Billiondollar fines are a good thing for stocks
What do Nike and Google have in common? Both faced European Union (EU) antitrust fines in March – $14 million for Nike, $1.7 billion for Google.
Whenever companies get slammed with fines, people get confused, presuming bad behavior. That’s true sometimes – BP’s penalties related to 2010’s oil spill come to mind. So do bank fines for employees opening fake customer accounts and the LIBOR rigging scandal. But often, penalties symbolize a government taking its cut – an alternate form of taxation. The government put time and money into an investigation and wants pay-out to avoid embarrassment.
It’s a basic fact of life: When a business grows large, governments start seeking ways to squeeze it. A few million here, a couple billion there. Lather, rinse, repeat every few years. Google has suffered three EU fines since 2017. The one in March won’t be the last. Apple suffered a $15.3 billion EU fine in 2016 over tax grievances. Facebook may be hit with roughly $1.6 billion in EU fines over data breaches.
These amounts sound big. To these companies, a couple billion is tiny. The $1.7 billion was a teensy 0.2% of Google’s market cap the day the EU fined it. Apple’s $15.3 billion fine, announced in 2016, was 2.7% of market cap. Nike’s fine? It was 0.01%. Peanuts, all.
Usually, when a firm pays 1% to 3% of its value in fines, it probably did nothing critically wrong. Governments have extortive capabilities to say, “Pay or we’ll run you through the ringer!” America has done this for eons. Europe has ratcheted it up lately, often on tech companies that slip through its tax net.
The process is mostly pomp and circumstance. There’s always an investigation, but they usually find little justifying prosecution and lengthy court proceedings. If they really had something, they’d identify perpetrators, bring charges and pursue due process through court. Fines would be far bigger.
The governments effectively say, pay this, without admitting or denying guilt, and we’ll leave you alone for a while. Otherwise, we’ll hassle you for years, and you’ll spend more fighting it than you would on the fine, and we’ll hurt your reputation. Companies rarely appeal and fight. Most are content to simply pay the pests to go away. Fighting back could make the company look like the bad guy. Nike wants to sell sneakers, not be perceived as sneaky.
For investors, small fines are good news. They put the investigation and uncertainty behind everyone. This is especially true when the issues are foggy and alleged misdeeds unclear. A fine totaling roughly 1% to 3%, or less, of market cap means there’s no “there” there. Markets price this “tax” near instantly – and move on.
Even with substantive issues, bigger fines are usually backward-looking confirmation of past troubles. The Justice Department announced BP’s final fines in October 2015 – right before its stock soared after years seesawing sideways. An extreme example, but illustrative.
Yes, there is real wrongdoing sometimes. But the huge majority of teensy tech fines currently are signs of success for the businesses in question. Governments know where the cash is! They also suggest, intuitively, that political wailing for Big Tech to get broken up won’t fly anytime soon. Companies would fight that hard, via lobbying and court. Governments would look bad if they lost ... and they probably would.
As a stock investor, always see these relatively small fines as the buy signal they really are.
Ken Fisher is founder and executive chairman of Fisher Investments, author of 11 books and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter: @KennethLFisher. The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.