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Paul Vaaler Blog- 3/14/18

The WCCO Morning News with Dave Lee
March 14, 2018 - 8:52 am
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What do tariffs, Tillerson and tech stocks have in common? 

When one goes up the other two go down.  25% steel and 10% aluminum tariffs announced last week may be great great for firms like Nucor Steel and Alcoa and workers in the Steelworkers and Aluminum Workers International unions.  But they're bad for everyone else who use steel and aluminum, and that's virtually every firm, but especially high-tech manufacturing firms in automotive and aerospace industries.  Thus tariff announcements, if credible, bring down the stock market, especially the tech-stock heavy Nasdaq. 

What about Tillerson, that is, Rex Tillerson, the now former US Secretary of State.  He got fired on Tuesday morning via Presidential tweet --thank you, Twitter, for taking over for the White House Press Secretary Sarah Huckabee-Sanders.  When he went down, so too again did the stock market: the Dow-Jones Industrial Index dropped 171 points, about 0.67%; the tech-stock heavy Nasdaq Composite Index dropped 77 points, more than a 1% drop. 

Here's where you can learn more about these trends.  

Analysts say the drop has to do with "uncertainty" associated with any sort of leadership change, but I think it's more. than, that. Tillerson's fall is a blow to free trade, just as Economic Advisor Gary Cohn's departure last week is a blow to free trade.  Read about them both here

Tech firms in the US are more likely to be exporting firms --think of Intel, Boeing, Lockheed Martin.  Trump is considering new tariffs on Chinese tech, telecom and apparel goods worth more than $60 billion.  Read about it here.  Expect the Chinese to retaliate against US exports like agricultural commodities and high-tech goods, both important to the Minnesota economy.  Tariffs, Tillerson and tech stocks:  One goes up, the other two go down.

Eden Prairie-based LIfetouch, the photographic portrait firm, is getting bought by the online photographic services firm, Shutterfly, for $825 million.  We found that out last January.  This month, however, Lifetouch attracted a lawsuit from an employee now seeking to create a class of employees holding that Lifetouch executives were unjustly enriched while the exmployee stock option program (ESOP) was mismanaged and lost value.  Here's where you can learn more about this lawsuit.  This is a "but for" lawsuit.  But for bad business decisions by those Lifetouch employees and bad oversight by the ESOP trustees, then current and former employees vested in the ESOP would be getting more with the Shutterfly acquisition.  We often see such lawsuits but typically in larger, publicly owned and listed firms.  Lifetouch is a privately-owned firm.  It's harder to value those shares because they don't trade on an exchange each day.  It's only when extraordinary events occur, like an acquisition, that valuation.  No matter what happens with this lawsuit, I think it represents a trend where employees assert their interests via ESOPs and other such vehicles to hold senior executives to account in acquisition and other "control" transactions.  Senior executives typically receive big bonuses from the acquiring firm, no matter how much value they created or destroyed for employee shareholders.  Lifetouch suggests that employee shareholders won't put up with that.  Other private firms take note.

Ever heard of the CFIUS:  The Committee on Foreign Investment in the United States?  Here's where you learn about the CFIUS.  It's an inter-agency committee with members from legislative and executive branches.  And its job is to screen proposed foreign investments for their national security implications.  The CFIUS rarely investigates a proposed foreign investment and even more rarely stops such an investment.  But it recently did both.  On Monday the CFIUS recommended blocking and President Trump confirmed the block of Singapore-based Broadcom Ltd.’s $117 billion hostile bid for San Diego-based Qualcomm Inc.  It caps a remarkable series of moves by the Trump administration reflecting officials’ concerns about an intensifying arms race between the US and China over advanced technologies.  Qualcomm makes the equipment for 5G (fifth generation) wireless technologies.  The Trump Administration thinks Qualcomm's acquisition by Broadcom would deprive US firms as well as US intelligence and military agencies of a reliable domestic source for those technologies.  That's strange.  Ever heard of this other 5G technology maker, Intel?  Yeah, Intel, another multi-, multi-billion dollar 5G technology maker in California.  Indeed, they have more 5G patents than Qualcomm as this article suggests.   So if there are US sources for this technology other than Qualcomm then why is Trump blocking the acquisition?  Remember, Broadcom's bid is a hostile one. Qualcomm wants much more than $117 billion from them or someone else.   Politics is simply business negotiation by other means.

Have a great week!

Paul Vaaler

Associate Professor and John and Bruce Mooty Chair in Law & Business, Strategic Management & Entrepreneurship, Carlson School of Management

Listen for Paul every Wednesday morning at 8:20am on the Morning News with Dave Lee!