By Richard Beales The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

There’s outrage on Capitol Hill about one tangential aspect of Facebook’s initial public offering. U.S. Senators Chuck Schumer and Bob Casey object to co-founder Eduardo Saverin’s tax “duck” on his stake in the social network now that he has given up his U.S. citizenship. But becoming a non-American is expensive and complicated. Lawmakers might instead ask what they’re doing wrong for U.S. expatriates even to consider it. 

Brazilian-born Saverin isn’t ducking anything. Anyone handing back a U.S. passport pays an exit tax on capital gains, including those that haven’t yet been crystallized by selling investments. His remaining Facebook stake, potentially worth several billion dollars, might have been valued at much less. But the Internal Revenue Service is nonetheless collecting hundreds of millions of dollars in taxes that Saverin might never have paid had he stayed a U.S. citizen and held onto the stock. 

So giving up his citizenship wasn’t cheap. It’s also a lengthy, bureaucratic process. Now the senators also want the IRS to presume that anyone of significant means who no longer swears allegiance to the stars and stripes is avoiding taxes, charge them double the prevailing 15 percent rate on capital gains, and capture future gains, too. And they want to make sure no such person can ever enter the United States again. 

In their zeal, Schumer and Casey are missing the bigger picture. First, while Saverin is privileged to have the option of giving up his U.S. nationality, his motivation almost surely stems partly from frustrations felt by most expats. Unusually, America taxes worldwide income of its citizens even if they live abroad. The compliance burden often makes it hard even to open a bank account. And the IRS makes reporting non-U.S. assets and income a nightmare. 

Then there’s the effect on attracting citizens from elsewhere. Anecdotal evidence suggests that the complexity and imperialist tendencies of Uncle Sam’s tax system – more so than its rates – turn off potential immigrants. For every Saverin who offloads a U.S. passport (and last year’s tally, although a record, was only 1,780) there could be thousands more who don’t want to get mired in IRS red tape and choose to take their talents, future earning power and tax contributions elsewhere. That’s something really worth getting outraged about.

By Richard Beales

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Contemporary art is becoming the gold of the new rich. This week’s strong auction sales in New York brought record bids for Rothko, Klein, Lichtenstein and several other post-war artists. Scarcity is part of the allure, along with taste and the spending power of the global plutocracy. One thing to please at least the financiers among them is that contemporary art has inked good returns, too.

Mark Rothko’s “Orange, Red, Yellow” fetched nearly $87 million at Christie’s, topping the bill at the auctioneer’s $388 million sale, its biggest ever. That’s a sign that the Contemporary category – albeit increasingly not an accurate description – has the upper hand these days, even if the all-time record, set by Sotheby’s with Edvard Munch’s “The Scream” last week, was officially in the firm’s Impressionist and Modern sale.

That’s further underlined by the trajectory of prices. Artnet’s Contemporary 50 index is up more than five-fold since 2001, against a mere 60 percent gain for the Impressionist 25 benchmark – and that’s before this week’s sales. Contemporary art dipped in 2009 with the global financial crisis, but recovered by 2011.

Like, say, high-end London property, expensive art is now a global market – it’s not like the end of the 1980s when Japanese buyers, who dominated auctions for Impressionist works, suddenly disappeared. If European collectors are cautious – as might be expected with financial tremors still rumbling around the region – there are plenty of U.S., Middle-Eastern, South American, Russian and Asian buyers to take their place.

And the super-rich aren’t short of cash. In fact, some of them have the luxury of not knowing what to do with it all. The financially-minded may not admit it, but they like the idea of art that can hang on the wall (even, or especially, at the office) or stand in the courtyard for a few years and then be sold at a profit. With a few exceptions, the records set this week were largely for works by famous deceased artists with a tried and tested market – not by risky relative newcomers.

By Richard Beales

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Facebook founder Mark Zuckerberg appears a bit sheepish about touting the company’s initial public offering. He probably doesn’t need to be. The hype around the social network makes it likely the price will go above the indicated $28-to-$35 a share range, which values the company at up to $96 billion. But an update of Breakingviews’ discounted cashflow calculator for Facebook shows that sanity is still at the low end of the valuation scale.

(A new Breakingviews e-book chronicling Facebook’s rise shows why its business model, corporate governance and exuberant valuation shouldn’t make it a love story. Purchase the e-book )

The price range revealed last week was actually a ratcheting down of the loftiest expectations. Facebook stock recently changed hands on secondary markets at an implied valuation north of $100 billion, and that may not have included the more than $5 billion of new cash the company plans to raise.

Breakingviews’ analysis in March projected Facebook’s revenue and margins based loosely on Google’s history and then applied a DCF method to arrive at a valuation. Big assumptions are needed – including that Zuckerberg’s company will expand as fast and profitably as the internet search giant did seven years earlier, when its top-line growth already appears to be slowing – but this is still among the most rational approaches available. Excluding new money from the IPO, the result was a valuation of around $75 billion.

Updated for the expected IPO proceeds, the latest share count information and the cash on Facebook’s balance sheet, the DCF valuation goes up to about $83 billion, or just above $30 a share. Well over half of that value depends on cash flows coming after 2021. With that risk in mind, any investor expecting some instant potential upside in the form of an IPO discount would be disappointed at a price of much more than $28 a share.

By Richard Beales The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

At about $550 billion, Apple’s market capitalization is mind-boggling. But for a company growing as quickly as it is, the iPhone maker trades at an absurdly low 12 times forecast earnings for the year to September. A new Breakingviews calculator shows why even cautious shareholders shouldn’t worry: even if growth and margins decline improbably fast, Apple should still be worth far more in 2016.

Companies in the S&P 500 index are collectively priced at about 14 times forecast 2012 earnings, given those earnings are expected to be about 7 percent higher than in 2011, according to Standard & Poor’s. Fast-growing companies usually trade at higher multiples. Bizarrely, investors award Apple a lower price-to-earnings ratio than the index even though the company’s bottom line almost doubled in the first calendar quarter of this year from the year before.

Strip out Apple’s $110 billion of cash at the end of March, and the multiple for the business looks even more anemic, at around 10 times. If current growth trends persist, it’s not hard to justify a $1 trillion valuation.

But give the skeptic his due. Suppose Chief Executive Tim Cook can’t sustain Apple’s better than 50 percent annual revenue growth, and competitive pressures quickly squeeze its profit margin down from the roughly 25 percent achieved recently. What if growth slows to a modest 10 percent in Apple’s financial year to September 2016, and the company’s profit margin drops to 15 percent?

Well, things still wouldn’t look too bad. Even assuming top-line growth declines faster in the earlier years, Apple would earn about 10 percent more in 2016 than the $44 billion analysts expect this year. With more pedestrian growth than currently, Apple would be seen as a more normal company. Attach the long-term average S&P 500 price-to-earnings ratio of about 15, and it would be worth some $720 billion.

Of course, Apple also would have stockpiled more cash by then, too. And technology companies have over the last 15 years traded on average at higher, not lower, PE ratios than the norm. So that valuation in 2016, like today’s, might look conservative. And apart from a 32 percent capital gain, investors would have collected the company’s recently announced dividend payouts along the way. Even with ultraconservative assumptions, Apple doesn’t look likely to go rotten any time soon.

By Richard Beales 

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

News Corp has found yet another way to annoy investors. The seemingly tardy discovery by Rupert Murdoch’s family empire that non-U.S. holders control 36 percent of its voting stock – breaching the 25 percent limit for owners of American television broadcasters – has led it to suspend half the voting rights of overseas owners. Even shareholders resigned to disenfranchisement have cause to worry.

They’ll be used to the control exerted by Murdoch. Owners of the company’s more numerous A shares don’t get a vote at all on most things. And voting B share investors are up against the family’s nearly 40 percent stake. In a tacit admission the conglomerate cocked up the monitoring of its shareholder register, the Murdochs agreed not to go beyond that percentage in any vote, even though foreign investors will now only have half the votes they had before.

All the same, the suspension may needle affected shareholders, including the retail and institutional bases in Murdoch’s native Australia. But what’s really galling is the bungle itself. The Fox TV franchise and other channels in the United States are critical to News Corp’s business, and they depend on licenses from the Federal Communications Commission.

Those licenses in turn rely on the company staying within shareholding and voting rules. While it seems to have done so with ownership of A and B shares combined, it looks as if the voting aspect escaped the company’s investor relations and legal teams – until now, when license renewals are looming.

The UK phone-hacking scandal and all that it wrought, including the departure of News Corp’s general counsel last summer, may have been a distraction. And all that followed a series of other missteps, like overpaying for Dow Jones and MySpace. But Murdoch should be acutely aware of the FCC’s U.S. ownership requirements. News Corp’s antipodean origins created headaches in the mid-1990s over the original acquisition of U.S. stations, with a waiver eventually being granted.

By Richard Beales

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Sheri McCoy, Avon Products’ new chief executive, should make a turnaround of the cosmetics firm a real alternative to a sale. After all, she has been running a big chunk of Johnson & Johnson, and Fortune ranked her the 10th most powerful woman in business last year. But Avon’s insistence on retaining Andrea Jung as executive chairman makes McCoy’s task look harder.

Ending the uncertainty over Avon’s leadership with such a credible hire probably gives the company sufficient ammunition to fend off takeover interest from smaller European rival Coty. And Avon has held off acting on its ongoing strategic review in order to give the incoming CEO the chance to make decisions.

Yet Jung has been the boss since 1999, and Fortune put her at number six on its list last year. In practice, having someone with such influence around full-time – potentially for a couple of years – will surely limit McCoy’s ability to make radical changes to her predecessor’s ultimately failed strategy. That’s a pity, because shareholders need a major overhaul. Until Coty showed up on April 2 with its $23.25 per share expression of interest, Avon’s stock was down by about 30 percent over 12 months.

Sure, Avon’s decision in December to split the two top roles was a step in the right direction, while Jung’s presence during a transition period makes sense. And McCoy will report to the board, which has a lead independent director, Fred Hassan, as well as Jung in the chair. It’s also possible that the executive chairman title means less than it suggests.

But having landed a creditably strong candidate as its next CEO, Avon’s board missed the chance to give her full autonomy, at least in its public statement. Investors will be hoping McCoy doesn’t find the corner office too crowded.

By Richard Beales The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Facebook’s 31 underwriting banks are mobilizing for the company’s initial public offering. In such a hyped IPO, any kind of valuation is possible. But a comparison with the history of the social network’s closest thing to a rival, Google, suggests that even $75 billion – at the low end of the talk to date – would be a stretch. A new Breakingviews calculator shows why, and allows bulls and bears alike to tweak the inputs.

Google’s revenue of $3.2 billion in 2004 was not far off Facebook’s $3.7 billion in 2011. One way to clarify the crystal ball is to assume the social network grows on the same trajectory as the search engine did seven years earlier. Then it’s consistent to assume EBIT margins settle at something like Google’s average 33 percent level.

Add a 30 percent tax rate and modest outlays for investments, and out pops an annual free cash flow figure to plug into a discounted cash flow model based on one created by Anant Sundaram at Dartmouth’s Tuck School of Business. A 15 percent discount rate seems rational for a business in the fast-changing Internet world, resetting lower – along with revenue growth – after 2021.

Run those numbers, and Facebook founder Mark Zuckerberg is presiding over a company worth $75 billion, or about $30 per pre-IPO share. But the pricing of run-of-the-mill floats is supposed to leave something – say 15 percent – on the table for incoming shareholders. That would knock the figure down below $65 billion. And with nearly two-thirds of the value stemming from cash flows more than 10 years hence, Facebook is a risky bet.

For likers of Facebook, however, it’s easy to dial things up. Just trimming 2.5 percentage points off the discount rate, say, adds $15 billion to the valuation. But the valuation is also sensitive on the way down. Shaving just 5 percentage points off near-term revenue growth and margin assumptions knock it down by $10 billion.

Facebook shares may prove scarce as would-be owners, potentially including many of its 845 million users, clamor for a piece of the IPO action. A staid DCF analysis could easily be drowned out. But it does at least show how bold the assumptions must be to justify whatever price the underwriters end up persuading investors to pay to cement their friendship.

By Richard Beales The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Apple has taken its share of criticism lately over working conditions at the Chinese factories of suppliers like Foxconn Technology. Despite the bad press, workers preparing the iPad 3 – which Apple is widely expected to unveil on Wednesday – are treated less badly than many in the electronics business. The sector in turn provides a noticeably better environment than, say, toy or clothing makers do, in the eyes of labor groups. But with Apple’s iconic brand, roughly $500 billion market capitalization and $100 billion of cash, doing things relatively well isn’t enough.

The basic problem is in some ways like Nike’s back in the 1990s. The sneaker maker was slow to wake up to criticism of sweatshop conditions at its suppliers’ factories. In the end, it realized its reputation and brand were too valuable to risk. Nike helped create the Fair Labor Association (FLA), a group of companies, organizations and academics that aims to protect workers’ rights, partly by requiring member firms to follow processes it lays down.

The result was never going to be perfection, but Nike has since successfully built a reputation for responsibility and fended off a repeat of the consumer boycotts of 15 years ago. Along the way, the company has talked about its “lonely leadership position,” arguing essentially that it was held to higher standards than others.

That may be both true and justifiable – and surely applies to Apple, too. Quantifying the reputational risk is difficult, but brand value sheds some light. Last year, the company’s global brand was estimated to be worth $153 billion, a massive 84 percent jump from the previous year and easily topping the BrandZ ranking conducted by WPP’s Millward Brown.

All these 12-digit dollar numbers – not to mention the nine-digit, 10-year pay package recently handed to Tim Cook, Apple’s chief executive – help any hint of mistreatment of the often low-paid workers at Apple’s suppliers resonate with the general public and maybe especially with the educated, artsy crowd the company likes to associate itself with.

Apple’s banana skin The iPhone, iPad and Macintosh computer powerhouse Cook took over from the late co-founder Steve Jobs last year is renowned for micromanaging everything about its products. Cook himself was involved in establishing Apple’s hyper-efficient global supply chain.

By Richard Beales

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

For bankers, the cash is greener on the other side of Wall Street. The top 40 hedge fund managers took home $13.2 billion between them for 2011, Forbes estimates. Yet even industry godfathers like Ray Dalio of Bridgewater Associates manage to attract far less opprobrium than bank bosses, whose paychecks are considerably smaller.

Dalio made $3 billion for last year, Forbes reckons. By contrast JPMorgan Chief Executive Jamie Dimon, for example, looks set to do no better than the $23 million he pocketed for 2010. The comparison isn’t clean. Hedgie figures typically include gains on their holdings in the funds they manage, whereas for bankers and other corporate executives, it’s usually just annual pay being quoted.

Even so, top hedge fund managers pull in far more than the top earners in banking. Yet an unscientific test suggests they also escape the public’s anti-wealth wrath. A check of the Factiva news archive shows big-name hedgies generate only a fraction of the publicity associated with words like “pay” and “bonus.” With the gap between haves and have-nots high on the U.S. election agenda, it’s worth understanding the discrepancy.

One explanation is that hedge fund titans are for the most part also entrepreneurs who built their firms from scratch. Also, they provide a product that, in good years, pleases investor clients. Dalio’s flagship fund just overtook retired George Soros’ Quantum Fund as number one in total dollar terms for investor returns over the years, at $35.8 billion, according to estimates from LCH Investments.

Most hedge funds stay private, too, echoing the closely held bank partnerships of years past and largely defying the trend of fellow alternative asset managers like Blackstone going public. And when it comes to pay, despite the high fees, hedge fund bosses get a lot richer only when their investors do.

By Richard Beales The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Investors will have to like Facebook a lot to justify a potential $100 billion valuation. Essentially, growth and margins would both need to track Google’s trajectory to justify a price tag so high.

A 12-digit valuation is conceivable. Equate Facebook’s 2011 revenue of $3.7 billion with Google’s $3.1 billion in 2004. Apply Google’s subsequent annual growth and its fairly consistent 30 percent operating margins. Allow for tax and a little investment and then discount the remaining cash flow at 12 percent, and the present value is almost exactly $100 billion, according to Anant Sundaram of Dartmouth’s Tuck School of Business.

That puts a lot of faith in Facebook founder Mark Zuckerberg. Assuming the company’s dependence on advertising for 85 percent of revenue declines to 75 percent in a decade, Sundaram reckons current trends suggest Google and Facebook together would need to attract a fifth of all global ad spending by 2021. That would mean displacing a lot of media.

Then there’s growth. Google’s revenue more than doubled in 2004 before drifting down to 92 percent the following year. Facebook’s 2011 revenue was already “only” 88 percent more than in 2010. And sales increased just 55 percent in the last quarter over the same period a year earlier.

Facebook could reignite growth, extract more dollars per user and beat Google at parts of the ad game. Then again, maybe Google triumphs or upstarts muscle in on both of them. Two-thirds of the value in Sundaram’s discounted cash flow model comes after 2021, and distant cash flows are highly susceptible to such risks.

Instead, conservatively cap Facebook’s annual revenue growth at 55 percent and raise the discount rate to a more risk-averse 15 percent, and the valuation falls below $50 billion – coincidentally, about what Google was worth at the end of 2004.