Monday, June 13, 2016

Apple tax disclosure: 2016 will be a defining moment for ending the multinational tax rort

Just because you spent a fortune on setting up overseas tax ministration structure does not mean that you won't end up paying it. Aivars Lode

By Heath Aston

Apple is one of many tech companies accused of shifting its Australian profits to places such as Ireland. 
Imagine the extra cream left in the jug of the household budget if we all paid an income tax rate of one cent in the dollar.
So how does Apple justify such a laughably low profit margin in Australia? 
Holidays on luxury yachts would no longer be the preserve of rap stars, investment bankers and the founders of Silicon Valley start-ups.
Chief executives and their advisers will tell you that understanding a multinational company's tax bill is far too complex for mere mortals.
It is not. And the numbers don't lie.
Apple's offering to the Australian tax man in 2015 was $85 million. In the same year, the company notched local sales of $8 billion. Of course, company tax is paid on profit not sales. Apple announced an Australian profit on those $8 billion of sales of just $123 million.
If you believe that is Apple's actual profit margin on products sold in Australia, step this way and start queuing for the iPhone 7. It washes the dishes and walks the dog and I can get you one cheap.
On Wednesday morning, Apple released its global profit statement. It was a far more plausible $US18.4 billion net profit on sales of $US75.9 billion.
So how does Apple justify such a laughably low profit margin in Australia?
With the same excuse used by all the big multinational companies, from its rival Google to the big pharmaceutical groups and the oil and gas giants: related party transactions.
These can include loans from a separate division of the company based in a low-tax country that come with punishing interest rates. They can also be steeply-priced intellectual property charges that the Australian arm is asked to pay another division.
In Apple's and Google's cases the process has been referred to as the "double Irish Dutch sandwich" but, whatever the means, the end result is a flow of funds out of Australia, severely limiting the profit that is left behind to be taxed. It is not rocket science.
The next 12 months will be the defining moment in forcing multinationals to at last pay a fair share in Australia.
The Coalition's multinational tax-avoidance law took effect on January 1 and will target 1000 companies with global sales of $1 billion or more.
Under the law, companies can be slapped with double tax, plus interest, if found to be illegally shifting profits offshore.
The carrot effect in encouraging companies to sit down and negotiate a more reasonable tax contribution is already working, according to Tax Commissioner Chris Jordan.
In Britain, the first OECD country to introduce a diverted profits law, Google this week offered $265 million in back-taxes as a token contribution to signify its acceptance of the new playing field there.
But if anyone thinks all 1000 multinationals will meekly start paying 30¢ in the dollar, you might also want to buy my iPhone 7.
Even after their humiliating grilling by the Senate's tax avoidance committee, the tech companies have maintained their implausibly low profit margins in Australia this year.
Those companies are known for the kind of agility lauded by Malcolm Turnbull.
Unfortunately, it is their agile approach to tax minimisation that is putting pressure on the Prime Minister's budget bottom line and making it more likely we will all be paying a higher GST on everything - including the next model of iPhone.

Yahoo to Cut 15% of Workforce, Explore Strategic Options

Tough times for old internet firms, lucky Alibaba. Aivars Lode
By Douglas Macmillan and Dana Mattioli
Yahoo Inc. has effectively hung a for-sale sign on its Web properties, signaling the possible end of a 20-year run by an Internet icon.
The company on Tuesday said it would explore “strategic alternatives” as part of a restructuring that will eliminate roughly 15% of its workforce. The announcement came alongside a dismal fourth-quarter report card in which Yahoo took a $4.5 billion charge to write down the value of businesses including its Tumblr blogging site.
Yahoo’s move to mull its options, confirming a report earlier Tuesday by The Wall Street Journal, sets the stage for a possible bidding war between a wide range of potential buyers. About 1 billion people a month travel collectively to Yahoo’s home page, email and other sites, making them an attractive asset to media conglomerates such as Wall Street Journal owner News Corp and IAC/InterActiveCorptelecom giants including Verizon Communications Inc. and private-equity firm TPG—all of which have expressed interest in purchasing parts or all of the business, people familiar with the matter said.
Yahoo’s next step may be to initiate a formal sale process, which entails setting up a virtual data room detailing the company’s business metrics, and proactively reaching out to the most likely potential buyers. Or the board could choose to wait until a suitor approaches them with an offer, at which point it would weigh that against any counteroffers.
Estimating the value of Yahoo’s business is difficult, because investors ascribe a large portion of its roughly $27 billion market value to its stakes in Alibaba Group Holding Ltd. and Yahoo JapanBrian Wieser, an analyst at Pivotal Research LLC, estimates Yahoo’s core business, excluding the Asian assets and its cash, is worth around $3.4 billion. 
A sale process would also likely mark the end of Chief Executive Marissa Mayer’s attempt to turn around Yahoo. Costs have risen, while revenue has shrunk in the 3½ years since she took the reins. Fourth-quarter revenue excluding commissions paid to retail partners was about $1 billion, down 15% from a year ago and the lowest point during Ms. Mayer’s tenure.
Her efforts were complicated in recent months by an exodus of top managers and growing impatience from investors, including hedge-fund activist Starboard Value LP, who has called for new leadership and a sale of the company.
In an interview, Ms. Mayer said she was confident a turnaround could still be accomplished. “I’m very much looking forward to the turnaround plan that I have presented today, and I think it will make us the best version of ourselves,” she said.
Three years ago, Ms. Mayer said she planned to return Yahoo to a growth rate on par with competing Internet companies such as Google Inc. and Facebook Inc. The new plan represents a more realistic vision for turning around the business, she said.
“I probably now understand more of what the necessary steps and ingredients are and have a bit more realism in terms of how quickly they can be at companies as large as Yahoo,” Ms. Mayer said.
Yahoo’s plan did little to appease some shareholders including SpringOwl Asset Management LLC, which in December recommended the company cut up to 75% of staff and bring in a more operations-focused CEO.
“This is a company that has clearly suffered from a lack of focus,” said Eric Jackson, managing director at SpringOwl. “We believe there is much more that needs to be done to improve the profitability of the business.”
Investors have until March 26 to submit proxy proposals. Prior to Tuesday’s announcement, Starboard has indicated it would nominate a slate of new directors. The investor didn’t respond to a request for comment. 
At the moment, Yahoo is focusing on trimming costs to make it more attractive to investors or buyers. Yahoo said that by the end of 2016, it anticipates having about 9,000 employees and fewer than 1,000 contractors, which represents a workforce that is roughly 42% smaller than it was in 2012. The company sees the cuts resulting in savings of $400 million a year.
In a call with analysts on Tuesday, Ms. Mayer said the restructuring would help Yahoo improve its focus on three key areas: search, communications and digital content.
“We will simplify the business to improve execution,” Ms. Mayer said on the call. “Yahoo cannot win the hearts and minds of users and advertisers with a complex portfolio of assets.”
Ms. Mayer is also betting Yahoo can make headway in mobile search, even though the company has failed to gain any ground in Web search from Google and Facebook. Yahoo has been working on a search engine tailored to mobile phones that can help people quickly find their personal information or the right apps, people familiar with the matter have said. “We really think mobile search needs a much deeper reimagination,” Ms. Mayer said Tuesday.
In the meantime, Yahoo also said it has begun to explore divesting itself of nonstrategic assets, such as patents, the sale of real estate, and other noncore assets. Through the end of the year, the company estimated that these efforts could generate between $1 billion and $3 billion in cash.
“The board also believes that exploring additional strategic alternatives, in parallel to the execution of the management plan, is in the best interest of our shareholders,” Yahoo Chairman Maynard Webb said in a news release. That represents a broadening in stance from December, when Mr. Webb said the company wasn’t interested in a sale but would entertain offers as part of the board’s fiduciary duty.
Yahoo also said Tuesday that finance-industry entrepreneur Charles Schwab is resigning from its board. Mr. Schwab was among the seasoned executives Ms. Mayer added to the board as she put her own stamp on its governance.
Mr. Schwab, whose departure will leave the Yahoo board with seven directors, pointed to his other professional commitments and demands on his time and said his departure wasn’t related to any disagreement with the company.
Shares of Yahoo, down 35% over the past year, fell 1.2% to $28.72 in after-hours trading.
Yahoo reiterated Tuesday that it will continue exploring a separation of its operating business from its stake in Alibaba. “I do feel comfortable we can do it this year,” Chief Financial Officer Ken Goldman said on the earnings call.

Foxconn Puts $5.5 Billion Sharp Takeover Bid on Fast Track

Further shakeouts in the technology space. Aivars Lode
By Takashi Mochizuki, Eric Pfanner, and Wayne Ma
TOKYO—Taiwanese iPhone assembler Foxconn is pushing to wrap up a takeover of Sharp Corp. within days, people familiar with the situation said Thursday, after the Japanese electronics company said it favored Foxconn’s offer over a government-backed bailout.
Sharp’s embrace of Foxconn marked a striking turnabout in a battle that has come to be seen as a test of Japan’s openness to foreign investment and highlighted the role of its government in restructuring a troubled electronics industry.
Until this week, a government-backed fund, Innovation Network Corp. of Japan, appeared to have the inside track toward a deal with Sharp, even though people familiar with the situation said Foxconn’s $5 billion-plus bid was worth more than twice as much.
But Sharp Chief Executive Kozo Takahashi said Thursday that the company would focus its attention on the talks with Foxconn, without shutting out INCJ entirely.
“The two offers are not equal,” he said. He cited potential synergies and the scale of Foxconn, which has $125 billion in annual sales. It is the largest assembler of Apple Inc. smartphones, making them and a range of other electronics devices at sprawling factories in China.
Foxconn Chairman Terry Gou was traveling Thursday to meet with Sharp officials at the company’s headquarters in Osaka, a person familiar with the situation said. Mr. Gou offered Sharp a ¥200 billion ($1.7 billion) deposit, and lawyers for the two companies were hashing out other details, the person added.
Prime Minister Shinzo Abe has urged Japan to put out a welcome mat to foreign investors, but deals have been scarce. Japanese firms, on the other hand, are pushing overseas aggressively to seek growth beyond a stagnant domestic market. The value of outbound deals has outweighed inbound acquisitions by nearly four to one over the past two years, according to research firm Dealogic.
Sharp’s tilt toward Foxconn “shows that Japan is open to foreign capital,” said Nicholas Benes, a Tokyo-based corporate governance expert. “The government must have realized that this was going to be viewed as a bellwether deal for Abenomics,” as Mr. Abe’s plan to revive Japan’s economy is known.
INCJ, which describes its role as fostering technological innovation and globalization, has helped to keep foreign suitors at bay by taking part in several rescues of troubled Japanese tech firms, including smartphone-panel maker Japan Display Inc. and chip maker Renesas Electronics Corp.
INCJ is also working with Toshiba Corp. in its restructuring, according to people familiar with the matter. Toshiba, which on Thursday forecast a record annual loss of ¥710 billion after a drawn-out accounting scandal, has said it plans to sell its medical-device unit and possibly other divisions.
Should Foxconn succeed in coming from behind to seal a deal, it faces an equally tough challenge: turning around a company suffering from years of decline in its consumer-electronics business and a plunge in prices of the liquid crystal display panels it provides to Apple and other smartphone makers.
On Thursday, Sharp said its net loss in the three months through December more than doubled from a year earlier, to ¥25 billion. Revenue dropped 13%. The company faces a March 31 deadline to repay lenders who have already bailed out the company twice in less than four years.
Sharp’s shares surged 17% on news of its shift toward Foxconn.
Mr. Gou’s pursuit of Sharp goes back to 2012, when he initially reached a deal for Foxconn to take a 10% stake in the Japanese company. The deal unraveled the next year after dismal earnings sent Sharp’s shares plunging.
That history made some Sharp executives reluctant to work with Mr. Gou again, according to people familiar with their thinking. Even after Thursday’s developments, it is possible the two sides could fail to reach a final agreement.
One person briefed on the talks said Sharp’s lenders pressed the company to take a closer look at the Foxconn offer after Mr. Gou traveled to Japan last week to make a personal appeal for a raised bid worth ¥659 billion, according to people familiar with the matter. That compared with an offer from INCJ that was worth no more than ¥300 billion, the people said.
In his presentation, Mr. Gou said Foxconn wouldn’t cut Sharp’s workforce, people familiar with the situation said. Sharp’s lenders believed the larger investment from Foxconn, formally known as Hon Hai Precision Industry Co., would give Sharp a better chance to grow, these people said.

Mr. Takahashi said Sharp and Foxconn had “built a relationship of mutual trust” via an existing partnership called Sakai Display Products.
People familiar with the situation said Sharp was keeping INCJ in the picture as a second option in case the talks with Foxconn fall through.
Foxconn didn’t respond immediately to a request for comment. INCJ said it would continue talks with Sharp. 
Sharp’s CEO said a deal with Foxconn could benefit Sharp’s production, sales and materials-procurement operations. He said he would work to prevent a breakup of Sharp, which makes everything from televisions to air purifiers to solar panels, and had no plans at this point to step down.
He also raised the prospect of an alliance with Japan Display Inc., the country’s other major producer of smartphone-display panels. Until now, Japan Display and Sharp, each of which supplies Apple with mobile-device screens, have operated at arm’s length.
For now, the prospect of reviving Sharp appears to outweigh previous concerns at the company and among some Japanese policy makers that the country’s technology might leak overseas.
“It’s no use having that technology if the company is going under,” said Hideyuki Ishiguro, senior strategist at Okasan Securities.

Tech Stocks: Why the Selloff Could Get Worse

Tough sledding. Aivars Lode
By Dan Gallagher and Justin Lahart
Dark clouds have descended on the tech sector. And while Punxsutawney Phil may say otherwise, a break may not be soon in coming.
A bruising selloff since the first of the year has cost the Nasdaq Composite all of its gains since late 2014, with the pain particularly acute in the riskier Internet and software sectors. The index is off 14% so far this year. The Nasdaq Internet Index has fallen 21%, and cloud stocks tracked by the BVP Cloud Index are off more than 31%. By contrast, the Dow Jones Industrial Average is off a more modest (even if still painful) 8%. 
The selloff reflects an unsettled global economic and financial-market environment that is hitting tech stocks on three fronts.
First, in an era when U.S. companies at large have become steadily more dependent on their foreign operations for sales, tech companies’ overseas exposures stand out. Hewlett-Packard, for example, generates only about a third of its sales in the U.S, while Intel books less than a fifth of its sales domestically. As a result, many tech companies are taking unusually hard hits from economic weakness abroad. The dollar’s strength against other currencies—the greenback averaged 12% higher on the year on a trade-weighted basis versus other currencies in the fourth quarter—has made a bad situation even worse.
Second, worries about the global economic environment have prompted many companies to rein in capital spending and other investments. This can hurt the flow of new deals that is the lifeblood of software companies that sell cloud-based services. Tableau Software trimmed its full-year forecast last week, citing “softness” in business-tech spending. That sparked a huge selloff that cut Tableau’s market value by more than half and badly damaged many peers., Workday and Splunk—which will report results later this month—are off more than 20% in just the past two sessions.
Finally, there is the issue of price. Most cloud and Internet companies carry lofty valuations. is still more than 100 times forward earnings despite losing nearly 30% of its value since the first of the year. The Nasdaq Composite still carries a premium of nearly 24% to the S&P 500 on the same basis.
Now, the benign economic environment those valuations were predicated on has been put into question, while a global flight to safety has pushed investors away from risky bets.
With the tech sector’s earnings season still in full swing, it is possible that pending reports could help turn the tide for the sector. Cisco Systems is slated to report Wednesday, and that company often serves as a barometer for corporate-technology demand.
The problem is, tech’s earnings reports have actually gone pretty well so far, relative to reduced expectations. But that hasn’t stanched the bleeding.
About 65% of reporting tech companies have also exceeded analysts’ revenue targets, compared with 49% for the S&P. Not that it has done them much good: Microsoft and Google are down 11% and 12%, respectively, since their relatively strong reports.
In the changed market environment, the tech sector has caught a sudden chill. Spring, especially for companies with little in the way of profit, will be a long time in coming.

Unicorn fever cools as deal terms toughen

Trouble in the unicorn world. Are valuations artificially being kept high by staying private? Aivars Lode

By Mark Boslet

Private company investors showed an abrupt caution for unicorn financings in the fourth quarter of last year with average valuations plunging and the use of tough deal terms on the rise.
A Fenwick & West survey of most, if not all, unicorn deals from the final nine months of 2015 uncovered a big drop in the fourth-quarter appetite of VCs and non-traditional investors to reward entrepreneurs with big mark-ups and eye-popping company valuations.
The study is the latest piece of evidence to point to a cooling of interest in so-called unicorn deal making as venture capitalists reassess exactly what their startups are worth.
In contrast to a prior study covering most of 2014 and the first quarter of 2015, the average valuation of unicorn financings in the fourth quarter was $1.6 billion. This is down from $4.1 billion in the third quarter and $5.6 billion in the second quarter.
Worth noting is that half of the Q4 deals came in with valuations of between $1 billion and $1.1 billion, or just enough for each of the companies to win the moniker of a being unicorn as they crossed the $1 billion threshold.
As a result, the average mark up over a company’s Series A round was a third or less than what it was earlier in the year. The average per share price increase over an A round was 2,081 percent in the fourth quarter compared with 6,291 percent in the third quarter, the study found.
The use of investor friendly terms also jumped. Senior liquidation preferences were far more common and the use of IPO protections increased. A third of deals had blocking rights, keeping a unicorn investor’s shares from automatically converting into common stock at an IPO unless the IPO price meets a certain level.
Ratchets giving investors extra shares if an IPO price falls below that of the unicorn round also were more frequent. They turned up in 17 percent of fourth quarter deals, the study found.
Non-traditional investors led 84 percent of unicorn deals in the final nine months of last year and the average deal size was $222 million.

Dell 'struggling to raise funds for EMC gobble'

Dell's deal on the ropes, check out the break up fee. Aivars Lode

By Iain Thomson

A falling tech market sinks all boats

Dell's US$67bn mega-merger with EMC could be in trouble, with bankers reportedly having trouble raising the funds to foot the acquisition.
The takeover, which was announced in October, looked like plain sailing, but the falling stock market, and in particular the crash in tech stock prices, appears to have had a knock-on effect: Dell has, we're told, hit a fundraising snag.
The New York Post reports that the banking consortium, led by JP Morgan, that was supposed to have nailed the first $10bn on Wednesday, has asked for a 10-day extension after struggling to price and sell the necessary bonds to the credit markets. This is according to an anonymous source.
It is suggested that Dell is also having problems selling Perot Systems. Dell had been asking around $5bn for the firm, which would help its finances considerably.
Atos had been the front runner to buy Perot but has pulled out of the bidding, citing stock price worries. NTT Data and Tata are apparently still in the bidding to take over Perot Systems.
The stock market has also caused problems with the terms of the EMC takeover deal. Shareholders in the company were due to get $24.05 per share in cash and a tracking stock tied to the value of VMware. That was when stock in VMware was worth $69 per share – it's currently at $43 and trending downwards.
If the deal doesn't go ahead, there's going to be a hefty bill to pay. Under the terms of the deal, Dell has to pay EMC $4bn in compensation if the buyout falls through, and that's going to wipe the smile off Michael Dell's face for a long time.
"The EMC transaction is on schedule under the original timetable and the original terms," a Dell spokesman told The Post. There has been no response to requests for information from El Reg.

China Loses Control of the Economic Story Line

China's growth story wains. Aivars Lode

By Andrew Browne

SHANGHAI—Sentiment on China among global investors has always veered between exaggerated optimism and excessive pessimism.
Even so, the latest bout of gloom is unusually severe. The economic slowdown doesn’t properly explain it. Although the official 6.9% growth last year was the slowest in a quarter century—and many economists believe the real number is more like 6%--China is still expanding faster than almost any other major economy. Banks are flush with savings. The government retains plenty of financial firepower. Unemployment is low.
The reason for the startling mood swing this time goes well beyond the performance of the economy. It’s fundamentally about leadership—how the world’s second-largest economy is run. 
When President Xi Jinping rose to power in 2012, investors knew the economy was ailing—“unstable, unbalanced, uncoordinated and unsustainable,” as former Premier Wen Jiabao famously described it in 2007. His blunt diagnosis of China’s broken growth model was also a kind of confessional; Mr. Wen, together with President Hu Jintao, recognized the problems early but made them much worse with wasteful government investment in heavy industry and infrastructure.
Mr. Xi pledged to do vastly better. Styling himself as a reformer on a par with Deng Xiaoping, he unveiled a 60-point plan to roll back the state and cede a “decisive role” to markets as China set out to switch from investment to consumption-led growth.
Yet entering year four—out of an expected 10—of Mr. Xi’s administration, the reforms are largely on hold.
Capital flooding out of China is one sign that some investors are giving up the wait.
Today’s disillusion is focused largely on China’s future prospects, not its current condition. Absent the reassurance of reform progress, the expectation is that growth will stall. Only the timing is in doubt.
Why the delay? Some say Mr. Xi has been too busy consolidating his power, or that he’s been consumed by his anticorruption campaign. It takes time, they point out, to build consensus on controversial overhauls to rejuvenate state-owned enterprises, open the financial system to greater competition and liberalize land and labor markets.
But evidence is building that reforms have stalled for a more basic reason: Mr. Xi, despite the early hype, sees only a limited role for markets.
There’s been some obvious backtracking on market principles, notably last summer’s crude intervention to rescue the Shanghai stock market when a government-induced bubble burst. Authorities forced brokerages to buy shares, barred large investors from selling and blamed speculators, journalists and even “hostile foreign forces” for the mess.
An offhand approach to markets has had global spillover: International Monetary Fund leader Christine Lagarde, among others, has expressed exasperation with how China spread financial panic by changing its currency regime last year without adequate explanation. For decades, the Chinese leadership countered pessimism about the myriad problems that inevitably beset an emerging economy the size of China’s by spinning a narrative on how market forces would triumph over challenges to growth.
Deng himself was a master storyteller. When investors fled the country after the 1989 Tiananmen Square massacre, he lured them back by journeying to Shenzhen, the cradle of his reforms, in a blaze of publicity. To underline his commitment to markets, he opened the Shanghai and Shenzhen stock exchanges in the early 1990s.
Later that decade, the Asian financial crisis became the prelude to a wave of market overhauls whose momentum has carried to this day. Then-Premier Zhu Rongji negotiated China’s entry into the World Trade Organization—a move intended to shake up state firms by introducing foreign competition—and kicked the military out of business. He also slashed the bureaucracy and championed the private sector.
Mr. Xi faces a far more complex set of challenges at the helm of a $10 trillion-plus economy.
But his big moves to date suggest he thinks he can still effectively control its direction through administrative engineering and state planning. A good example is the way he is merging government enterprises to create even more powerful monopolies. A plan to allow private companies to invest in these Goliaths hasn’t gone very far.
If ever there was a moment when foreign investors needed a strong reform story to lift their spirits it’s right now. Currency speculators are attacking the Chinese yuan in Hong Kong. The financier George Soros thinks China’s economy is already crashing. “I’m not expecting it, I’m observing it,” he told an audience in Davos.
The U.S.-China Business Council, an industry lobbying group, issues a regular scorecard on the progress of Mr. Xi’s ambitious reforms that testifies to dismay among its members. Even though Beijing frequently boasts about its success in cutting red tape and streamlining a notoriously complicated licensing regime, a council survey showed 77% of companies see no progress at all in those areas.
Without a convincing narrative to offer hope of improvement, investors are drawing an increasingly bleak conclusion: On reform, Mr. Xi’s administration is losing control of the plot.

Saudi Oil Minister Says No to Production Cuts

It is amusing now to read about such glut of oil after all the talk of a peak oil and the investment that followed now being wiped out. Aivars Lode

But world’s largest oil exporter will continue to work with other oil states to forge agreement to steady production while demand catches up

By Bill Spindle 
HOUSTON—Saudi Arabia delivered its starkest message yet to a reeling global oil sector, saying it wouldn’t rescue the industry from low prices by cutting its production.
Ali al-Naimi, Saudi Arabia’s powerful petroleum minister, told the elite of the global energy industry here Tuesday that demand for oil remains strong but that for prices to recover, excess supply will still need to be curbed. That rebalancing, he said, will start as low prices squeeze out the production of oil that is the most expensive to extract and sell.
That production comes from places including U.S. shale fields, Canada’s oil sands and deepwater projects that attracted investment during the years oil was priced over $100. Now it is closer to $30.
Mr. Naimi’s message is a shot across the bow for an industry already struggling to adjust to a price drop of more than 70% since June 2014, to a level at which many producers can’t survive.
Never before has Mr. Naimi, who has dominated Saudi oil policy for two decades, laid out so bluntly the Kingdom’s vision for how the industry should adjust to market conditions. New sources of supply are converging with pressures on oil demand created by China’s slowing economy, growing energy efficiency and, eventually, new power sources such as solar and wind.
“The producers of these high-cost barrels must find a way to lower their costs, borrow cash or liquidate,” Mr. Naimi told the IHS CERAWeek gathering, which included top executives from many of the world’s biggest oil companies and senior officials from big producing countries. 
He added that prices hovering above $100 a barrel for years encouraged inefficient producers to grow output, and those barrels will have to leave the market first.
“It sounds harsh, and unfortunately it is. But it’s the most efficient way to rebalance markets.”
Saudi Arabia could produce oil profitably at $20 per barrel, Mr. Naimi asserted, a level well below current prices. “We don’t want to, but if we have to, we will,” he said. Few, if any, other officials or executives in the room could say that about their country or company.
Mr. Naimi’s prescription to rely on market forces marked a reversal from the Organization of the Petroleum Exporting Countries’ traditional role of trying to orchestrate supply adjustments.
His comments come a week after talks among oil producers about freezing output levels helped to kindle a brief rally in oil prices. After he spoke Tuesday morning, the U.S. benchmark fell $1.62, or 4.9%, $31.77 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, traded down $1.50, or 4.3%, at $33.19 a barrel on ICE Futures Europe.
Prices in the $30-a-barrel range aren’t enough to salvage the budgets of oil-dependent economies such as Venezuela, Algeria and Nigeria. Even Saudi Arabia ran a budget deficit of more than $100 billion last year. 
Few if any U.S. companies can extract oil profitably at current price levels, and those producing crude from unconventional tar-sands deposits in Canada need far higher prices to make a return on the billions of dollars they invested there. 
ConocoPhillips CEO Ryan Lance told conference attendees a few minutes after Mr. Naimi’s speech that oil companies can’t count on a deal between Saudi Arabia and other major producers to halt the oil bust. 
“We have to prepare for the worst case,” he said. 
Saudi Arabia played a key role in the sharp decline in crude prices by declining to intervene in the global market at a November 2014 OPEC meeting. The decision disappointed those in the industry who had hoped the Kingdom would orchestrate the sort of coordinated output cut by OPEC producers that has pushed prices higher in the past. 
Saudi Arabia raised market hopes, and the price of crude, again recently by agreeing with Russia, the world’s second-largest producer after Saudi Arabia, and a few other exporting countries to freeze production at current levels on the condition others support it. Hopes for a rapid agreement were dashed by Iran, which having recently been released from international sanctions has plans to nearly double its production. 
Hours before Mr. Naimi’s address, Bijan Zanganeh, Iran’s oil minister, called the Saudi Arabia-Russia pact “ridiculous.” His remarks helped send global prices lower. 
The market has struggled with a surplus of more than 1 million barrels a day above demand. That gap was created before 2014 by a near doubling of U.S. output and after that by an increase in production from OPEC members and Russia.
The oil market’s rebalancing will be reflected in a fundamental restructuring of the industry as it comes out of this oil bust, according to Mark Papa, a partner at Riverstone Holdings and former CEO of shale pioneer EOG Resources.
Mr. Papa said the industry will first see “a lot of bodies, a lot of bankruptcies,” but the pain will leave the industry more stable—particularly independent U.S. producers.
“The management teams that survive are going to come out of it and be a lot more conservative,” Mr. Papa said. “As times get better you are going to see that they are not going to stress the balance sheets as much.”

The case for a bright American future, according to billionaire Warren Buffett

I wrote about this exact same topic back in 2008. Aivars Lode
By Niraj Chokshi
Sourpusses take note: One of the world’s wealthiest and most respected investors thinks you’re dead wrong about the future of the country.
In his annual letter to shareholders, published on Saturday, Berkshire Hathaway Chairman Warren Buffett made a forceful argument that Americans should look to the future with optimism, despite the dour messages broadcast from the presidential campaign trail.
“For 240 years it’s been a terrible mistake to bet against America, and now is no time to start,” he said in the letter. “America’s golden goose of commerce and innovation will continue to lay more and larger eggs.”
For 50 years, Buffett has written the annual letters, which are widely read for his pithy and incisive analysis of the past, present and future of the holding company and the economy. This year, he laid out the case for a bright American future, even as he notes some cause for concern.

‘There will be struggles’

Even though he said the American economy is growing, Buffett nodded toward growing inequality.
Though the pie to be shared by the next generation will be far larger than today’s, how it will be divided will remain fiercely contentious. Just as is now the case, there will be struggles for the increased output of goods and services.
Congress will be the battlefield; money and votes will be the weapons. Lobbying will remain a growth industry.
But, Buffett argued, there is a silver lining:
“Even members of the ‘losing’ sides will almost certainly enjoy – as they should – far more goods and services in the future than they have in the past,” he said.
The market excels at producing things people don’t know they want, he said. For example, Buffett noted that he never thought as a child that he would someday need a personal computer.
“I now spend ten hours a week playing bridge online,” he said. “And, as I write this letter, ‘search’ is invaluable to me. (I’m not ready for Tinder, however.)”

‘America’s economic magic remains alive and well’

A history of growth drives Buffett’s argument for optimism, which he framed as a response to the modern politics of fear.
It’s an election year, and candidates can’t stop speaking about our country’s problems (which, of course, only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do.
That view is dead wrong: The babies being born in America today are the luckiest crop in history.
Today’s politicians need not shed tears for tomorrow’s children.
Buffett noted that American economic output, per person, has grown tremendously over his lifetime.
“American GDP per capita is now about $56,000,” he said. “As I mentioned last year that – in real terms – is a staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or their contemporaries.”
American efficiency and productivity drove — and will continue to drive — that growth, he argued.
“This all-powerful trend is certain to continue: America’s economic magic remains alive and well.”

America’s ‘secret sauce’

Productivity, Buffett said early in the letter is “the all-important factor in America’s economic growth over the past 240 years” — a fact lost on too many Americans, Buffett lamented.
“That kind of improvement has been the secret sauce of America’s remarkable gains in living standards since the nation’s founding in 1776,” he said. “Unfortunately, the label of ‘secret’ is appropriate: Too few Americans fully grasp the linkage between productivity and prosperity.”
To prove his point, Buffett turned to three industries in which Berkshire has a stake: freight, insurance and utilities. Productivity gains in those and other industries “have delivered awesome benefits to society,” he said.
There are consequences, though: Productivity gains in America and abroad can disrupt lives, Buffett said.
When low-cost competition drove shoe production to Asia, our once-prosperous Dexter operation folded, putting 1,600 employees in a small Maine town out of work. Many were past the point in life at which they could learn another trade. We lost our entire investment, which we could afford, but many workers lost a livelihood they could not replace.
The United States should deal with such disruptions not by regulating the drivers of increased productivity but by ensuring a “variety of safety nets” exist for Americans whose skills don’t match those valued by markets. In particular, he points to the Earned Income Tax Credit, viewed by many as one of the most effective policy tools to help the poor.

Innovation ‘has its dark side’

There are threats, notably cyber, biological, nuclear or chemical attacks on the nation, Buffett said.
The probability of such mass destruction in any given year is likely very small. It’s been more than 70 years since I delivered a Washington Post newspaper headlining the fact that the United States had dropped the first atomic bomb. Subsequently, we’ve had a few close calls but avoided catastrophic destruction. We can thank our government – and luck! – for this result.
Nevertheless, what’s a small probability in a short period approaches certainty in the longer run. (If there is only one chance in thirty of an event occurring in a given year, the likelihood of it occurring at least once in a century is 96.6%.) The added bad news is that there will forever be people and organizations and perhaps even nations that would like to inflict maximum damage on our country. Their means of doing so have increased exponentially during my lifetime. “Innovation” has its dark side.
Such risks are unavoidable, he said. And the consequences will probably be dire.
“No one knows what ‘the day after’ will look like,” Buffett said. “I think, however, that Einstein’s 1949 appraisal remains apt: ‘I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones.’ "

Mutual Funds Sour on Startup Investments

Looks like it will be a slow death and not a big bang like the dot com era. Aivars Lode

Fidelity, BlackRock and other giants cut value of their stakes at faster pace, make fewer new investments

An electronic advertisement for fantasy-sports company DraftKings at Madison Square Garden in New York. DraftKings tumbled in valuation by an average of 71% in the fourth quarter, an analysis of mutual-fund filings by The Wall Street Journal shows. Photo: Mark Lennihan/Associated Press 
By Rolfe Winkler and Scott Austin 
Mutual funds that helped fuel the technology boom are cutting the value of their startup investments at an accelerating pace and are making fewer new investments.
These are ominous signs for Silicon Valley, where a flood of money into young companies pushed valuations skyward, and subsidized hiring sprees and advertising binges at scores of companies.
The mutual-fund pullback threatens to deepen a wider downturn that has already led to falling valuations, shrinking ambitions and layoffs as the receding tide of capital forces startup companies of all kinds to focus on the bottom line rather than growth at any cost.
BlackRock Inc., Fidelity Investments, T. Rowe Price Group Inc. and Wellington Management run or advise mutual funds that own shares in at least 40 closely held startups valued at $1 billion or more apiece, according to securities filings analyzed by The Wall Street Journal.
For 13 of the startups, at least one mutual-fund firm values its investment at less than what it paid, the Journal’s analysis shows. Those firms are valuing the 13 companies at an average of 28% below their original purchase price.
The companies include mobile-messaging service Snapchat Inc., note-taking software maker Evernote Inc. and health-insurance brokerage Zenefits.
Just three stakes held by the same fund firms were underwater a year ago.
Meanwhile, the fund firms bought only 10 new stakes in startup companies in the fourth quarter, down from a peak of 32 in last year’s second quarter, according to Dow Jones VentureSource.
The markdowns have stunned many venture-capital investors and blindsided some executives at startups.
Lower valuations by mutual funds could make it harder for all but the most successful companies to raise additional capital at richer prices and lead to more funding rounds at lower valuations. That can sap employee morale and hurt efforts to lure new hires with stock options.
“That level of reporting and transparency has never really been a part of the [venture-capital] market, and all of a sudden it came out and it was a shock,” said Jeff Richards, a managing partner of GGV Capital, a venture-capital firm based in Menlo Park, Calif.
GGV owns a stake in Web analytics firm Domo Inc., which has been marked down 16% by Fidelity since August. The mutual-fund firm still values the investment 72% above its purchase price.
Fantasy-sports company DraftKings Inc., also partly owned by GGV, tumbled in valuation by an average of 72% in the fourth quarter. Regulators have alleged its service constitutes illegal gambling. DraftKings said daily fantasy sports is a game of skill.
DraftKings declined to comment on the markdown. Domo didn’t respond to requests for comment.
Because shares in private companies aren’t traded on a stock market, the mutual funds must estimate how much each startup’s stock is worth, reporting the amount every month or quarter.
The reversal began in the last half of 2015 as the ebullient, sky’s-the-limit mood in Silicon Valley grew anxious. Collapsing tech stocks and the punishing market for initial public offerings are now reining in the runaway optimism that gave 146 venture-capital-backed private companies a valuation of at least $1 billion as of February, up from 45 two years earlier.
So far this year, Fidelity and funds advised by Wellington have marked down their estimated values of 13 different billion-dollar startups by at least 5%. No startups have been marked up by 5%.
In contrast, 14 startups were marked up in value in last year’s second quarter and only three were marked down, according to the Journal’s analysis.
The Journal created an interactive graphic, called The Startup Stock Tracker, that shows the estimated share prices for startups valued at more than $1 billion by big mutual-fund firms.
BlackRock, Fidelity, T. Rowe Price and funds advised by Wellington are among the largest investors in startups by dollars invested, though those stakes are tiny compared with the firms’ overall assets.
According to securities filings, startups have gotten at least $3.8 billion from Fidelity and T. Rowe Price alone, representing roughly 12% of the startups’ total funding.
The mutual-fund firms declined to comment on why their opinion of some startups is souring. When analyzing startups, independent valuation committees at fund firms usually sift through financial information from the company and valuations of publicly traded rivals. The committees also look at the share prices paid by investors in previous funding rounds.
Mutual funds depend on a vibrant IPO market to cash in on their private-company investments, usually made by buying stock directly from startups. 
No U.S.-based, venture-backed technology companies have gone public so far this year. Last year, 16 such companies had IPOs, down from 30 in 2014. Their shares had fallen more than 30% on average as of mid-February.
The suffering stock market is likely to keep the IPO pipeline shut to companies that previously raised capital at lofty valuations and don’t want to go public at a lower price. Through Wednesday’s close, the technology-laden Nasdaq Composite Index was down 6.1% so far this year.
Many Americans own a piece of private technology companies through their mutual funds. Last year, about 45% of the funding rounds that valued a U.S.-based, venture-backed startup at $1 billion or more included a mutual fund, according to securities filings and data from Dow Jones VentureSource.
For example, securities filings show that Fidelity pumped at least $106 million into Zenefits last May as lead investor in a funding round that swelled the San Francisco company’s valuation to $4.5 billion.
The next day, Zenefits trumpeted the news in a recruiting note to potential employees. “In case you missed it, we just closed our EPIC series C of $500MIL at a valuation of $4.5BIL which makes us a UNICORN! That would be awesome for any company—but for a scrappy, two year old startup it’s LEGENDARY!”
In September, Fidelity marked down its Zenefits stake by 48% to $7.74 a share from $14.90. The cut left the company’s implied valuation at $2.3 billion.
Zenefits founder Parker Conrad was surprised by Fidelity’s move, according to people familiar with the matter. Zenefits called the mutual-fund firm to find out the reason for the cut, the people said.
Two of the people said Fidelity portfolio manager Steven Wymer attended Zenefits’s next board meeting. One person said he was asked about the markdown.
A Fidelity spokesman said an independent committee sets valuations for private-company investments, not portfolio managers.
In November, the Journal reported that Zenefits was falling short of its revenue targets and had started to curb expenses. Mr. Conrad resigned as Zenefits chief executive in February after coming under fire for what the company has said were inadequate compliance procedures and weak internal controls.
Last week, Zenefits fired 250 people, or 17% of its workforce. Zenefits declined to comment.
Andrew Boyd, head of global equity capital markets at Fidelity, said some executives at startups were surprised when the firm cut the estimated value of its investment. But few follow-up conversations have been contentious.
“They were looking for more clarity on how the [valuation] decision was made,” Mr. Boyd said.
Software company MongoDB Inc.’s finance chief sent a 500-word memo to employees after technology-news website The Information reported in August that Fidelity had marked down the company’s shares.
“Our public mutual fund investors have limited information about our business,” wrote Michael Gordon in the memo, which was reviewed by the Journal. “This is where the complexity and nuance comes in.”
Fidelity has cut its valuation of MongoDB in eight of the nine quarters since Fidelity made its investment in December 2013, valuing the shares 58% below what it paid. The software firm’s revenue roughly doubled to about $100 million last year, according to a person familiar with the matter.
But the company’s last valuation of $1.6 billion is a larger multiple of revenue than at publicly traded companies such as Hortonworks Inc., where revenue has been growing at a similar rate.
Fidelity now estimates that MongoDB is worth $6.98 a share. In an interview, Mr. Gordon said employees haven’t been focused on the markdowns.
Parker Conrad, the founder of health-insurance brokerage Zenefits. He was surprised when Fidelity Investments marked down its stake in the startup by 48% in September. The mutual-fund giant also is making fewer new investments in young companies. Photo: Steve Jennings/TechCrunch/Getty Images 
Securities filings earlier this week show that Fidelity marked down in January the value of stakes in 13 of the 26 startups tracked by the Journal. The cuts included a 17% drop for software company Nutanix Inc., which filed in December for an IPO. A Nutanix spokesman declined to comment.
In a sign of Fidelity’s caution, the mutual-fund firm didn’t mark up in January the value of any startups tracked by the Journal.
Fidelity also is making fewer new investments in startups because it “couldn’t reach mutually acceptable terms as often,” Mr. Boyd said. The number of new stakes fell to six in the fourth quarter from nine in the third quarter and 16 in last year’s second quarter, according to VentureSource.
Fidelity did invest a fresh $175 million in Snapchat in February at the same price per share where the mutual-fund firm invested last March, according to a person familiar with the matter.
T. Rowe Price bought two new stakes in startups during the fourth quarter, down from five apiece in the previous two quarters. The two new investments by Wellington were its lowest total since the first quarter of 2014.
The BlackRock mutual funds made no new startup investments in the fourth quarter, according to VentureSource.
BlackRock said its valuations “are based on approved pricing methodologies and utilize multiple sources of information.” T. Rowe Price said in a statement: “What we are observing now is that the market appears to be bifurcating” into companies that are executing and those that aren’t. Wellington didn’t respond to a request for comment.
The mutual-fund firms analyzed by the Journal remain far ahead in paper profits on most of their stakes in privately held billion-dollar companies.
For example, mutual funds that invested in car-hailing service Uber Technologies Inc. at $15.51 per share now value the stock at triple that price.
Uber raised funding in December that valued it at more than $60 billion, a record for any private venture-backed company.
But some venture capitalists anticipate further markdowns by mutual funds. That could make some startups more reluctant to seek mutual-fund money, since public disclosure of their valuations is watched so closely.
Mutual funds often still value their startup stakes at higher prices per share than venture-capital firms do. BlackRock said data-mining software firm Palantir Technologies Inc. was worth $10.70 a share as of Sept. 30. That was 61% more than venture-capital firm Founders Fund’s valuation of Palantir on the same day, according to fund documents reviewed by the Journal.
In December, BlackRock increased its Palantir valuation to $11.38 a share. Palantir and Founders Fund didn’t respond to requests for comment.
Despite the markdowns, some tech executives see a silver lining. Mr. Richards, the venture capitalist at GGV, said lower valuations by mutual funds are helping him convince entrepreneurs to scale back their expectations.