The Microsoft deal for Skype is the surest sign that business hasn’t a clue what to do with its money

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Microsoft has bought Skype for $8.5 billion.

I declare an interest: I use the products of both companies.

And I declare another interest. I agree with those analysts who say Microsoft has got this one very, very wrong. It's not just the price is too high, although I cannot see how something which is fundamentally free could be worth as much as Microsoft paying for it.  The real issue is something fundamentally more important than that.

As the Bank of England noted yesterday,  they use an intense myopic  tendency within financial markets at present.  They have always taken a short-term view,  but that trend is becoming increasingly prevalent.  I suspect that the Microsoft / Skype  deal is indicative of this.  Microsoft, like most large businesses, is sitting on a massive pile of cash, hidden somewhere in the world, as far away from a tax authority as possible. There is good reason for this.

First,  it seems that businesses run out of any ideas  about what really  to really invest in.  I stress, in this regard Microsoft buying Skype is not an investment. It is simply a change of ownership.  investment involves the creation of new products and services, new infrastructure, new training, and so on.  Because it is not investing it is sitting on a massive pile of cash.

Second, businesses like Microsoft are sitting on a massive pile of cash because they will not take cash back to the USA where it might be taxed. There business investment criteria are being completely messed up by their paranoia about making a cash return to the governments that underpin their viability, and which give them their licence to operate.  I have little doubt that the funding for the Skype deal will come from outside Microsoft USA,  which is one reason why Microsoft is willing to pay so much more for the company than it might be worth, and a good reason why the shareholders of Microsoft should question the judgement of the management who would rather overspend on buying assets at excess value than  return funds to shareholders.

Third, as this shows, far from business needing more tax cuts to encourage innovation and investment, they are actually so awash in cash, and enjoy such low tax rates, but they are now unable to work out what to do with their money. Despite this our government is giving tax cuts to UK business, even though everyone else in society will be seeing tax increases.  All the rhetoric of business supports this, but all that rhetoric is utterly untrue. The reality is that big business is bankrupt of ideas, but awash with cash, and pays little or no tax, a combination that results in the market failures that the Bank of England have so accurately described.

So what's the conclusion?

1)  Tax incentives for big business to buy and sell other enterprises should be removed. This is simply wheeler dealering, and adds no value to society.

2)  There is no justification for tax cuts for big business,  so they should be cancelled.

3)  There is no prospect whatsoever of big business creating the investment that will fuel growth in our economy. All the incentives to invest already exist. They have the money (although small business has not). They are facing low interest rates, low wage rates, low property costs, a government willing to waive rules to let them establish new activities, and yet they won't.  So let's face reality, there is no prospect of private sector fuelled growth in the UK, or right now, just about anywhere else ( Germany excepted).

4)  In that case there is only one  prospect of economic recovery in the UK, and that comes from government spending, funded by increased tax charges on business,  largely by closing the loopholes they are using to generate large piles of cash  hidden in tax havens.


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