Most observers agree that creating a tax structure that allows U.S. companies to be competitive around the world is a major positive. The recent tax law should accomplish that goal.
Basically, corporate tax rates go from 35 to 21 percent. This should level the global corporate playing field and stop the trend of corporations moving headquarters overseas for tax purposes. Minnesota would likely have not lost the headquarters of Pentair and Medtronic if this tax law was in place then.
It is no wonder that stock prices continue to reach new highs. A tax reduction of this magnitude is a direct increase in corporate cash flow. Cash drives all businesses.
This raises a key question: What will CEOs, senior executives, and corporate boards choose to do with their increased cash flow? Americans are encouraging them to pursue a path that has the highest probability of benefiting all U.S. workers, and, in turn, the health of our communities. The risk is that their decisions could broaden the gap between the wealthy and poor.
There are many potential choices for companies to make with enhanced free cash flow. One that should be avoided is using the money for executive compensation and shareholders. This option will do nothing for organic growth and won’t help U.S. workers or companies. Buying back stock is another option for public companies, and while this potentially benefits shareholders, it does nothing for the company’s competitive position.
A third option is to acquire another company. While this can strengthen a company’s position, mergers do little for organic growth. Reducing costs is usually a priority in acquisitions, which can eliminate jobs and reduce opportunities for remaining workers.
A fourth option, and one that’s an attractive opportunity to bolster organic growth, is to invest in people, property, plants and equipment in international markets. Emerging markets can be especially attractive, since their growth rates are faster than the U.S. Too often, though, this option is used to outsource to achieve a lower cost structure, not to improve a company’s strategic position.
This is why globalization has mostly not worked for the average U.S. worker. It would likely have worked fine if companies had used their increased cash flow from moving manufacturing to low cost countries to invest organically in their businesses. Unfortunately, this did not happen.
A fifth option, investing in the U.S., is the preferred route to achieve the broadest benefit. Investing in domestic plants, equipment, training, wages, etc., may be the riskiest form of growth, but done right it holds the most promise to help all workers and produce sustainably growing companies.
We need companies enjoying the benefits of this major tax overhaul to consider taking this risk. Investing organically shows they believe in opportunity, believe in their strategic abilities, believe in the creativity of their companies and their people.
The U.S. has bought into organic products and holistic health. It is very clear that companies that grow organically (growing internally instead of buying other companies) command a higher price to earnings valuation on the stock market. They are holistically healthy.
In fact, the first thing financial analysts do when examining a company is to peel out acquisition growth and look through the numbers to determine organic growth. It is a key measure of corporate health. Organic growth “builds companies to last.” Organic growth creates jobs.
Minnesota has a strong history of organically growing companies. 3M is a great example. Over the years the company has invested organically in R & D and people far beyond the levels of its competitors. Over the long term, 3M’s organic growth has outperformed its peers, as has its stock performance.
Organic growth will require courage and vision. There is no question that mergers, acquisitions, and occasionally buying back stock can be important parts of a strategic plan. However, we call on corporate leaders to prioritize organic growth as a key strategic path. After all, business should be a calling to grow healthy companies, employees and communities.
Paul P. Karos is former president of equity capital markets at U.S. Bancorp Piper Jaffray; research analyst, C.S. First Boston; and former head of equity at Whitebox Advisors.