First up, some background on how Intel lost its mojo.
Stock buybacks by the issuing corporations were illegal in the United States until 1982 when the SEC decided, despite the practice being a form of stock manipulation—artificially boosting a company's share price above what it would otherwise be—and a straight-up tax dodge—lifting the share price results in capital gains which are taxed at much lower rates than the ordinary income that a cash dividend is subject to—when the SEC decided to implement rule 10b-18 (17 CFR § 240.10b-18 - Purchases of certain equity securities by the issuer and others.)
For a company's upper management stock buybacks have the added benefit of dramatically lifting the value of stock-based compensation, to the point that cash and perks are now looked at as merely spending-money while the real wealth-builders are the stock grants and options to purchase same.
I'll skip the discussion of how the differential between ordinary income and capital gains tax rates no longer achieve their stated purpose—capital investment and job creation—and go straight to one of the best academic researchers in this area of the finance business, coincidentally using Intel corporation as one of his examples. From February 2023's "Why Biden’s 4% buyback tax could boost stock prices and dividends":
....William Lazonick, Professor Emeritus of Economics at UMass has done some very interesting work on the interplay of resource mis-allocation (those cash flows) with declining innovation and financialization/value extraction versus value creation in tech industries. His book, "Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States", although going on fifteen years old is still pertinent. Here's an example.
In June 2021 we linked to a New York Times article in "How the World Ran Out of Everything" which, among much else had these three little throwaway lines:
....Still, the shortages raise questions about whether some companies have been too aggressive in harvesting savings by slashing inventory, leaving them unprepared for whatever trouble inevitably emerges.
“It’s the investments that they don’t make,” said William Lazonick, an economist at the University of Massachusetts.
Intel, the American chip-maker, has outlined plans to spend $20 billion to erect new plants in Arizona. But that is less than the $26 billion that Intel spent on share buybacks in 2018 and 2019 — money the company could have used to expand capacity, Mr. Lazonick said.....
Twenty months later we read at Barron's:
Intel’s Quarter Was Brutal. There’s Still No Bottom In Sight.
“The magnitude of the deterioration is stunning," one Wall Street analyst wrote on Friday. There's no easy fix in store for the chip maker.
In total Intel has bought back $110 billion of their own stock, treating what was once one of the crown jewels of American technology as just another corpus to asset-strip, like some private-equity-owned packaged food company with maybe a dividend recap down the road before the equivalent of a bankruptcy bust-out.
So Intel, having spent all their money buying back stock, and their CEO saying Nvidia just got lucky—December 2023: "Intel CEO: Nvidia Got 'Extraordinarily Lucky' in Dominating the AI Market" (NVDA; INTC), lobbied for the CHIPS Act and yesterday we read, from the White House:
Funding catalyzes $100 billion in private investment from Intel to build and expand semiconductor facilities in Arizona, Ohio, New Mexico, and Oregon and create nearly 30,000 jobs
Today, President Biden will travel to Chandler, Arizona, to visit Intel’s Ocotillo campus and announce that the Department of Commerce has reached a preliminary agreement with Intel to provide up to $8.5 billion in direct funding along with $11 billion in loans under the CHIPS and Science Act.....
And just when you thought things couldn't get any sleazier, Reuters cuts directly to the chase on what is actually going on here. Also March 20:
Arizona independents in play as Biden pushes big Intel investments
President Joe Biden's move on Wednesday to pump $19.5 billion into Intel's expanding chip-making business could pay dividends with a critical part of the American electorate his Democrats need to win over: independents in the swing state of Arizona.
The move will create thousands of jobs in the Southwestern border state that is expected to play a critical role in determining the Nov. 5 elections for president and Congress. Recent polling shows the economy as Arizona voters' No. 2 concern after immigration.
In addition to the close-fought contest between Biden and Republican challenger Donald Trump, Arizona voters will be choosing a successor to retiring Senator Kyrsten Sinema, a Democrat-turned-independent, and deciding two highly competitive races for House of Representatives seats now held by Republicans.
"The potential could be independent voters," said Thom Reilly, a professor at Arizona State University's School of Public Affairs, who noted that independents are the state's largest voting bloc and represented about 40% of voters in the 2022 midterm elections.
"Independents came out in significant numbers for Democrats in 2022," said Reilly, who added that Wednesday's news could carry weight with the state's large and growing numbers of youth and Hispanic voters, as well as California transplants.
The funds come from the 2022 CHIPS and Science Act, which slated around $52 billion in federal government subsidies to support the domestic production of semiconductors, coupled with about $24 billion worth of investment tax credits.
In addition to Arizona, funds will go to Ohio, home to another key Senate race, New Mexico and Oregon. Intel estimated the new plants will create 3,000 new jobs in the company and another 6,000 spots for the construction workers who build them.
Arizona will play a critical role in determining whether Democrats can protect their slim 51-49 majority in the Senate. The race will pit Democratic U.S. Representative Ruben Gallego against Republican former television broadcaster Kari Lake, a vocal Trump supporter.
TIGHT CONTEST
Biden won Arizona in a tight 2020 race against Trump. A Feb. 22 Emerson College poll of 1,000 registered voters in the state had Trump leading Biden 46% to 43%, which is within the margin of error of 3 percentage points. In that same poll, Gallego led Lake 46% to 39%, with 15% undecided.Intel said the new, expanded facilities will be in the city of Chandler, about 20 miles (32 km) southeast of Phoenix. That puts it within driving distance of the state's two most competitive House districts. With Republicans holding a narrow 219-213 majority, a few changes could flip control of the chamber.
Both those seats are held by Republicans, Representatives David Schweikert and Juan Ciscomani, who are expected to face tough races against Democrats. Republicans and Democrats hold their primary elections on July 30....
....MORE
If interested see also:
- "Managing Decline: The Economy of Value Extraction"
- "With CHIPS Act, US Risks Building a White Elephant" (incentives matter)
- "Vampires at the Gate? (Finance and Slow Growth)"
- "Share Buybacks and the Contradictions of 'Shareholder Capitalism'”
- Taibbi: "The S.E.C. Rule That Destroyed The Universe"
- Harvard Business Review Announces "The Best Management Article Of 2014" (it's by Lazonik)
And here's some more from Professor Lazonik in that 2021 New York Times piece:
"How the World Ran Out of Everything"
....The most prominent manifestation of too much reliance on Just In Time is found in the very industry that invented it: Automakers have been crippled by a shortage of computer chips — vital car components produced mostly in Asia. Without enough chips on hand, auto factories from India to the United States to Brazil have been forced to halt assembly lines.
But the breadth and persistence of the shortages reveal the extent to which the Just In Time idea has come to dominate commercial life. This helps explain why Nike and other apparel brands struggle to stock retail outlets with their wares. It’s one of the reasons construction companies are having trouble purchasing paints and sealants. It was a principal contributor to the tragic shortages of personal protective equipment early in the pandemic, which left frontline medical workers without adequate gear.
Just In Time has amounted to no less than a revolution in the business world. By keeping inventories thin, major retailers have been able to use more of their space to display a wider array of goods. Just In Time has enabled manufacturers to customize their wares. And lean production has significantly cut costs while allowing companies to pivot quickly to new products.
These virtues have added value to companies, spurred innovation and promoted trade, ensuring that Just In Time will retain its force long after the current crisis abates. The approach has also enriched shareholders by generating savings that companies have distributed in the form of dividends and share buybacks.
Still, the shortages raise questions about whether some companies have been too aggressive in harvesting savings by slashing inventory, leaving them unprepared for whatever trouble inevitably emerges.
“It’s the investments that they don’t make,” said William Lazonick, an economist at the University of Massachusetts.
Intel, the American chip-maker, has outlined plans to spend $20 billion to erect new plants in Arizona. But that is less than the $26 billion that Intel spent on share buybacks in 2018 and 2019 — money the company could have used to expand capacity, Mr. Lazonick said.
Some experts assume that the crisis will change the way companies operate, prompting some to stockpile more inventory and forge relationships with extra suppliers as a hedge against problems. But others are dubious, assuming that — same as after past crises — the pursuit of cost savings will again trump other considerations.....
That 2021 CHIPS Act/White Elephant article in the bulleted list fleshes out some of the above:
....Several U.S. tech companies now lobbying for the CHIPS Act have squandered past support from the U.S. government while instead showing more appetite for share buybacks to boost company stock prices. Among the Semiconductor Industry Association (SIA) corporate signatories of a recent letter to President Biden, Intel, IBM, Qualcomm, Texas Instruments, and Broadcom did a combined $249 billion in buybacks over the decade 2011-2020, according to William Lazonick, Professor of Economics Emeritus at the University of Massachusetts.
Intel lags behind TSMC and Samsung in process technology in part because of a swing toward buybacks, according to Lazonick. While Intel spent $50 billion on capital expenditures and $53 billion on R&D during the past five years, it also lavished shareholders with $35 billion in stock buybacks and $22 billion in cash dividends, which altogether used up 100 percent of Intel’s net income. Intel’s distributions to shareholders have been far greater than those made by either Samsung or TSMC, according to Lazonick.
Like Intel, IBM also decades ago focused on maximizing shareholder value. After drastically cutting headcount during the 1990s, IBM began distributions to shareholders in the form of buybacks, even as from 1996 through 2020 the company increased its annual dividend payouts. IBM did $51.4 billion in buybacks (79 percent of net income) in 1995-2004 and $119.7 billion (93 percent) in 2005-2014....
