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Is the Stock Market Accurately Valuing Your Company?

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Traditionally, price discovery — determining a company’s fair value price — is based on the interactions of buyers and sellers in a marketplace. The publicly quoted share price demonstrates how capital markets value a company, and it’s the basis upon which the company issues debt and equity. It also helps determine how the company allocates capital towards paying dividends, buying back company shares, compensating employees, paying down debt or reinvesting in the enterprise for future growth.

But today, five trends are colliding to distort how markets are pricing companies. The dangers of this distortion, especially at a time of buoyant stock markets, is that company executives and investors use these incorrect valuations as a basis to enter unaffordable M&A transactions and/or overleverage the company. The five trends are:

1. Low Interest Rates

Historically low interest rates, massive stimulus in response to the global pandemic, and the rising threat of inflation are leading to questions on appropriate discount rates to value a company in its entirety — its equity and its debt, including its pension obligations.

Low interest rates are also fueling enormous money flows into private capital, as are lower expected returns from public markets. Private equity investors are sitting on approximately $2.5 trillion in cash, according to Preqin. That is the highest on record and more than double what it was five years ago. Looking ahead, venture capital and private equity combined ware predicted to more than double their assets from $4.4 trillion at the end of 2020, to $9.1 trillion by 2025.

Capital flows to private equity have been accompanied by a decline in publicly traded companies. According to the Wilshire 5000 Total Market Index, the number of publicly listed U.S. stocks peaked at a record of 7,562 in 1998. At the end of 2020, there were fewer than 3,500. This decline means there are fewer public peers for business leaders to value their companies against, and less liquidity for companies as capital drains from the public capital markets.

2. Shift Towards Passive Investing

Another shift occurring across the investor landscape that can affect company value is the trend away from active investing toward passive funds. From 1995 to March 2020, passive funds grew from 3% of equity markets to make up 48% of assets under management in equities as of March 2020, according to a paper by the Boston Fed.

As of 2019, passive funds are estimated to be around $4.3 trillion, and they’re expected to reach parity with active funds with each totaling $13.4 trillion in assets by 2025, according to Price Waterhouse Coopers.

The growth in passive funds can materially improve stock price stability in the markets, reducing volatility in the shareholder register and potentially in the stock price itself, because passive funds strictly track benchmarks, only sell stocks that leave the benchmark, and are therefore considered long-term, permanent capital. These data suggest a shift which should aid in a better price discovery process – more price stability from permanent capital.

However, the shift towards passive investors tips that balance of power toward a small number of dominant investors, which could create additional complexity for companies. For example, the three biggest passive investors by volume — BlackRock, Vanguard, and State Street — own around 20% of the shares of the typical S&P 500. These three funds combined own 18% of Apple shares, 20% of Citigroup, 18% of Bank of America, 19% of JPMorgan Chase, and 19% of Wells Fargo, according to Bloomberg.

In practice, this means these passive investors wield enormous power – and potentially could find themselves on both sides of, say, an M&A transaction, not only unveiling conflicts that have to be cleared but also potentially impacting the price of a deal. Specifically, the same passive investors would be important shareholders and voters on both sides of a merger between two companies. When the vote comes on whether to accept a bid, investors on both sides of the trade might be willing to accept a lower price than those who solely own shares in the company being sold.

3. The Rise of ESG Investing

ESG market trends, purported to be worth $45 trillion in assets under management in 2020, are creating a quandary for how global corporations think about fair value for their companies and price discovery.

On the one hand, ESG trends impose additional costs of compliance, which can reduce revenues by shutting down products and business lines, as well cutting operations in certain jurisdictions. This creates a risk of undervaluation compared with companies from countries where ESG expectations and costs of compliance are lower.

On the other hand, there is increasingly a risk, particularly in Western capital markets, that companies without strong ESG credentials could see their valuations marked down. These conflicting ESG forces add opacity to the price discovery process.

4. Nationalism, Protectionism, and Other Global Cross-Currents

Fourth, the risk of greater deglobalization promises to impact all manner of how companies do/operate business. Rather than benefit from the synergies of a global business – such as centralized logistics, supply chains and procurement – companies face financial loss as they navigate a series of threats, including:

  • Curbed trade in goods and services due to protectionist policies
  • Limits to investment and repatriation amid capital controls
  • Barriers to global recruitment under restrictive immigration policies
  • More balkanized intellectual property platforms as a “splinternet” pits a China-led platform against that of the U.S.
  • The breakdown of global cooperation – so that global standards and multilateralism take a back seat to national interests.

The collision of these trends suggests price discovery itself is at risk of becoming a more balkanized and less transparent exercise. In a more siloed world, a company’s valuation could suffer from the risk that the sum of its parts may not be equal to, and could be lower than, the whole.

5. Cryptocurrency and Other Global Financial Innovations

Finally, fundamental changes in the global financial architecture — whether the rise of cryptocurrency or the threat of China’s efforts to unseat the U.S. dollar as a reserve currency — could also materially affect the price discovery of a company depending on how it is exposed and positioned.

With respect to cryptocurrencies, issues of volatility and speed lead skeptics to wary of its effects. With customers and suppliers adapting to their use, companies should consider the effects of placing cryptocurrencies on their balance sheet — and the potential impact on company valuation. For instance, Bitcoin’s volatility would make it harder to calculate the true value of a company at any given point. Bitcoin’s three-month realized volatility, or actual price moves, is 87% versus 16% for gold according to a February 2021 report by JPMorgan.

Meanwhile China is now the largest trading partner, foreign direct investor and lender to numerous developed and developing countries around the world. It’s also the largest foreign lender to the U.S. government. Through expansive cross border efforts, such as the Regional Comprehensive Economic Partnership (RCEP) trade agreement, the Belt-and-Road Initiative and its use of derivatives in trading contracts, China is stamping its imprimatur on the globe. But perhaps most crucially China is backing its own digital currency, a virtual yuan, which, although not a peer-to-peer cryptocurrency, could challenge both Bitcoin and the U.S. own attempts at a digital dollar.

Corporations will have to weigh up the risks and benefits of crypto and digital currencies and decide whether to hold them as assets and liabilities on the company balance sheet; a decision that will affect the company’s value.

Business leaders are constantly managing risks and opportunities in an uncertain world in the hope that their companies will continue to operate and appreciate in value. Yet, quite clearly, there are a number of trends that could left unchecked, undermine and harm a company’s valuation — many of which remain widely overlooked by consensus views.

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Finance & Accounting

Section 321 Probably isn’t Going Away Anytime Soon

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With the change of administration in the U.S. in 2021, many American domestic businesses—and some from throughout the world—watched to see if the U.S. imposed trade tariffs would be lifted on China. 

However, the tariffs remain in place which means that Section 321, a regulation that pertains to imports, is here to stay. On the bright side, this statute presents a money-saving opportunity for eCommerce business owners and a continued need for fulfillment companies in Canada and Mexico. 

What is Section 321?

The statute, Section 321, categorizes certain goods that can be cleared through customs without extra taxes or duties. This allows business owners to avoid additional shipping expenses that would usually force them to increase prices and/or gain very little profit.

Likewise, by invoking Section 321 on imports while employing the services of a Mexican or Canadian fulfillment company, businesses can also save time by improving the efficiency of their logistics strategy. 

What Has Prompted Frequent Use of Section 321?

China and the U.S. make up two of the largest economic powers in the world. In fact, as of 2019, trade between both countries equaled almost $559 billion in American dollars. This, in part, resulted from China’s induction into the World Trade Organization in 2001. Flash forward a little over a decade and half later, tariffs were imposed on Chinese goods to hold the economic power accountable for a rash of intellectual theft, unfair trade practices, and to leverage the playing field between the two nations.

While during the election of 2020, President Biden had disagreed with President Trump’s political or economic tactics in relation to dealing with China, he has not made any moves to lift the tariffs that were imposed by the previous administration. Rather, he has chosen to keep these measures in place that cover roughly $350 billion worth in goods imported from China. This decision stems from the first in-person meeting between President Biden and President Xi Jinping which did little to thaw the relationship between the two countries.

Thus, going with the bipartisan support of holding China accountable for its political missteps and for its unfair trade practices on the economic world stage, the tariffs remain in place for the time being. 

Why is Section 321 Here to Stay?

So, what does this mean for companies that have traded with China? 66% of goods that are exported from China to the U.S. carry a tariff at an average rate of 19%. According to the Peterson Institute for International Economics, that’s about 19% higher than before the trade war started. 

Since American importers bear the cost of those duties, prices on items like televisions, baseball hats, luggage, bikes, and sneakers have gone up. This means that consumers might have noticed a difference on the price tag compared to years ago or a higher shipping cost once they reach “cart” on an eCommerce site. 

Consequently, business owners have invoked Section 321 with the help of Canadian or Mexican fulfillment companies to cut the cost that’s triggered by these tariffs. 

How to Qualify for Section 321

While Section 321 enables businesses to avoid tariffs on some imported goods, you would have to make sure shipments do not exceed $800 in value. Additionally, you would have to remember that not all products fall under the eligibility of Section 321 coverage. These include:

  • Cosmetics
  • Dinnerware
  • Bio samples for lab analysis
  • Raw oysters

Plus, you would have your shipments to Canada or Mexico, where fulfillment companies will divide your goods into parcels that value $800 or less. They are then shipped to the U.S. but not all at the same time so as not to exceed the $800 limit. 

How to Apply Section 321 to Your Business Strategy?

Depending on where you’re located, you would partner with a fulfillment company in Canada or Mexico to come up with a plan of how to divide the shipment and schedule delivery. Furthermore, the fulfillment company would check the proper paperwork to ensure all necessary and correct information is given. With the shipments arriving in either of these two countries, you wouldn’t have to be concerned about the tariffs because the destination from China would be Canada or Mexico. Neither of these countries have to pay a tariff (or as high of a tariff). Plus, technically, your supplies are “arriving from” Canada or Mexico who have a trade agreement in place with the U.S. that doesn’t involve tariffs. So, this practice presents a mutually beneficial situation for your organization and the fulfillment company. 

Because Section 321 doesn’t appear to be going away anytime soon, you can ensure a timely delivery of your goods by securing the services of a Canadian or Mexican fulfillment company, depending on your location. These companies take care of the logistics and paperwork for you which saves time and money. They double check on the scheduling of the arrival of your imports to guarantee that they will meet the Section 321 criteria. All in all, this means that you won’t have to worry about paying the high tariffs, and your customers can count on reasonable prices and receiving their products on time.

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Finance & Accounting

GoDaddy Payments — Now available with Online Pay Links and Virtual Terminal

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Simple and secure

GoDaddy recently announced the launch of a new payment capability for our Websites + Marketing Ecommerce and Managed Word Press Woo Commerce customers, providing a secure payment processing capability for online stores with GoDaddy Payments.

And now we’re expanding GoDaddy Payments capabilities to enable small business owners to take online and remote payments with Pay Links and Virtual Terminal — all without the requirement of a website or an online store.

New payment capabilities with GoDaddy Payments

When you sign up for GoDaddy Payments, you now have two ways to accept all major debit and credit cards: Online Pay Links and Virtual Terminal, with a point-of-sale device for in-person payments coming soon.

Online Pay Links

With Online Pay Links, you can accept online payments in minutes, without needing a website.

This new feature will allow business owners to create a payment link in minutes and share it with their customers anywhere they do business — social media, text message, email and more. These links will direct customers to a secure checkout page to complete their payment.

While you don’t need a freestanding website to use Pay Links, you can customize it to fit your brand.

Pay Links allows you to add your product image, company brand and logo to your checkout page.

The pricing for this service is a standard fee of 2.9% + $0.30 per transaction. There are no setup fees or long-term contracts.

Virtual Terminal

With Virtual Terminal, take over-the-phone or remote payments quickly and securely using your computer, smartphone or tablet.

Business owners can open Virtual Terminal in a web browser and manually enter a customer’s payment information to process a payment, whether over the phone or remotely.

Virtual Terminal transactions are priced at a standard fee of 3.3% + $0.15 per transaction, with no setup fees or long-term contracts.

Fast and secure payments with GoDaddy Payments

From setup to completing a transaction, GoDaddy Payments is fast, easy and secure. Account creation is simple, verification takes minutes, and you can take payments right away.

Once you’ve completed a transaction, money is deposited into your bank account as soon as the next business day.

GoDaddy Payments uses advanced online encryption and maintains the strictest payment card industry (PCI) compliance standards, keeping you and your customers protected.

If you ever need help with GoDaddy Payments, you can reach our award-winning customer care team 24/7. Customer support agents are here to answer your questions, provide support and help you get paid quickly with GoDaddy Payments.

Ready to get started? Sign up for GoDaddy Payments and get paid quickly and securely.



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Personal Finance

Retiring Early: 4 Principles of the FIRE Movement

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There comes a time in your life when you feel that you are ready to quit working and enjoy the fruits of your labor with a well-earned retirement.

If you have an entrepreneurial streak or simply want to generate as much income as possible, as quickly as possible, you will probably be a regular visitor to sites like journeytobillions for inspiration.

It may be that one of those ideas leads you to unlock the money you need to be able to retire early. You might also want to consider the principles of the FIRE movement, which is an extreme saving and investment movement that is designed to achieve a goal of Financial Independence and to Retire Early.

Here is a look at the key principles behind the FIRE movement.

Live for tomorrow

If you truly want to retire as early as possible you are going to have to make short-term sacrifices and adjustments to the way you live in order to achieve that goal.

A key element of the FIRE movement revolves around your ability to be financially disciplined with your money.

This means living as frugally as you possibly can so that you put aside as much of your income into savings and investments as possible. The target figure is to save 70% of your income and avoid debt as much as possible, or at least pay off your mortgage as a matter of priority.

The magic number that makes early retirement a reality is to be able to accumulate a net worth that is a multiple of at least 25 times your current annual spending.

A typical person who aspires to the FIRE principles manages to put aside somewhere between 25% and 50% of their monthly income.

Put your money to work

Simply putting your money into a savings account won’t get you to the finishing line of early retirement and it will probably mean that your wealth doesn’t keep pace with inflation either.

You need to grow your savings by investing in the stock market and taking calculated risks with your capital.

A tracker fund that follows the performance of the stock market would be a typical investment strategy, but it always pays to get professional guidance if you want to try and get the best returns.

Home ownership

You are never truly free to retire until you have paid off the mortgage and own a property outright so that you don’t have to make regular monthly payments anymore.

A key FIRE principle is to clear the mortgage as early as possible, even if that involves directing some of your savings to overpay the mortgage to clear it quicker.

Boost your income

It goes without saying that the more money you can earn each year the quicker you will be able to build up the sort of financial wealth and independence that will allow you to retire early.

Look at potential additional income streams such as so-called side hustles, which are extra jobs you do alongside your regular work.

Taking on part-time work or maybe starting your own business that can be run while you keep your full-time job can all help you get where you want to be at a faster rate.

Looking at your current financial situation, could FIRE be your route to early retirement?

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