What Facebook’s latest stock move means for investors and the SEC — Charles Kane

MIT Sloan Senior Lecturer Charles Kane

MIT Sloan Senior Lecturer Charles Kane

From Fortune

Under Armour and Alphabet have similar stock structures.

Activist investors are fundamentally changing the investment market. They accumulate enough stock in publicly traded companies to influence who sits on the board, then pressure the management and board to focus on short-term returns at the expense of long-term investment. Facebook’s introduction of non-voting shares last week is a preemptive move to block this sort of intervention.

Currently, Facebook FB -0.21% has a dual-class stock structure, with Class A shares having one vote per share and Class B shares, which its founder Mark Zuckerberg and company insiders own, conferring 10 votes per share. The company intends to issue two Class C shares as a one-time stock dividend, which will grant economic ownership of Facebook, but no voting rights. This structure will preserve founder control, and enables Zuckerberg to liquidate a large portion of his shares to pursue philanthropic interests, yet still retain majority-voting control—without a majority of shares. It also means that, as Zuckerberg put it, “You don’t have to worry about losing your job over a couple of bad quarters or controversial short-term decisions, and that makes it easier to make the decisions you think are correct.” In short, predatory activist investors can’t take control and push him out.

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Here’s why negative interest rates are more dangerous than you think — Charles Kane

MIT Sloan Senior Lecturer Charles Kane

MIT Sloan Senior Lecturer Charles Kane

From Fortune

Europe and other parts of the world are in for big risks.

Desperate times call for desperate and somewhat speculative measures. The European Central Bank (ECB) cut its deposit rate last Thursday, pushing it deeper into negative territory. The move is not unprecedented. In 2009, Sweden’s Riksbank was the first central bank to utilize negative interest rates to bolster its economy, with the ECB, Danish National Bank, Swiss National Bank and, this past January, the Bank of Japan, all following suit.

The ECB’s latest move, however, was coupled with the announcement that it would also ramp its Quantitative Easing measures by increasing its monthly bond purchases to 80 billion Euros from 60 billion Euros — a highly aggressive policy shift. The fact that the ECB has adopted this approach raises two key questions: What are the risks? And, if the policy fails, what other options are left?

Negative rates are an attempt by the ECB to prod commercial banks to lend more money to businesses and consumers rather than maintain large balances with the Central Bank. In essence, it is forcing the banks to leverage its balance sheet to a higher level or the ECB will penalize the banks by charging interest on their deposits. Historically, such a practice would be highly inflationary, however, with oil prices falling to record lows combined with a slowdown in global growth, inflation is not feared. In fact, inflation is desired at a manageable level, as this would promote near-term growth in the economic markets.

This does not mean, however, that the ECB’s policy does not present risks. First, if the commercial banks decide to pass on the cost of the negative rates to their customers — in other words, they charge customers for keeping their savings in the bank in the same way central banks are now charging the commercial banks for keeping their money – the customers might simply withdraw their savings. In a worst-case scenario, this could create a run on the banks in Europe with customers hoarding their money rather than paying interest on deposits. This would inhibit the free flow of funds through the financial system — ironically, the very reason that negative interest rates were implemented in the first place.

Read the full post at Fortune.

Charles Kane is a Senior Lecturer in Technological Innovation, Entrepreneurship and Strategic Management Goup and also in the Global Economics and Management at the MIT Sloan School of Management.

Why the battle of computer services companies is good news for businesses — Charles Kane

MIT Sloan Senior Lecturer Charles Kane

MIT Sloan Senior Lecturer Charles Kane

In the early days of computers, companies used a fee-for-shared-service model for technology. It was common to pay a company like IBM rent for use of its mainframe machines. As computers became smaller and less expensive, businesses began to purchase their own equipment and the computer rental model went the way of the dinosaur. Interestingly, we’re now seeing a return to that old model, but instead of computers, businesses are renting web and cloud infrastructure services for apps and storage.

This is great news for small- and medium-size companies, as building the data centers to run those services is exorbitantly expensive. By only purchasing the infrastructure cloud services that they need from large companies like Microsoft, Google and Amazon, they eliminate the risk of that huge financial investment.

Even better, we’ve seen recent price wars among those service providers. Some of them slashed their prices by as much as 85 percent this spring in an effort to attract and retain customers.

I sit on the board of several companies that are dependent on web services and have seen this decision to rent play out several times. A good example is Carbonite, which is launching its computer backup services across Europe and recently joined the ranks of Amazon customers for web services. The decision for Carbonite was simple: If it were to build its own data center, not only would it cost excessive funds, it would have to maintain it and then (all too soon) upgrade it. It would be akin to building its own telephone or cable company instead of simply renting what it needs from a provider like Verizon or Comcast.

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IPO opportunities in the cloud — Charles Kane

MIT Sloan Sr. Lecturer Charles Kane

MIT Sloan Sr. Lecturer Charles Kane

From the Boston Business Journal

IPOs are making a comeback, according to Ernst & Young. E&Y surveyed 300 institutional investors and found that 82 percent had invested in IPO or pre-IPO stocks in the previous 12 months, compared with only 18 percent in the prior two years.

While the rebound has occurred across industries, investors clearly like certain kinds of companies more than others. Biotech has had a string of successful IPOs. This infusion of capital will allow companies to get their products to market faster, which should get us closer to curing or combating diseases. The social media industry also has been drawing IPO investors of late, despite Facebook’s bungled IPO in the spring of 2012.

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Don’t blame Apple — Charles Kane

From WSJ MarketWatch

The media spotlight has recently been on Apple Inc. AAPL +0.52%  for shifting profits overseas to avoid U.S. taxes. In its international tax strategy, though, Apple is no different from other American technology companies, which (like Apple) began moving manufacturing overseas starting in the early 1980s.

Initially, U.S. technology firms that went abroad during this period were drawn by the lower labor, sourcing, and procurement costs. They also found they could eliminate exchange-rate risk by producing and selling in the same currency.

But these companies soon discovered another important advantage of being global: favorable taxation.

Read the full post at MarketWatch.

Charles Kane is a Senior Lecturer in Finance at the MIT Sloan School of Management.