This week, Verizon and its bankers begin shopping the world’s largest issuance of corporate debt. The company is looking for a blockbuster $20 billion loan at an interesting time for the bond world. Interest rates are far higher than they were a few months back, but still low by historical standards—the market’s appetite for a huge new swath of bonds will tell us a lot about where investors think rates are going. But for the actual world, this record-setting proposition is surprisingly boring. A never-before-seen spurt of corporate borrowing isn’t going to finance some exciting new investment that will bring new jobs, new products, and new competition to the marketplace. Instead, as with Apple’s previous record-setting debt sale earlier this year, the Verizon debt is being raised for what amounts to financial shenanigans. It’s a dull outcome for America’s business writers, and a sign of the excruciating malaise in corporate America that continues to hold back the national economy.
Verizon is incurring the debt to finance the largest corporate acquisition since 2000, and the third-largest of all time. That itself sounds pretty exciting—a throwback to the 1990s era of epic deal-making. The two larger acquisitions, Vodafone’s purchase of the German mobile phone operator Mannesmann and AOL’s acquisition of Time Warner, both remade industries. But what Verizon is doing will reshape precisely nothing: It’s buying Verizon Wireless. Most consumers will not notice any difference. Indeed, most consumers probably (and sensibly) assume that Verizon already owns Verizon Wireless, since the companies share a logo and a name.
But Verizon Wireless is not a subsidiary of Verizon. This part is somewhat complicated. Back in 2000, when M&A meant something, the British wireless company Vodafone was looking to expand aggressively. That’s how the blockbuster Mannesmann deal took place. To succeed in the American market, Vodafone and Mannesmann believed they needed a giant network—far larger than the fragmented regional ones that then dominated the space. So rather than spending the money to cover the entire United States, they formed a joint venture with two U.S. telecom companies—Bell Atlantic and GTE—which themselves were in the process of merging as Verizon. Vodafone bought a pager network operator called AirTouch and then merged it with the Bell Atlantic and GTE wireless resources to form Verizon Wireless. Vodafone owns 45 percent of the company, and Verizon owns 55 percent.
It’s been a huge success. So huge that year after year Verizon regrets not owning the whole thing. So huge that year after year Vodafone doesn’t want to give it up. All this acquisition means is that the two firms finally settled on a price and figured out strategies to minimize the tax bills from the sale. Verizon is borrowing a bunch of money and handing it to Vodafone, which will largely kick it out to shareholders. No actual investments are taking place.
The second-largest corporate debt issuance was similarly dreary. Rather than invest his company’s vast profits and enormous cash stockpile in expanded operations, Apple CEO Tim Cook wanted to increase dividends. It was more tax-advantageous to borrow the money—with the cash stockpile as implicit collateral— than simply to pay out the cash Apple already had on hand to shareholders. Clever financial engineering, but hardly an investment in the future.
These kinds of financial high jinks are inherent to the business world. But it’s depressing and disturbing that this is what the biggest deals and most aggressive fundraising in corporate America look like today.
For all the hype that the world of venture capital and startups attracts, the bulk of business investment is in established firms using retained profits or tapping debt markets. But today’s firms aren’t thinking big. The business lobby likes to complain about taxes and regulation, but whatever the sins or merits of the Obama administration, corporate profits have soared to over 12 percent of GDP while net investment has withered to about 4 percent.
Some of the mega-deals of yesteryear were disasters. But the spirit that gave us the AOL Time Warner fiasco also brought Vodafone into continental Europe and built America’s largest and most successful mobile phone network. This kind of investment is also how corporate profits transform into job creation and rising incomes. It’s no coincidence that the merger mania of the late 1990s was also a time of sky-high investment, full employment, and rising wages for rank-and-file employees.
Getting back to a healthier economy is going to take better public policy. But it will also take a bolder, more imaginative executive class that’s willing to tap financial markets to buy in to big ideas and big investments, rather than just buying up their own stock.
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