Archive for the ‘Vertical: Technology’ Category

Intralinks (IL) Falls 7.5%+ on No News, Possible Insider Trading Alert!

Tuesday, June 7th, 2011

After trading flat for days, Intralinks just lost over 7.5% on no news.  For those of you who aren’t familiar with the name, “IntraLinks, formerly TA Indigo Holding Corporation, is a global provider of software-as-a-service (SaaS) solutions for securely managing content, exchanging critical business information and collaborating within and among organizations.”  The company serves financial institutions host data rooms, etc.  Now the company performed well in 2010, missed guidance slightly this spring, and traded down 30%.  Over the past two weeks, it performed well enough to stay in a band around $20.00/share.

Through the last four down days, IL’s stock moved with the market, staying about $20, then gave up almost 10% of its value during the first half of the trading day.  The last time I saw a move like this on no relevant news was for Interoil Corp. in 2007, right before an insider trading investigation (which was eventually resolved, and the stock performed well):

InterOil has ‘undiscovered resources’ and calling a field ‘world class’ isn’t the same thing as actually knowing how much of a natural resource exists there. InterOil is capitalizing on the confusion between undiscovered resources (which are unknown quantities) and discovered resources. And the victims are the investors who falsely believe that InterOil has known quantities of natural gas, when in fact they do not.

Sam Antar, says InterOil’s stock is boosted by a manipulation scheme involving InterOil, John Thomas Financial, and Clarion Finanz AG:

I believe that InterOil with the assistance of Clarion Finanz concealed John Thomas Financial’s involvement in helping it raise $95 million through a private placement of convertible debt securities. Clarion Finanz acted as a buffer between InterOil and John Thomas Financial to help InterOil hide John Thomas Financial’s role in raising funds. Afterwards, InterOil filed false and misleading reports with the Securities and Exchange Commission in an effort to conceal John Thomas Financial’s role in helping the company raise $95 million in convertible debt.

Courtesy of Lawrence Delevigne

Angry Bird Creator (Android) Raises $42mm in Seed Capital

Friday, March 11th, 2011

The latest phone app craze is the game “Angry Birds,” a popular pastime for android users across the globe.  It was developed by Finnish company, Rovio, and is played by over $40 million users per month. The game description on the Android app website reads: “Use the unique powers of the Angry Birds to destroy the greedy pigs’ fortresses! The survival of the Angry Birds is at stake. Dish out revenge on the greedy pigs who stole their eggs. Use the unique powers of each bird to destroy the pigs’ fortresses. Angry Birds features challenging physics-based game-play and hours of replay value. Each of the 225 levels requires logic, skill, and force to solve.”  Is this Company the next Zynga?  Who knows…I questioned Farmville when it came out as well.

Rovio, the tiny Finnish company behiind the iPhone, iPad and Android app Angry Birds, says it has raised $42 million from investors.

The game, consisting of angry birds shot at bewildered-looking pigs, is played by 40 million users every month, the Wall Street Journal said today. its fans, according to Daily Mail, include UK prime minister David Cameron, and Aussie leader Julia Gillard.

The funding round was co-led by venture capital firm Accel Partners, known for working with fast-growing companies such as Facebook. Also involved was the venture capital firm Atomico Ventures, created by Skype co-founder Niklas Zennstrom.

It is part of an “aggressive expansion mode” that Rovio’s co-founder and chief executive Mikael Hed said will make the company an “important entertainment media company for the future”.

Although he would not say what projects the company was working on, or how big of a share of the company was sold, Mr Hed reportedly told TV-industry website C21media.net that Rovio was looking at plans to make a broadcast cartoon version of Angry Birds.

“We will strengthen the position of Rovio and continue building our franchises in gaming, merchandising and broadcast media. Our next big thing is to execute superbly well on our strategy,” Mr Hed said in the article today.

Rovio has all ready been building on Angry Birds’ success with franchise products such as soft toys, which have sold more than 2 milion units.

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Facebook Valuation Jumps to $65 Billion – General Atlantic Purchases Shares from Former Employees

Friday, March 4th, 2011

And you thought that Facebook was overpriced at $50 billion! It seems that investors will go to all lengths to purchase shares in the company. General Atlantic has a track record of making investments in successful growth equity stories.

“The valuation of Facebook is taking another leap, according to a report Thursday by CNBC.

General Atlantic, a $17 billion investment firm, agreed to buy one-tenth of 1% of Facebook in a deal that values the social-networking website at $65 billion, CNBC’s David Faber said, citing unidentified people with knowledge of the transaction.

General Atlantic is buying about 2.5 million shares of stock from former employees of Facebook. The deal needs to be approved by Facebook so it hasn’t closed yet, Faber noted.

Earlier this year, a fund organized by Goldman Sachs Group Inc. (GS 164.49, +2.80, +1.73%) invested more than $1 billion in Facebook at a $50 billion valuation.

That means the value of Facebook has jumped 30% in about six weeks, CNBC’s Faber noted.

General Atlantic, founded in 1980, makes equity investments in six high-growth sectors, including Internet and media.

The firm’s current investments include: Gilt Groupe, which sells luxury goods and services online; Privalia, an online retailer; SouFun, an online Chinese real-estate portal; and Kaspersky Lab, a security software company.

General Atlantic also made early-stage investments in E-Trade Financial (ETFC 15.93, +0.35, +2.25%) , Priceline.com (PCLN 464.79, +15.61, +3.48%) and Lenovo (HK:992 4.71, +0.01, +0.21%).”

Zynga, Facebook, Groupon Colossal Valuations!

Tuesday, March 1st, 2011

Week after week, investors have seen multi-billion deals for online businesses with suspect business models. In January, Goldman invested in Facebook at a $50 billion valuation. Zynga’s reported $7-$10 billion valuation surpassed that of software giant EA Games. With its recent I.P.O. announced, Groupon even values itself at $15 billion. Some question the reason behind such high valuations…the answer is immense revenue growth. The true question is whether this revenue growth is sustainable:

“Why are venture investors placing colossal valuations on consumer Internet companies like Facebook, Groupon and Zynga? Their revenue growth is simply off the charts.

The Wall Street Journal reported Friday that Groupon’s revenue in 2010 rose more than 22 times to $760 million in its second full year since its daily deals site launched, up from $33 million in 2009. Zynga, the maker of online social games like FarmVille, scored revenue of $850 million in its third full year in 2010, more than triple the year before, and Facebook’s revenue rocketed to as high as $2 billion in 2010, its sixth full year.

Their ridiculous revenue growth rates actually rival those of the four largest Internet companies–Google, eBay, Yahoo and Amazon.com–early on. Taking a look at the line graph below, Groupon and Zynga’s charted growth is steeper than San Francisco’s famous Filbert Street. Over the longer haul, Facebook’s sales fall short of the two Internet kings, Google and Amazon, but top those of eBay and Yahoo, in their first six years.

Granted, Amazon, Google, eBay and Yahoo grew up during the dot-com boom a decade ago when online advertising and e-commerce were in their infancy–so their growth is arguably more impressive–but the chart does highlight just how fast this latest crop of consumer Internet companies has come along, and why venture firms have been fighting to own a piece.

Not only is revenue exploding, but profits are, too. Through the first nine months of 2010, Facebook made $355 million, meaning it likely scored a profit well over $400 million, if not $500 million, for the year. Google’s net income in 2003, its sixth year, was $399 million. Zynga’s profit was also about $400 million in 2010, only its third full year.

Compare all of this with the software industry. As we analyzed previously, less than one-third of the nation’s top software companies reached $50 million in annual sales in six years or less–and the fastest to $50 million, Novell, took three years. Microsoft crossed the $50 million barrier in eight years; Oracle, 10 years.

A big question for these young Internet companies – is the growth sustainable?” WSJ Blog

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Bing Copies Google

Thursday, February 3rd, 2011

On Tuesday Google revealed that it has been running a “sting operation” against its rival, Microsoft’s Bing search engine. Google says they began noticing Bing’s ability to display the same search results as Google even when words were misspelled. As the overlap in Bing and Google’s top 10 search results increased, Google set up a one time code to over ride it’s search algorithm, and instead manually rank a page for a particular code/term that had no connection with that webpage. They created about 100 “synthetic searches,” such as hiybbprqag, mbzrxpgjys, that previously had either no, or very few search results on both Google and Bing. After a couple of weeks, the pages Google had assigned for these synthetic searches began to appear on Bing. In response to this “sting operation,” Microsoft declared that it has not been copying Google. Stefan Weitz, director of Bing search engine at Microsoft, said in an interview that any similarities seen between the two search engines may be the result of “clickstream data,” information that the Bing toolbar and Internet Explorer users automatically share with the company. Mr. Weitz also said that clickstream data is just one of over 1,000 “signals” that Bing uses when creating its own search results algorithm.

Google Inc. accused rival Microsoft Corp. of copying its Internet search results, the latest salvo in the competition between the two technology behemoths.

Google made the claim Tuesday after releasing the results of a test it carried out purporting to show how Google’s results for search terms were copied weeks later by Microsoft’s Bing search engine. Amit Singhal, who helps oversee Google’s search engine algorithm, called Bing’s behavior “cheating.”

In response, Harry Shum, a Microsoft corporate vice president, wrote in a blog post that Google’s claims were misleading and amounted to a “spy-novelesque stunt to generate extreme outliers.”

“We do not copy Google’s results,” a Microsoft spokesman said.

The verbal volleys are the latest in the ongoing rivalry between Microsoft and Google, which for years have battled on multiple fronts including online advertising and Web browsing, among other things.

In its claim Tuesday, which was first published on a tech blog called Search Engine Land, Google said it ran a “sting” by altering its results algorithm in order to see whether Bing would do the same.

For example, Google changed its algorithm to show a link to the website for BlackBerry maker Research In Motion Ltd. if users searched for “mbzrxpgjys.” Later, the same result showed up on Bing, Google said. It found such copying in about seven to nine out of 100 different search queries it tested, according to the blog post.

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Late Tuesday, Mr. Singhal posted a detailed post on Google’s official blog describing how the company came to the conclusion that Bing was copying the Google search engine, adding that he wanted to see that practice stop. Google wants to compete with “algorithms built on core innovation, and not on recycled search results from a competitor,” he wrote.

Stefan Weitz, director of the Bing search engine at Microsoft, said in an interview the company studies how certain users interact with Google in order to improve Bing. It does this by looking at “clickstream data,” or information that users of Microsoft’s Internet Explorer or the Bing search toolbar voluntarily share with the company. But Mr. Weitz added such data is just one of more than 1,000 “signals” that Bing uses for its own search results algorithm. That’s the reason why Google only found a handful of alleged copies, he said. “Competitors are all trying to see what the best ideas are out there,” Mr. Weitz said.

Google in the past has been accused by some technology observers of copying Bing’s user interface, including its home page, a left-hand navigation bar on the results page, and the look of its image search feature, among other things. Google didn’t immediately respond to requests for comment about whether it copies Bing.

Goldman Values Facebook at $50 billion, Digital Sky Technologies Makes 400% on its Investment Since 2009!

Monday, January 3rd, 2011
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The New York Times announced today that Goldman Sachs and Russian Investor Digital Sky Technologies are investing $500 million into Facebook at a valuation of $50 billion.   According to Second Market, some private investors have bid up the Company’s shares to imply a value of $56 billion.  This bid comes soon after Google announced a $6 billion bid for Groupon a couple weeks ago.  Some call the Facebook valuation astronomical, and it theoretically doubles the net worth of founder Mark Zuckerberg to approximately $14 billion.  Two years ago Microsoft attempted to purchase a stake in Facebook at $15 billion, which at the time was deemed too high.  Digital Technology’s original 2009 stake in Google, which valued the company at $10 billion has since quintupled.  While Goldman is purchasing shares, VC firm Accel Partners is selling very aggressively at much lower valuations.  When examined more closely, with this purchase, Goldman may have bought it’s right to the Facebook IPO.  If Goldman is able to IPO shares of the company at a higher price, it could eventually simply divest of its shares in the open markets at a higher valuation and make a fat fee in the process.
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According to Reuters, “Goldman Sachs is investing $450 million of its own money into Facebook and that it’s bringing along $50 million from Digital Sky Technologies and as much as $1 billion more from its high-net-worth clients — all at a valuation of $50 billion.

The enormous sums of money involved here clearly ratify the valuation: this isn’t a handful of shares trading in an illiquid market, it’s an investment substantially larger than most IPOs.

It’s worth remembering here that only two years ago, when Microsoft bought into Facebook at a $15 billion valuation, that sum was described in the NYT as “astronomical”. But that said, Facebook’s multiples have clearly shrunk from those heady days: in 2007, Facebook could actually use Microsoft’s $240 million to fuel its expansion. Today, it’s reportedly earning $2 billion a year, which implies to me that this is a cash-out rather than a dilutive offering. Facebook has raised, in total, about $850 million to date, and there’s no obvious need for a massive new round of funding which would dwarf that entire sum.

If Goldman is leading the buyers, then, who are the sellers? VC shop Accel Partners has been selling Facebook shares quite aggressively of late, at lower valuations than this. They could easily provide all the shares that Goldman is buying and still be left with a stake worth some $3.5 billion. And it’s entirely conceivable that some early employees might well want to diversify their holdings and have maybe a little less than 99% of their net worth in Facebook stock.

As for Goldman, it has probably bought itself the IPO mandate, which could easily generate hundreds of millions of dollars in fee income. It has also become the only investment bank which can give its rich-people clients a coveted pre-IPO stake in Facebook: the extra cachet that brings and the possible extra clients, make this investment a no-brainer. Facebook doesn’t need to stay worth $50 billion forever — Goldman just needs to engineer an IPO valuation somewhere north of that, then exit quietly in the public markets. And that is surely within its abilities.

According to Dealbook, “the deal could double the personal fortune of Mark Zuckerberg, Facebook’s co-founder.

Facebook, the popular social networking site, has raised $500 million from Goldman Sachs and a Russian investor in a deal that values the company at $50 billion, according to people involved in the transaction. The deal makes Facebook now worth more than companies like eBay, Yahoo, and Time Warner.

The stake by Goldman Sachs, considered one of Wall Street’s savviest investors, signals the increasing might of Facebook, which has already been bearing down on giants like Google. The new money will give Facebook more firepower to steal away valuable employees, develop new products and possibly pursue acquisitions — all without being a publicly traded company. The investment may also allow earlier shareholders, including Facebook employees, to cash out at least some of their stakes.

The new investment comes as the SEC has begin an inquiry into the increasingly hot private market for shares in Internet companies, including Facebook, Twitter, the gaming site Zynga and LinkedIn, an online professional networking site. Some experts suggest the inquiry is focused on whether certain companies are improperly using the private market to get around public disclosure requirements.

The new money could add pressure on Facebook to go public even as its executives have resisted. The popularity of shares of Microsoft and Google in the private market ultimately pressured them to pursue initial public offerings.

So far, Facebook’s chief executive, Mark Zuckerberg, has brushed aside the possibility of an initial public offering or a sale of the company. At an industry conference in November, he said on the topic, “Don’t hold your breath.” However, people involved in the fund-raising effort suggest that Facebook’s board has indicated an intention to consider a public offering in 2012.

There has been an explosion in user interest in social media sites. The social buying site Groupon, which recently rejected a $6 billion takeover bid from Google, is in the process of raising as much as $950 million from major institutional investors, at a valuation near $5 billion, according to people briefed on the matter who were not authorized to speak publicly.

“When you think back to the early days of Google, they were kind of ignored by Wall Street investors, until it was time to go public,” said Chris Sacca, an angel investor in Silicon Valley who is a former Google employee and an investor in Twitter. “This time, the Street is smartening up. They realize there are true growth businesses out here. Facebook has become a real business, and investors are coming out here and saying, ‘We want a piece of it.’”

The Facebook investment deal is likely to stir up a debate about what the company would be worth in the public market. Though it does not disclose its financial performance, analysts estimate the company is profitable and could bring in as much as $2 billion in revenue annually.

Under the terms of the deal, Goldman has invested $450 million, and Digital Sky Technologies, a Russian investment firm that has already sunk about half a billion dollars into Facebook, invested $50 million, people involved in the talks said.

Goldman has the right to sell part of its stake, up to $75 million, to the Russian firm, these people said. For Digital Sky Technologies, the deal means its original investment in Facebook, at a valuation of $10 billion, has gone up fivefold.

Representatives for Facebook, Goldman and Digital Sky Technologies all declined to comment.

Goldman’s involvement means it may be in a strong position to take Facebook public when it decides to do so in what is likely to be a lucrative and prominent deal.

As part of the deal, Goldman is expected to raise as much as $1.5 billion from investors for Facebook at the $50 billion valuation, people involved in the discussions said, speaking on the condition of anonymity because the transaction was not supposed to be made public until the fund-raising had been completed.

In a rare move, Goldman is planning to create a “special purpose vehicle” to allow its high-net worth clients to invest in Facebook, these people said. While the S.E.C. requires companies with more than 499 investors to disclose their financial results to the public, Goldman’s proposed special purpose vehicle may be able get around such a rule because it would be managed by Goldman and considered just one investor, even though it could conceivably be pooling investments from thousands of clients.

It is unclear whether the S.E.C. will look favorably upon the arrangement.

Already, a thriving secondary market exists for shares of Facebook and other private Internet companies. In November, $40 million worth of Facebook shares changed hands in an auction on a private exchange called SecondMarket. According to SharesPost, Facebook’s value has roughly tripled over the last year, to $42.4 billion. Some investors appear to have bought Facebook shares at a price that implies a valuation of $56 billion. But the credibility of one of Wall Street’s largest names, Goldman, may help justify the company’s worth.

Facebook also surpassed Google as the most visited Web site in 2010, according to the Internet tracking firm Experian Hitwise.

Facebook received 8.9 percent of all Web visits in the United States between January and November 2010. Google’s main site was second with 7.2 percent, followed by Yahoo Mail service, Yahoo’s Web portal and YouTube, part of Google.

For Mr. Zuckerberg, the deal may double his personal fortune, which Forbes estimated at $6.9 billion when Facebook was valued at $23 billion. That would put him in a league with the founders of Google, Larry Page and Sergey Brin, who are reportedly worth $15 billion apiece.

Even as Goldman takes a stake in Facebook, its employees may struggle to view what they invested in. Like those at most major Wall Street firms, Goldman’s computers automatically block access to social networking sites, including Facebook.”

Yahoo! Jumps on Buyout Rumors from AOL, KKR, Silver Lake, Blackstone

Tuesday, November 9th, 2010

Two years after Microsoft tried to acquire Yahoo! for $33/share and the company lost half its market value, AOL and Silver Lake have separately lined up financial advisers to explore options for the company.  AOL is also exploring a scenario where Yahoo!’s Asian assets are spun off and the capital is returned to shareholders before the acquisition.  AOL has been extremely proactive in buying companies over the past two months, purchasing 5min Ltd., an Internet content provider and TechCrunch, a popular technology blog.

Bloomberg announced today that KKR is also interested in helping finance the transaction.  Silver Lake Partners and Blackstone are currently in buyout talks.  The sponsors are interested in Yahoo!’s 40% stake in Alibaba, a growing Chinese online business.  Yahoo! currently employs about 13,600 people and had revenues of about $1.6 billion last quarter. Shares in the company rose 9.5% on the rumors today, and the firm’s management team may have hired Goldman Sachs as a takeover defense advisor to ward off bids.

According to the WSJ, analysts say that a Yahoo!-AOL merger could create a strong competitor in the display ads market, which is estimated to be $20 billion this year.  This should be an interesting transaction, if it proceeds further, as Yahoo has a market capitalization of $21.85 billion and AOL has a market capitalization of $2.66 billion.  However, analysts value Alibaba.com at between $15bn and $25bn, which means that Yahoo!’s 40% stake could be worth $10 billion. By selling those assets, Yahoo!’s market value would fall to about $11 billion, which would make the deal much more realistic.

On the other hand, Alexei Oreskovic and Sue Zeidler argue that the company will have hurdles even if it does get bought out.  Yahoo! made many desperate attempts to grow revenue this year, such as its attempts to purchase foursquare and Groupon.  According to one analyst, “making Yahoo! bigger or smaller will not accomplish anything.”  Yahoo! is the 2nd most popular search engine behind Google, but it has failed to find growth in page views or new business.  From a private equity investor’s point of view, Yahoo! may simply be attractive because of the steady cash flow it generates, if nothing else.

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Google Gets Away with Paying 2.4% Tax Rate Overseas!

Thursday, October 21st, 2010

Google only paid 2.4% taxes on its overseas income last year using a strategy called “Double Irish,” where it legally used a tax loophole allowing it to move income to tax shelters in Ireland, while shifting expenses to countries with high corporate taxes, like the United States and Europe.  In the U.S., the corporate tax rate is 35%, and in Britain, its 28%, so how exactly does Google do it?  Well, after shifting income into Ireland, it effectively moves funds from Ireland to Bermuda, where funds become difficult to track for the U.S.  This type of tax avoidance is common amongst Fortune 500 companies, and even more common for the large technology players, including Microsoft and Facebook.  Google was able to lower its overall tax rate to 22% last year using these tactics.  If it had paid 35% in taxes on all its income, the company’s stock price would fall about $150, according to stock analysts.
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According to Bloomberg writer Jesse Drucker, “Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda.
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Google’s income shifting — involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” — helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries.
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“It’s remarkable that Google’s effective rate is that low,” said Martin A. Sullivan, a tax economist who formerly worked for the U.S. Treasury Department. “We know this company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent.” The U.S. corporate income-tax rate is 35 percent. In the U.K., Google’s second-biggest market by revenue, it’s 28 percent.
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Google, the owner of the world’s most popular search engine, uses a strategy that has gained favor among such companies as Facebook Inc. and Microsoft Corp. The method takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax. (See an interactive graphic on Google’s tax strategy here.)
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The earnings wind up in island havens that levy no corporate income taxes at all. Companies that use the Double Irish arrangement avoid taxes at home and abroad as the U.S. government struggles to close a projected $1.4 trillion budget gap and European Union countries face a collective projected deficit of 868 billion euros.
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Countless Companies
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Google, the third-largest U.S. technology company by market capitalization, hasn’t been accused of breaking tax laws. “Google’s practices are very similar to those at countless other global companies operating across a wide range of industries,” said Jane Penner, a spokeswoman for the Mountain View, California-based company. Penner declined to address the particulars of its tax strategies.
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Facebook, the world’s biggest social network, is preparing a structure similar to Google’s that will send earnings from Ireland to the Cayman Islands, according to the company’s filings in Ireland and the Caymans and to a person familiar with its plans. A spokesman for the Palo Alto, California-based company declined to comment.
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Transfer Pricing
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The tactics of Google and Facebook depend on “transfer pricing,” paper transactions among corporate subsidiaries that allow for allocating income to tax havens while attributing expenses to higher-tax countries. Such income shifting costs the U.S. government as much as $60 billion in annual revenue, according to Kimberly A. Clausing, an economics professor at Reed College in Portland, Oregon.
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U.S. Representative Dave Camp of Michigan, the ranking Republican on the House Ways and Means Committee, and other politicians say the 35 percent U.S. statutory rate is too high relative to foreign countries. International income-shifting, which helped cut Google’s overall effective tax rate to 22.2 percent last year, shows one way that loopholes undermine that top U.S. rate.
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Two thousand U.S. companies paid a median effective cash rate of 28.3 percent in federal, state and foreign income taxes in a 2005 study by academics at the University of Michigan and the University of North Carolina. The combined national-local statutory rate is 34.4 percent in France, 30.2 percent in Germany and 39.5 percent in Japan, according to the Paris-based Organization for Economic Cooperation and Development.
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The Double Irish
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As a strategy for limiting taxes, the Double Irish method is “very common at the moment, particularly with companies with intellectual property,” said Richard Murphy, director of U.K.- based Tax Research LLP. Murphy, who has worked on similar transactions, estimates that hundreds of multinationals use some version of the method.
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The high corporate tax rate in the U.S. motivates companies to move activities and related income to lower-tax countries, said Irving H. Plotkin, a senior managing director at PricewaterhouseCoopers LLP’s national tax practice in Boston. He delivered a presentation in Washington, D.C. this year titled “Transfer Pricing is Not a Four Letter Word.”
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“A company’s obligation to its shareholders is to try to minimize its taxes and all costs, but to do so legally,” Plotkin said in an interview.
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Boosting Earnings
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Google’s transfer pricing contributed to international tax benefits that boosted its earnings by 26 percent last year, company filings show. Based on a rough analysis, if the company paid taxes at the 35 percent rate on all its earnings, its share price might be reduced by about $100, said Clayton Moran, an analyst at Benchmark Co. in Boca Raton, Florida. He recommends buying Google stock, which closed yesterday at $607.98.
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The company, which tells employees “don’t be evil” in its code of conduct, has cut its effective tax rate abroad more than its peers in the technology sector: Apple Inc., the maker of the iPhone; Microsoft, the largest software company; International Business Machines Corp., the biggest computer-services provider; and Oracle Corp., the second-biggest software company. Those companies reported rates that ranged between 4.5 percent and 25.8 percent for 2007 through 2009.
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Google is “flying a banner of doing no evil, and then they’re perpetrating evil under our noses,” said Abraham J. Briloff, a professor emeritus of accounting at Baruch College in New York who has examined Google’s tax disclosures.
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“Who is it that paid for the underlying concept on which they built these billions of dollars of revenues?” Briloff said. “It was paid for by the United States citizenry.”
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Taxpayer Funding
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The U.S. National Science Foundation funded the mid-1990s research at Stanford University that helped lead to Google’s creation. Taxpayers also paid for a scholarship for the company’s cofounder, Sergey Brin, while he worked on that research. Google now has a stock market value of $194.2 billion.
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Google’s annual reports from 2007 to 2009 ascribe a cumulative $3.1 billion tax savings to the “foreign rate differential.” Such entries typically describe how much tax U.S. companies save from profits earned overseas.
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In February, the Obama administration proposed measures to curb shifting profits offshore, part of a package intended to raise $12 billion a year over the coming decade. While the key proposals largely haven’t advanced in Congress, the IRS said in April it would devote additional agents and lawyers to focus on five large transfer pricing arrangements.
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Arm’s Length
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Income shifting commonly begins when companies like Google sell or license the foreign rights to intellectual property developed in the U.S. to a subsidiary in a low-tax country. That means foreign profits based on the technology get attributed to the offshore unit, not the parent. Under U.S. tax rules, subsidiaries must pay “arm’s length” prices for the rights — or the amount an unrelated company would.
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Because the payments contribute to taxable income, the parent company has an incentive to set them as low as possible. Cutting the foreign subsidiary’s expenses effectively shifts profits overseas.
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After three years of negotiations, Google received approval from the IRS in 2006 for its transfer pricing arrangement, according to filings with the Securities and Exchange Commission.
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The IRS gave its consent in a secret pact known as an advanced pricing agreement. Google wouldn’t discuss the price set under the arrangement, which licensed the rights to its search and advertising technology and other intangible property for Europe, the Middle East and Africa to a unit called Google Ireland Holdings, according to a person familiar with the matter.
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Dublin Office
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That licensee in turn owns Google Ireland Limited, which employs almost 2,000 people in a silvery glass office building in central Dublin, a block from the city’s Grand Canal. The Dublin subsidiary sells advertising globally and was credited by Google with 88 percent of its $12.5 billion in non-U.S. sales in 2009.
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Allocating the revenue to Ireland helps Google avoid income taxes in the U.S., where most of its technology was developed. The arrangement also reduces the company’s liabilities in relatively high-tax European countries where many of its customers are located.
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The profits don’t stay with the Dublin subsidiary, which reported pretax income of less than 1 percent of sales in 2008, according to Irish records. That’s largely because it paid $5.4 billion in royalties to Google Ireland Holdings, which has its “effective centre of management” in Bermuda, according to company filings.
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Law Firm Directors
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This Bermuda-managed entity is owned by a pair of Google subsidiaries that list as their directors two attorneys and a manager at Conyers Dill & Pearman, a Hamilton, Bermuda law firm.
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Tax planners call such an arrangement a Double Irish because it relies on two Irish companies. One pays royalties to use intellectual property, generating expenses that reduce Irish taxable income. The second collects the royalties in a tax haven like Bermuda, avoiding Irish taxes.
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To steer clear of an Irish withholding tax, payments from Google’s Dublin unit don’t go directly to Bermuda. A brief detour to the Netherlands avoids that liability, because Irish tax law exempts certain royalties to companies in other EU- member nations.
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The fees first go to a Dutch unit, Google Netherlands Holdings B.V., which pays out about 99.8 percent of what it collects to the Bermuda entity, company filings show. The Amsterdam-based subsidiary lists no employees.
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The Dutch Sandwich
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Inserting the Netherlands stopover between two other units gives rise to the “Dutch Sandwich” nickname.
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“The sandwich leaves no tax behind to taste,” said Murphy of Tax Research LLP.
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Microsoft, based in Redmond, Washington, has also used a Double Irish structure, according to company filings overseas. Forest Laboratories Inc., maker of the antidepressant Lexapro, does as well, Bloomberg News reported in May. The New York-based drug manufacturer claims that most of its profits are earned overseas even though its sales are almost entirely in the U.S. Forest later disclosed that its transfer pricing was being audited by the IRS.
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Since the 1960s, Ireland has pursued a strategy of offering tax incentives to attract multinationals. A lesser-appreciated aspect of Ireland’s appeal is that it allows companies to shift income out of the country with minimal tax consequences, said Jim Stewart, a senior lecturer in finance at Trinity College’s school of business in Dublin.
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Getting Profits Out
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“You accumulate profits within Ireland, but then you get them out of the country relatively easily,” Stewart said. “And you do it by using Bermuda.”
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Eoin Dorgan, a spokesman for the Irish Department of Finance, declined to comment on Google’s strategies specifically. “Ireland always seeks to ensure that the profits charged in Ireland fully reflect the functions, assets and risks located here by multinational groups,” he said.
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Once Google’s non-U.S. profits hit Bermuda, they become difficult to track. The subsidiary managed there changed its legal form of organization in 2006 to become a so-called unlimited liability company. Under Irish rules, that means it’s not required to disclose such financial information as income statements or balance sheets.
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“Sticking an unlimited company in the group structure has become more common in Ireland, largely to prevent disclosure,” Stewart said.
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Deferred Indefinitely
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Technically, multinationals that shift profits overseas are deferring U.S. income taxes, not avoiding them permanently. The deferral lasts until companies decide to bring the earnings back to the U.S. In practice, they rarely repatriate significant portions, thus avoiding the taxes indefinitely, said Michelle Hanlon, an accounting professor at the Massachusetts Institute of Technology.
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U.S. policy makers, meanwhile, have taken halting steps to address concerns about transfer pricing. In 2009, the Treasury Department proposed levying taxes on certain payments between U.S. companies’ foreign subsidiaries.
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Treasury officials, who estimated the policy change would raise $86.5 billion in new revenue over the next decade, dropped it after Congress and Treasury were lobbied by companies, including manufacturing and media conglomerate General Electric Co., health-product maker Johnson & Johnson and coffee giant Starbucks Corp., according to federal disclosures compiled by the non-profit Center for Responsive Politics.
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Administration Concerned
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While the administration “remains concerned” about potential abuses, officials decided “to defer consideration of how to reform those rules until they can be studied more broadly,” said Sandra Salstrom, a Treasury spokeswoman. The White House still proposes to tax excessive profits of offshore subsidiaries as a curb on income shifting, she said.
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The rules for transfer pricing should be replaced with a system that allocates profits among countries the way most U.S. states with a corporate income tax do — based on such aspects as sales or number of employees in each jurisdiction, said Reuven S. Avi-Yonah, director of the international tax program at the University of Michigan Law School.
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“The system is broken and I think it needs to be scrapped,” said Avi-Yonah, also a special counsel at law firm Steptoe & Johnson LLP in Washington D.C. “Companies are getting away with murder.””

Blackstone, THL Bid More Than $15 Billion for Fidelity National Information Services, Reminiscent of KKR’s First Data $29B Buyout

Wednesday, May 12th, 2010

Ever since the First Data buyout by KKR, the BPO industry has been a target for large cap private equity funds across the United States.  The First Data deal was a $29 billion deal, and at the time, the company was largest publicly traded American electronic transaction processing company.  Fiserve has an enterprise value of over $13 billion, and about $750 million in EBITDA.  This gives an EV/EBITDA multiple of 17.0-18.0x, even higher the multiple paid for First Data.

Silver Lake and Warburg Pincus also recently bought IDC, Interactive Data Corp., seeing revenue growth potential in the need for market transparency across financial institutions.  IDC provides reference data, markets pricing and trading infrastructure services to customers, including mutual funds, asset managers and banks.  The IDC deal, a carve out from Pearson valued at $3.4 billion, would have been the largest deal this year.

According to Reuters, Fidelity National Information Services, Inc. (FIS) is a global provider of banking and payments technology solutions, processing services and information-based services. It offer financial institution core processing, card issuer and transaction processing services, including the NYCE Network, a national electronic funds transfer (EFT) network. As of December 31, 2009, FIS had more than 300 solutions serving over 14,000 financial institutions and business customers in over 100 countries spanning segments of the financial services industry. Additionally, the Company provide services to numerous retailers, through the check processing and guarantee services. The Company operates in four business segments: Financial Solutions Group (FSG), Payment Solutions Group (PSG), International Solutions Group (ISG), and Corporate and other. On October 1, 2009, FIS completed the acquisition of Metavante Technologies, Inc. (Metavante).

According to Mr. Miller of Bloomberg, ” Blackstone Group LP, Thomas H. Lee Partners LP and TPG Capital are in talks to pay more than $15 billion including debt for Fidelity National Information Services Inc., said a person with knowledge of the matter, a deal that would value the company at about $32 a share.

Fidelity National Information may reach an agreement with the buyout group as soon as May 16 if talks don’t collapse, this person said, speaking on condition of anonymity because the discussions are private. Marcia Danzeisen, a spokeswoman for Fidelity National, didn’t return a call after regular business hours yesterday.

A $15 billion deal would be about three times as big as the largest leveraged buyout since the credit markets crumbled in July 2007, showing how private-equity firms are again putting capital to work after more than a two-year drought in transactions. LBO funds worldwide have about $500 billion of unspent committed capital, according to researcher Preqin Ltd.

Private-equity firms announced about $24 billion of company takeovers so far this year, compared with $5.7 billion during the same period in 2009.

For Fidelity National Information, a Jacksonville, Florida- based payment-processing company, a deal in the $32 a share range would represent more than a 20 percent premium to the $26 closing stock price on May 5, the last day before the Wall Street Journal reported the company was in buyout talks.

Other private-equity firms have recently held talks about joining the group bidding for Fidelity National Information, said two people with knowledge of the matter. With banks preparing about $10 billion in debt financing, the private- equity group would have to put up more than $5 billion, one of the people said.

Financing Group

Bank of America Corp., Barclays Plc, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG and JPMorgan Chase & Co. are among the banks that have been working on financing the takeover, said other people with knowledge of the matter.

Credit-market turmoil in 2007 led banks to pull back on leveraged loans used to finance buyouts. Since July of that year, the largest LBO was that of IMS Health Inc., acquired in February for about $5 billion including debt.

Fidelity National Information had about $2.9 billion of net debt and noncontrolling interest as of March 31. With about 377 million shares outstanding as of April 30, a deal at $32 a share would value the company’s stock at $12.1 billion.

Thomas H. Lee, also known as THL Partners, already owns about 4.4 percent of Fidelity National, according to data compiled by Bloomberg. Private-equity firm Warburg Pincus is the company’s largest shareholder, with about 11 percent.

Fidelity National Information processes payments and issues cards for more than 14,000 institutions globally. The company had profit of $105.9 million in 2009 on revenue of $3.77 billion.

Spokesmen for Blackstone, THL, and TPG declined to comment or didn’t immediately respond to calls seeking comment.”

China Censorship Laws Go Overboard, Ongoing Dispute with Google, Inc.

Sunday, May 9th, 2010

China’s “Great Firewall” has been around for too long.  It blocks websites for various sensitive topics and has been forcing U.S. based Google to abide by its censorship laws.   Many believe that the views of the Chinese government with respect to censorship  should be reassessed, especially after the country’s recent altercation with Google over what began as a mining incident in Vietnam (more details below).

The country screens through thousands of blogs and articles a day to hide literature regarding democracy, the treatment of the Dalai Lama, and other topics.

Officials now require a photo ID to create a domestic website.  The influence of online media is greater than ever, as internet users in the country have jumped from 30 million to over 400 million from 2000 to 2009.

According to the NYT, “Google, fresh off a dispute with China over censorship and intrusion from hackers, says it has identified cyber-attacks aimed at silencing critics of a controversial, Chinese-backed bauxite mining project in Vietnam.

In attacks it described as similar to but less sophisticated than those at the core of its spat with China, Google said malicious software was used to infect “potentially tens of thousands of computers,” broadly targeting Vietnamese speaking computer users around the world.

Infected machines had been used to spy on their owners and to attack blogs containing messages of political dissent, wrote Neel Mehta of the company’s security team in a post late Tuesday on Google’s online security blog.

McAfee, the computer security firm, said in a separate blog posting that it believed “the perpetrators may have political motivations and may have some allegiance to the government of the Socialist Republic of Vietnam.”

It added: “This incident underscores that not every attack is motivated by data theft or money. This is likely the latest example of hacktivism and politically motivated cyberattacks, which are on the rise.”

Google said that while the malware itself was not especially sophisticated, “it has nonetheless been used for damaging purposes.”

“Specifically, these attacks have tried to squelch opposition to bauxite mining efforts in Vietnam, an important and emotionally charged issue in the country.”

Bauxite is a key mineral in making aluminum and one of Vietnam’s most valuable natural resources. Plans by the Vietnamese government to exploit bauxite in the Central Highlands region, in partnership with a Chinese state-run company, have generated much local criticism, including from a well-known war hero, Gen. Vo Nguyen Giap.

General Giap and other opponents say the project will be ruinous to the environment, displace ethnic minority populations and threaten the south-east Asian country’s national security with an influx of Chinese workers and economic leverage.

The role of China in the bauxite project also has stirred up anger in a nation that still fears its bigger neighbor: Vietnam was a tributary state of China for 1,000 years and was invaded by China in 1979, and the two countries continue to joust for sovereignty in the South China Sea. ”