Los Angeles Times - 01.08.2019

C2 THURSDAY, AUGUST 1, 2019 LATIMES.COM/BUSINESS

BUSINESS BEAT

The corporate world has
a new king of cash. The title
for the company with the
biggest financial reserves,
held by Apple for a decade,
has passed to Google’s par-
ent, Alphabet.
The switch in leadership
follows a concerted effort by
the iPhone maker to reduce
its liquid reserves, six years
after it first came under
pressure from activist in-
vestor Carl Icahn to pay out
more of its cash hoard. Ap-
ple’s holdings of cash and
marketable securities, net of
debt, has fallen to $102 bil-
lion, down from a peak of
$163 billion at the end of 2017.
Alphabet’s financial re-
serves have been moving in
the opposite direction. At
$117 billion, its cash pile has
risen by almost $20 billion
over the same period.
The rise of Google’s par-
ent to the top of the corpo-
rate liquidity rankings puts
its corporate wealth and
power on conspicuous dis-
play at a politically sensitive
moment. After being hit
with $9 billion in antitrust
fines by the European Union
in the last two years, it now
faces intense scrutiny in
Washington.
The company’s prefer-
ence for hoarding its money
and spending it on trying to
break into new markets,
rather than using it to re-
ward shareholders with buy-
backs or dividends, as Apple
has done, also antagonizes
some investors.
“In general, their at-
tempts to reinvent them-
selves with their new initia-
tives aren’t working out,”
said Walter Price, a portfolio
manager at Allianz Global
Investors. “I wish they’d re-
turn more cash to share-
holders and waste less.”
The cash buildup has
come despite a surge in capi-
tal spending. At $25 billion
last year — up from around
$13 billion in 2017 — much of
the money has been pouring
into real estate, as Google
has added to its office hold-
ings in cities such as New
York and built data centers

to support its growing cloud

computing business.

Ruth Porat, chief finan-

cial officer, has been at pains

to downplay the real estate

investments, emphasizing

that they are a one-off and

that, in a normal quarter,

70% of capital spending goes

into servers and other new

equipment.

The infrastructure to

support artificial intelli-

gence that Google had been

building “requires a ton

of compute power,”said

Youssef Squali, an analyst at

SunTrust Robinson

Humphrey. But he added

that, like some other big tech

companies, it had seen

higher spending on machine

learning feed through di-

rectly into higher revenue.

That had left Wall Street

generally comfortable with

the spending surge.

It is in areas beyond

Google’s core business that

the complaints persist.

Alphabet’s cash is pro-

duced almost entirely by its

search advertising business,

which has been supple-

mented by strong growth

from online video service

YouTube.

By contrast, Google’s

other businesses — such as

cloud computing, smart-

phones and home automa-

tion — are believed to have

been consuming cash. Al-

phabet has also lost $15 bil-

lion in the six years since dis-

closures began in businesses

beside Google — something

it describes as its “Other

Bets,” which include the

Waymo driverless car unit

and the Verily healthcare di-

vision.

Google had done enough

to “make the cut” in cloud

computing, where it is chas-

ing market leaders Amazon

Web Services and Microsoft,

Price said. But he added

that it had had little effect in

breaking into other markets.

Until last week, Alphabet

also stood out among big

tech companies for not tak-

ing a more aggressive stance

on returning cash to share-

holders after the passage of

U.S. tax law at the end of 2017.

The new law applied an im-

mediate — though reduced

—tax rate to companies’

overseas cash reserves, in

the process removing the in-

centive to sit on the money

rather than start paying it

out.

Apple has responded to

the change by spending $122

billion on buying back stock

and paying dividends in the

last 18 months.

Other companies to dig

deep include Cisco Systems,

which has cut its cash hold-

ings from $35 billion at the

time of the new tax law to

only $11 billion.

Alphabet’s stock buy-

backs, by contrast, have

been paltry. In the nearly

four years since it began re-

purchasing its own stock, it

has spent an average of only

$1.7 billion a quarter.

In that time, it has han-

ded out more new shares in

the form of employee stock

benefits than it has bought

back through its repurchase

program. As a result, the

payments have done noth-

ing to lift its earnings per

share — the reason investors

generally welcome buy-

backs.

Things could be about to

change. Last week, Alpha-

bet said its board had added

$25 billion to its stock buy-

back program, taking total

new repurchase authoriza-

tions to $37.5 billion since the

start of this year.

Porat said the increase

did not reflect any change in

Alphabet’s financial pri-

orities, and that its two top

goals were unchanged: to in-

vest in the long-term growth

of its existing businesses,

and to support acquisitions.

However, the move contrib-

uted to a strong stock-price

rebound on the same day

that the company reported a

rebound in revenue growth,

dispelling worries about a

sharp secular slowdown in

its advertising business.

Even the heightened rate

of buybacks may not cap the

growth in Alphabet’s cash

mountain. Its free cash flow

this year was forecast to top

$30 billion, rising to almost

$40 billion next year, said

George Salmon, an analyst

at Hargreaves Lansdown.

The new buyback intentions

“don’t represent a step

change” big enough to re-

duce the company’s total re-

serves, he said.

Many investors are now

counting on a steady in-

crease in Alphabet’s stock

repurchases as its search ad-

vertising business continues

to mature.

One potential avenue for

using the money — making

acquisitions — looks less

likely given the regulatory

backdrop, according to

some investors.

“The U.S. government is

going to take care of the

[mergers and acquisitions]

question by making it more

difficult to do deals,” said

Jim Tierney, a chief invest-

ment officer at Alliance-

Bernstein. Along with grow-

ing maturing in the core

business, that was likely to

make the $25-billion repur-

chase authorization an-

nounced last week “the tip of

the iceberg,” he said.

Facebook, with less than

half the cash reserves, has

also turned its thoughts to

distributing more of its ex-

cess cash, heavily outspend-

ing Google last year on stock

repurchases.

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Alphabet builds a huge cash reserve

SOME analysts want Alphabet to spend its cash reserves to reward shareholders with buybacks or dividends.

Mark LennihanAssociated Press

Google’s parent tops

Apple in liquidity as

hoard is scrutinized.

By Richard Waters

Prosecutors in Germany
charged former Audi Chief
Executive Rupert Stadler
with fraud and other of-
fenses, accusing the dis-
graced manager of continu-
ing to sell cars with manipu-
lated engines even after the
scandal burst into the open
in late 2015.
Stadler, who was charged
alongside three others, was
detained for months last
year after concerns he may
have tampered with a wit-
ness. Munich prosecutors
are accusing the executive of
knowing about the deliber-
ate diesel-engine rigging by
September 2015, according
to a statement Wednesday.
Since the diesel scandal
was uncovered, Volkswagen,
which owns Audi, has been
repeatedly dragged back
into its biggest corporate cri-

sis. Allegations have been

swirling since about who at

the top knew what, and

when, about the manipula-

tion of as many as 11 million

diesel cars worldwide.

Stadler’s attorney, Thilo

Pfordte, did not immedi-

ately reply to an email seek-

ing comment, and Audi de-

clined to comment beyond

saying that all individuals

should be presumed inno-

cent until proved otherwise.

Once seen as a possible con-

tender for VW’s top job,

Stadler was arrested in June

2018 and spent months in

jail. Audi, which had previ-

ously extended his contract,

suspended him shortly after

he was detained.

VW’s biggest profit cen-

ter, Audi quickly became im-

plicated in the cheating af-

fair, setting back Volks-

wagen’s attempt to contain

fallout. The focus turned to

Stadler as prosecutors

sought to untangle the ori-

gins of the scandal. In the

years that followed, re-

peated recalls of Audi vehi-

cles over their emission per-

formance — including

Porsche cars with engines

developed by VW — contin-

ued to taint the brand.

In April, Braunschweig

prosecutors charged former

Volkswagen head Martin

Winterkorn with serious

fraud for his role in the scan-

dal that has so far cost the

carmaker about $33 billion.

More investigations are

pending, including one into

market manipulation tar-

geting Volkswagen CEO

Herbert Diess, Chairman

Hans Dieter Poetsch and

Winterkorn over allegations

that they informed markets

too late about the diesel case

and its effect. Volkswagen

has said it couldn’t have an-

ticipated the dramatic fall-

out from the revelations.

GERMANprosecutors contend former Audi Chief Executive Rupert Stadler
knew about Volkswagen’s deliberate diesel-engine rigging by September 2015.

Tobias SchwarzAFP/Getty Images

Audi ex-CEO charged with fraud

in VW diesel emissions scandal

bloomberg
Bayer’s chief executive
said he’d consider a “finan-
cially reasonable” settle-
ment of litigation over the
weedkiller Roundup as the
caseload swells and the com-
pany’s shares slump anew.
The number of lawsuits
from people in the United
States who say the herbicide
caused them to develop can-
cer rose by about 5,000 to
18,400, Bayer said in a state-
ment. The company also re-
vealed more troubles at its
crop-science division Tues-
day after bad weather
curbed demand from far-
mers.
Quarterly sales and earn-
ings missed estimates and
the German company ques-
tioned its ability to meet its
full-year forecast.
CEO Werner Baumann
has staked his credibility on
last year’s $63-billion take-
over of Monsanto Co., saying

his company is better off bal-

ancing its portfolio between

agriculture and healthcare.

But the surge in U.S. law-

suits alleging that Roundup

— which Bayer inherited

from Monsanto — causes

cancer suggests that settling

the claims will become more

expensive than previously

thought, heaping more pres-

sure on Baumann three

months after he received an

unprecedented rebuke from

shareholders.

“The jump in lawsuits is

worrying,” said Mustaq Ra-

haman, a credit analyst at

Bloomberg Intelligence.

“This set of results will do lit-

tle to stem calls for more

dramatic action, including a

split.”

Baumann said on a con-

ference call that he is open to

a settlement as long as it re-

solves all Roundup litiga-

tion. He repeated that the

herbicide is safe, that the

cases have no merit and that

the company is “construc-

tively engaging” with court-

appointed mediator Ken

Feinberg.

After the call, Bayer de-

clined to say how much a “fi-

nancially reasonable” sum

would be or whether he was

referring only to the current

load of cancer cases or the

possibility of future suits

tied to other ailments.

Bayer’s definition of what

a reasonable settlement

amount would be for all the

Roundup cases isn’t likely to

match up with estimates

from lawyers for users of the

weedkiller, said Carl Tobias,

a professor at the University

of Richmond’s law school

who teaches about mass-

tort litigation.

“They aren’t going to like

the numbers,” Tobias said.

Bayer CEO eyes settlement

Lawsuits alleging

Roundup causes

cancer have soared.

bloomberg

BAYER’S Werner Bau-

mann wants to resolve all

Roundup litigation.

Roberto PfeilAFP/Getty Images

Afederal judge in Mon-

tana overturned an Internal

Revenue Service rule that

allowed many political non-

profit groups to keep their

donor lists private.

The ruling upends a

change the IRS made last

year that permitted so-

called Section 501(c)4

groups, known as “social

welfare” organizations, to

keep their donor lists pri-

vate. A federal judge said the

IRS didn’t follow proper pro-

cedure in writing the rule

and needs to let the public

weigh in on the change be-

fore altering the tax code.

“Then, and only then,

may the IRS act on a fully

informed basis when mak-

ing potentially significant

changes to federal tax law,”

U.S. District Judge Brian

Morris said in the opinion

Tuesday.

Montana Gov. Steve Bull-

ock, who is also a Demo-

cratic presidential candi-

date, sued the IRS, saying

the change to what groups

must report to the IRS lim-

ited information states re-

ceived about political

donors. The IRS rule re-

quired the groups to disclose

their donors only if an audi-

tor requested to see it.

New Jersey was also a

plaintiff with Montana and

has filed a separate suit in

New York. The state’s attor-

ney general, Gurbir Grewal,

called the decision a “big win

for democracy.”

“Not only did the IRS try

to make it easier for dark

money groups to hide their

funding sources, it did so be-

hind closed doors,” Grewal

said in a statement.

The ruling is a blow to

Treasury Secretary Steven

T. Mnuchin, who said the

rule protected donor privacy

because the IRS could en-

force tax laws without that

information. Democrats

had criticized the move, say-

ing it opened up the possibil-

ity for foreign interests to in-

fluence elections.

Among the organizations

with 501(c)4 status are the

National Rifle Assn., the

Democratic Socialists of

America, the AARP and

Americans for Prosperity,

the conservative group

backed by the billionaire

brothers Charles and David

Koch.

The groups can be en-

gaged in politics so long as

they don’t spend more than

half of their money on cam-

paign advertisements or ac-

tivities to sway an election.

Donors do not have to be dis-

closed to the public.

IRS rule allowing private

donor lists is overturned

bloomberg