When corporate raiders coopted “shareholder democracy” for their own ends.
I remember reading how a private equity company bought into Sainsbury's shares and tried to convince the other share holders that by getting Sainsbury's to sell all its property and then lease it back again they would make massive bonanza, and then the private equity fund would have walked off with an enormous bundle for little outlay. This could have left Sainsbury's far less competitive in the future but Sainsbury's management, fortunately, managed to foil the plan.
Shin Jang-Sup talks about how share holder democracy was increased through legislation but this gave some private equity companies and hedge funds a way of getting more control over companies which was unwarranted by the amount of shares they owned, after which they were able to force CEO's to do things like buy back their companies shares rather than invest, or even break up their companies so they could be asset stripped. This predatory capitalism is cannibalizing itself slowly bringing Western civilization down, ruining companies, and causing more unemployment.
ICI was one off the world's leading chemical engineering companies until a private equity company broke it up and asset stripped it. KV
The casual observer can hardly comprehend the value-extracting power of hedge fund activists. Technically, they are no more than minority shareholders. Yet they exert enormous influence, often forcing these companies to undertake fundamental restructuring and to increase stock buybacks and dividends substantially. For instance, Third Point Management and Trian Fund Management, holding only 2% of the outstanding stock of Dow Chemical and DuPont, respectively, engineered a merger-and-split of America’s top two chemical giants at the end of 2015 that resulted in both massive layoffs and the closure of DuPont’s central research lab, one of the first industrial science labs in the United States.
So how did hedge fund activists gain power so far in excess of their actual shareholdings?
In the 1980s, predatory value extraction was the province of the corporate raiders who flexed their muscles by becoming major shareholders of target companies and staging hostile takeovers. This mode of value extraction was highly risky in two respects. First, the raiders needed to raise substantial amounts of money to purchase enough shares that they could plausibly threaten to take control of the companies they targeted. Second, they frequently faced legal battles with management or incumbent shareholders because nothing less than control of the company was at stake. Being able to influence corporations without taking those risks would be a corporate raider’s dream come true.
In the late 1980s and 1990s this dream became a reality. Driven by a clamor for “shareholder democracy” amid a rapid increase in institutional shareholding of public corporations and broadening acceptance of the maximizing shareholder value (MSV) view, the federal government implemented regulatory changes that set the stage for hedge fund activism.
Economics
ReplyDeleteWalmart makes more on controlling their real estate than on their stores. They typically build and control the shopping centers surrounding their stores and they build affordable housing near their stores to provide employees and customer base for their stores. Giving over control of your one monopoly on space is the dumbest idea accountants always propose.
On the other hand, Sears' only valuable asset remaining is their real estate but if you look at their real estate they didn't control their environment -- typical defeatist Chicago outlook.
I wonder if anyone has done an analysis of success rates between business' that rent vs own. No idea how you'd control for stupidity except by looking at returns on non-real estate assets.