have record cash hoards. Take Apple, one of the most successful firms over the past fifty years. Apple has around two hundred billion dollars sitting in the bank, yet it has borrowed billions of dollars cheaply over the past several years to pay back investors via stock buybacks and dividends in order to bolster its share price (because the underlying corporate growth story hasn’t done that on its own). All that financial engineering helped temporarily boost the California firm’s share price. But it didn’t stop activist investor Carl Icahn, who had manically advocated for borrowing and buybacks, from dumping the stock the minute revenue growth took a turn for the worse in late April of 2016. Financial engineering is not the same as the real kind.
It is perhaps the ultimate irony that large, rich companies like Microsoft and Apple are most involved with financial markets at a time when they don’t need any financing. Top-tier American businesses have never enjoyed greater financial resources. They have a record two trillion dollars in cash on their balance sheets, enough money to make them the tenth largest economy in the world. Yet, in the bizarre order that our market system has created, they are also taking on record amounts of debt to buy back their own stock, creating what may be the next debt bubble to burst. The next President should address this before we brew up another financial crisis.

Rico says just because you've got a lot of money doesn't make you smart...