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ESB – Extremely Silly Behavior
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I am amazed, astounded, stupefied, by the reports of companies run by CEOs and CFOs, purportedly bright, who are twisting their companies like pretzels to issue special dividends in December ahead of the US "Fiscal Cliff."  Get a grip, folks.  This is so silly that it may even constitute dereliction of fiduciary duty,  for no doubt while you are doing this you are taking your eye off the ball.

Don't get me wrong--I understand companies which operate by the motto: "Our customers are our shareholders and our product is cash."  Nevertheless, the reported actions take this to extremes.

And I am not dismissing the idea of the "Fiscal Cliff" and the ramifications it may bring.  However, neither you, I or anyone else, including every last politician and pundit in Washington, D.C. has any idea how this will come out.  If you are making decisions now, particularly decisions involving your company's cash position and balance sheet, you are likely taking risks beyond Las Vegas odds.  And you are making assumptions that may not come to fruition.

Some hypothetical examples...

Suppose you are borrowing money to pay a special dividend in December.  What if the real outcome is that Congress decides dividends are tax free but that you can no longer deduct corporate interest expense?   Granted, highly unlikely, but we all know as much about this being the outcome as we do about higher taxes on dividends.  Nevertheless, if this were the outcome, you are going to look mighty silly.

Suppose Congress decides to pass a retroactive tax, at a special high rate, on all dividends disbursed in December 2012 and keeps the current rate going forward in January?  Again, we don't know, but this is as likely as anything else at this moment.

Perhaps Congress decides to provide a huge incentive for new plants and equipment purchased in 2013 and installed in the United States.  Suppose you just weakened your balance sheet with a special dividend and will not be able to participate, or, if you can, it will be at a higher interest rate because the rating agencies have downgraded your company.  Want to explain this one to shareholders?

Think about all the things you think are going to stay the same while you imagine what is going to happen with the "Fiscal Cliff."

The real reality is this.  A number of years ago, as I analyzed the viability of projects in various countries, we would assign a "country risk" to our analysis.  This was based on stability of the local economy and government.

In reality today, the "country risk" problem has expanded to be a worldwide one, affecting, in particular, the European Union and the United States.  There are no longer any safe havens.  Want to learn how to deal with it?  Study pulp and paper companies that have had to deal with it forever in places like Lebanon, Turkey, Iran and Pakistan.  They are way ahead of the Europeans and Americans on dealing with country risk for they have been dealing with it for a very long time.


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