VideoThe classification is innate and fixed, says Prince, so putting a natural risk-taker into a corporate environment that calls for conservative management can be a recipe for disaster. "All the MBAs from the best business schools in the world cannot offset the impact of unconscious financial drivers," argues Rob Kaiser, a partner at management consulting firm Kaplan DeVries, in a recent article for Personnel Psychology. Instead, explains Prince, executives need to pick companies with a mission and a culture that fit their financial style. (For another view of decision-making, see Insight.)
There is some hope for those whose style clashes with their company's needs. According to the author, once executives are conscious of their intrinsic financial style, they can resist those tendencies and make decisions that benefit the company. In other words, while executives' views are inherent, with some work, behavior can change. — Joseph McCafferty
Don't Even Mention It
Trying to boost your stock price with a spin-off, stock buyback, or debt-financed acquisition, or by entertaining a leveraged-buyout offer? You may have to contend with lower credit ratings sooner than you thought.
With corporate-bond issues by investment-grade companies up 72 percent in the first half of 2006, credit-ratings agencies say they may lower ratings upon the announcement of such an event.
"Often the final rating isn't [issued] until the transaction closes. But in some cases, where the motivation is clearly pressure from shareholders," the rating will drop immediately, says John Olert, managing director at Fitch Ratings. He says there is no need to wait when it's pretty clear that the goal is to reward shareholders. A recent Fitch survey found that such moves were the top concern of 78 large bond investors.
In July, the major agencies immediately put HCA on review for potential downgrade after it accepted a $33 billion buyout offer from major LBO firms. Kinder Morgan received the same treatment back in May upon mere receipt of an LBO bid, even though by August no decision had been made to accept the bid. The Tribune Co. was slashed to junk status when it announced in May that it would use $2 billion in debt to repurchase shares, even though such buybacks can take months or even years to complete.
Pamela Stumpp, Moody's Investor Services managing director, says that slightly more than 75 percent of this year's so-called fallen angels, or companies that have been downgraded from investment to junk, are associated with M&A transactions or stock buybacks, creating the need for earlier warning signs for bondholders.
In late July, Moody's put out a request for comment on specific guidelines for circumstances under which it would downgrade a company upon announcement of a credit-eroding event, instead of just putting it on watch. Stumpp says the move is timely because "stock prices are fairly flat, and many companies are considering what they can do to change capital structures." — A.N.S.
IRS Seeks Truth in Veritas Deal
Symantec Corp. develops software that battles computer viruses. But these days, the company spends time battling what it considers to be another pest: the Internal Revenue Service.
In June, Symantec filed a petition with the U.S. Tax Court to dispute more than $1 billion in back taxes and penalties that the IRS believes the company owes. The petition labeled the IRS's claim "arbitrary, capricious, and unreasonable."
The eye-popping tax bill stems from the transfer-pricing agreements in place between Veritas U.S., which Symantec acquired in 2005, and its Irish subsidiary, Veritas Software International Ltd. The IRS says the amount of income attributed to Veritas U.S. as a result of a technology-licensing agreement with the Irish subsidiary was too low for tax years 2000 and 2001. At the same time, the IRS says Veritas allocated more of the costs of developing software than it should have, boosting expenses at Veritas while lowering its income. (In June, Symantec settled a similar case for fiscal years 2003 and 2004 for $36 million; the IRS wanted $100 million.) The outstanding case is one of the largest transfer-pricing tax disputes ever.
The software company argues that Veritas worked with its outside accountants, Ernst & Young, to develop its licensing and cost-sharing arrangements. In 2004, Symantec approached the IRS in hopes of reaching what's known as an advance pricing agreement (APA), which would have allowed that the transfer prices the taxpayer was using were comparable to what two unrelated parties would have negotiated. In 2005, the IRS rejected the request. (The IRS and Symantec declined further comment on the dispute.)
Normally, APAs are done prospectively, says Carolyn Fanaroff, counsel with Greenberg Traurig in Washington, D.C. However, taxpayers requesting an APA can also ask for a rollback, which would cover prior years' transfer-pricing issues.
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