How a Public Utility was Acquired for Nothing

This is a true story.  It is very ingenious, smart, strategic and entrepreneurial.  A public multimillion public utility company was acquired from a foreign company by a local tycoon for nothing.

This was a kuwento by Prof Dudes Echauz, my professor on FinMan thirty years ago.

At the end of Laurel Langley agreement, the foreigners beginning l974 could no longer own public utility companies:    broadcast, advertising, energy companies in the Phil.  Thus the foreigners had no choice but to divest and sell to Filipino investors.

The deal

The deal:   20% d/p, balance payable in l0 years, the shares would have to be transferred now (to comply with the law)

Here is what the Filipino did:

l.  The tycoon borrowed money from a commercial bank the amount needed for downpayment.  He could have put up a collateral or could have been unsecured because of his credibility.

2.  The shares of stock from the American company on the basis on DP, and a contract.

3.  The tycoon established a holding company to hold on to the share and execute the contract

4.  The holding company pledged the share of the tycoon to take out the personal loan of the tycoon for the downpayment

5.  The holding company went public to produce money for:  cap ex and to pay for the loan incurred in 4.

6.  The amortization for the l0 year contract came from the earnings of the public utility company.  Smart.  Neat.
                    



We benchmarked this to buy a memorial park in the south.  The owner was a widow was old and did not want any more head ache.

 

Using Tax Laws to your Advantage to Create More Wealth

                  


I know of one businessman who was very smart.  Knowing that if he sells his company on private, would mean that he would pay l0% of the first Pl00,000, and 20% on the succeeding, he went public before disposing.

The reason for going to Stock Exchange.

l.  Going public is an exit strategy.  You want to liquify your holding and make you wealthier.

2.  But the main compelling reason is the tax angle.  Going public means you pay only l/4 of l% for capital gains.  Even if you pay the broker fees, say 2 to 3%, you are still far ahead of the capital gains tax

Savings on the estate and/or donor's tax.

Ever wondered why there are so many big corporations have foundations.  It is not just about being a do gooder or corporate citizen.  It is about wealth preservation.  A foundation as allowed by BIR (before it was NEDA l-8l) to do CSR and other social entrep projects and be tax exempt from donor's and donees tax.  Now if you have an estate, when you transfer the same to your heirs, you can do any of these things:

       l.  Simulated sale  (pay only capital gains of 7.5% to l0%)

      2.  Donate to heirs and pay both the donees and donor's tax (this is hefty too)

      3.  Or pay estate tax of up to 35% when there is a will, or the principal dies intestate.

What happens if you donate this to the foundation?  How much do you pay?

Nada.  Nothing.  Zero.

 

Would you be surprised if some major companies are now owned by the foundation.?

How about control?   You simply appoint yourself and your children to the foundation (they will earn salaries too).  You and your foundation being a major stockholder, can still elect your own board of directors.

Pretty neat. eh....

Some Tips on Wealth Building

Here are some time proven tips on how to get wealthy:

l.  Save save save.  Be frugal.

2.  Spend lesss than what you earn.

3.  Always believe in the power of cash.  Have cash on hand, in the bank for any eventuality.  But some other assets should be earning.

4.  Do not lose your principal.

5.  Do not dabble in anything you do not understand or you are not expert in:

       l.  Do no lend to friends or relatives if you do not know how to lend;

       2.  Do not invest in something or partner with anybody in a business you do not understand.

6.  If you must invest in a business have a say in it;   if you are a minority do not.

7.  Use all  available laws to your advantage to multiply your wealth:  tax exemptions, PEZA etc. foundation etc.  I will discuss more of this on next post.

8.  Believe in the power of compounding.