Activist investors DESTROY COMPANIES. Don't get me started on share dealings... Public companies have four groups of stakeholders: shareholders; execs paid with share performance in mind; other workers; and their customers. Shareholders and share value-incentivised execs are ripping the heart out of many public companies, siphoning off their wealth, going for short-term in favour of long-term interests, and …
Both peas of the same pod. All they are interested in is taking value out of a company.
The VC's load it with Debt
The AI's basically milk a company for all it is worth and then move on often dumping their holdings and leaving other investors poorer.
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The worst thing is the top execs who strip a company then get hired by another company, even though the second company knows the exec's track record. It's like hiring a fox to mind your hen house because he's suddenly available after the previous hen house he minded mysteriously became devoid of chickens...
Steve Davies 3,
There's nothing wrong with taking value out of a company. That's called earning a profit on your investment. If the company was viable without investment, then it wouldn't take it.
The alternative is taking money from banks. Who want assets to secure it against. If you don't have that, or don't fancy risking your house, then you borrow from VCs. Or your family. Or keep your job, and start your company in your spare time.
Remember that people investing at the A round are going to lose all their money on half their projects. Assuming a hit rate of say 3 out of 10 - they have to treble their stake in each of the surviving companies, just to break even. You've then got to cover several years of inflation and add in some pay for the VC's staff and some profits.
Taking value out of a company....
So the 200Million that the VC's took out of Phones4You didn't play a part in their path into Administration then?
The debt they left behind was IMHO impossible to service AND do decent deals with the Carriers/Phone suppliers.
Steve Davies,
You mentioned the A round, so I assumed you were talking start-up venture capital.
In the case of turnaround venture capital, you're somewhat correct. Phones 4U, Rover, Comet are all cases I can think of where the companies took them on and took too much out, or too much debt. I'd be interested to see more aggressive auditing and/or enquiries as to whether they were trading while insolvent i.e. committing fraud. Didn't the Rover directors get struck off?
None of these companies were doing well before the VCs walked in though. It's not as if they've come along and destroyed healthy companies. They've failed to rescue crap ones. You can add to this some of the junk bond deals from the 80s, or the Man United purchase. I don't know if it would be posible to legislate so that you have to have skin in the game to be able to buy up a company and load it with debt - so you lose massively too. But it's hard. Once you've bought a company, it's your asset to borrow against. It's hard to make legislation work right.
There have also been plenty of successful turn-arounds by VCs as well. Just as the vulture has a vital niche in the ecosystem, so does the corporate raider. Sometimes you need someone to pick out and turn around the good bits, while losing the crap bits. Or the crap bits take the whole company out. Sadly VCs can cock up their companies, just as well as the original managment did. Or to be fair, sometimes the market just turns hostile, and companies are doomed.
>So the 200Million that the VC's took out of Phones4You didn't play a part in their path into Administration then?
This old chestnut, been here!
VC's in the main invest real money in growing businesses (unlike AI's), when a business deviates from the path, VC's will make a decision about their investment and its future potential and if necessary pull out before they loose their shirt. Hence I've been in businesses where the VC's have pulled the plug at the point where there was money in the bank, exactly as they did with Phones4You.
Yes it is galling to successfully deliver a contract and get paid, thinking that perhaps the business has gained a small breathing space, only to have the rug pulled by the VC's who've decided that they have better investment opportunities for their monies elsewhere...
The difference between VC's and AI's is that AI's tend to buy listed shares on the open market and hence the underlying company does not financially gain from their 'investment'.
There is a system for legally taking value out of a company: it's called taxation.
When there are several stakeholders in a company:
1) its employees
2) its customers
3) its suppliers
4) the community
Should not each group get its share in the policy-making of the company?
What's this stakeholder thing supposed to mean? Am I a stakeholder of The Register, just for being a reader? Do I have a right to veto how much profit they're allowed to make? Can I insist that they must invest all their cash in a better forum design, rather than spending it down the pub. Or blowing it on rockets...
Shareholders are owners. It's their property. And they should have a right to do what they like with their stuff, in compliance with the law and absent a court order. The company has legal duties towards its staff of course. And fewer towards its customers. But if the customer doesn't like it, their choice is to take their money elsewhere. Again, so long as their legal rights have been met. Executive pay has bugger-all to do with them.
Until the voters tell the politicians to change the law, giving customers representation on the board. Then watch business flee our country, and our economy suffer.
It's all very fine and dandy saying how you'd like a share of other people's property. But if you do that too arbitrarily, you're no longer running a free economy - and people will start squirrelling their money away elsewhere. There's a lot of deeply unattractive stuff goes on in the City. But the side-effects of mustering the morality police and mounting our high horses could be quite dangerous. We've got plenty to do trying to regulate our banks for now.
Yes it's sad that the Glazers got to buy Man U for a song, them load it up with debt and make a killing. But that's because everyone else undervalued it, so they got it incredibly cheap. Very hard to regulate to stop that, and I'm not even sure we have any right to complain. Other than a general feeling that someone's getting more than we are...
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The primary reason for share bybacks in tech companies is to ensure that:
1. An activist infestor (spelling intended) has a considerable difficulty getting the necessary shares to force activist decisions which provide him with value in the short term and ruin the company long term.
2. That the company valuation to asset ratio remains sufficiently high so that it is not a target for loan funded takeover which is after that repaid by offloading assets - defence against shark funds.
I would have expected you to know that much before starting to write this drivel. Anon - because any of the places of interest to me to work in actively employ all of these tactics. Some are smart enough to do it preventively. Others have had to start doing it after their "jewels" were cut off by an Elliot or one of its clones.
You do realize that, by quoting reasons why management would consider a buyback scheme, you directly verified the article author's main premise: business actions in response of "activist investors" are distracting the management from thier proper jobs of addressing customer concerns and product advancement.
Right?
It is, however, the American Way.
A further side effect of short sighted pursuit of next quarter's profits is that the company is fixated on doing the same old same old. Even when EVERYONE knows you have to cannibalize your current business (at least periodically) to stay in the game, no self serving exec would ever do this. They all wait for Death to be imminent before the next c-suite gets a chance to recover the company, if there are any employees left who can mechanize this feat. Clearly the c-suite is just a pile of very well paid suits, for any Fortune 1000 company they can't really do squat other than fumble around the steering wheel.
After a while you start to realize that the hedge funds, Wall Streeters, and most of the execs simply don't know what they are doing-- other than playing a negative sum money game where wealth creation happens in spite of the machinations of the charlatans. Unfortunately, even the government buys into this game with regulations and statistics, and the salarymen as sole wealth creators are left happily slurping the soma in decaying hovels with a mythical "credit score" ball and chain to keep them in line. Just a company town writ big, nothing to see here, move on.
Erm, the article misses a few rather really major points. In fact, make that enormous ones. I started numbering my points, and had to stop...
Let's start with dividends. In the US the tax regime is rather unfriendly to divvies. So US companies tend to avoid paying them. This is government's fault, not corporate greed. Hence share buy-backs being what the shareholders ask for.
Next, it's the shareholders bloody money! So yes, companies should give it back to their owners when they ask for it. I admit people can invest for short-term reasons, and it doesn't look nice. But if you buy the shares, you own the company. If management can't convince their own shareholders that they aren't going to piss their owners' money up a tree, you can't blame the shareholders for asking nicely to get it back. Didn't Apple hit $130 billlion in cash at one point? They've never made a large aquisition, had no plans for massive growth, and were using maybe $10-20 at most in some very clever supply chain management. So the only sensible thing to do is give that back to the shareholders, who own it.
Microsoft were the same. Loadsa cash, no idea what to do. Give it back. Although they did spend $7bn on aQuantive, $8.5bn on Skype and $4bn on Nokia. Oh, and I forgot Yammer for another couple. I do wonder if the shareholders wouldn't be better off if MS had given them that over $20bn instead...
Now we come to not being able to sell shares for 5 years. Firstly, what happened to property rights? Should I not have the right to do with my property as I wish? Also what happens if I'm suddenly ill/unemployed and need the cash?
Next, do you hate pension companies? They have very strict rules about how much capital they have to hold, in order not to be insolvent. If a share suddenly goes down, they may need to sell lots of it in order to not suddenly go bankrupt, taking all their pensions with them. Pension companies are often longer term investors - and reasonably cautious. So surely represent the 'good bits' of stock markets. Long term saving, and hopefully long-term thinking.
I do agree with you that executive share options are often too generous, better than other staff are allowed to get, and risk incentivising them to pump the share price then dump. On the other hand, it's really hard to incentive programs.
It's all very well to say "something should be done". Lots of people agree with that. But what? I nkow it doesn't look good when people are making out like bandits. Particularly when they're other people. But always remember the rule of unintended consequences. Standard Life went under because they were forced to sell too many shares in order to meet government regulations in the dot.com bust. Those shares bounced back within a few years, so if there'd been a way to grant them a temporary exemption including regulator supervision and board level decapitation, they'd still exist today. And their pensioners would be getting their full money. This stuff's hard to write rules for.
In my personal opinion it's going to take a change in culture to fix a lot of these issues. Which is very slow. Governments are trying regulation, but it's unlikely to be all that successful. To misquote Churchill - free market capitalism is the worst system in the world, except for all the others.
Far too often these activist investors (Leeches) screw the past and existing employees out of their meager health benefits and pensions while taking out "their" money.
That has got to stop! That money should NEVER be able to be "Borrowed" against or in other words, stolen.
Benefits should never be a part of any company valuation. should not be part of any taxation scheme. They should be held separate in perpetuity.
I say that you should be a voting member as a pensioner or employee. You made the company what it is and should have a say in it's future direction.
Dan Paul,
Employees get paid. That's their reward for the work they do to build the company. It would be nice if they could have share-options, so they too can become owners. But like customers, if you don't like the offer, go elsewhere. I don't see why shareholders should have their property seized, just because someone else fancies it. Obviously tax should be properly collected i.e. simplified and enforced - so everyone pays a proper share.
Remember that many shares are owned by pension funds. You can't magically tax the fat cats without accidentally nuking the pensions of ordinary workers.
As for employees' healthcare and pension benefits, I agree. Pension funds should not even be allowed to hold shares or assets from their parent company. So if it goes bust, they don't lose all their assets as well as their contributor. And so desperate execs can't borrow from the pension fund when no one else will touch them. Before going pop, and hitting staff with the double-whammy of redundancy and lost benefits.
This isn't a mistake of the government, but is by design. A corporation provides a liability shield for its owners, the price for that liability shield is double taxation of profits at both the corporate and personal level.
If they did not, why would anyone want to operate as a sole proprietorship or partnership? Every business would incorporate.
Be careful criticizing something as a "mistake" when it has been that way for decades and worked quite well until Black Scholes figured out how to price options, it started being used for CEO compensation, and the way they measured shareholder value changed from "the value of the future dividend stream" to "today's stock price".
If it weren't for the questionable decision to lower taxes on capital gains below that of other income, the source of income wouldn't matter. While I think some adjustment for inflation in calculating long term capital gains makes sense, I think all income should be treated equally. The government shouldn't be getting into the business of making some income favored more than others, but unfortunately that ship sailed so long ago it has circled the Earth a number of times by now.
"Consider these ideas:
"1 People who buy shares should be forbidden from selling them for five years.
"2 Execs paid with share options should be prevented from vesting them for five years from the award date.
"3 Everybody in the company should be paid with the same share option deal.
"4 Public companies should go private to escape activist investor hell."
Let's consider these in order.
1. Sure, this stops the roller-coaster ride that is the modern stock market, but it also makes getting investment more difficult, because it means you can only access the people willing to hold for the long term, come what may. And that means the pension funds won't buy your stock because they will lack the flexibility to unbuy it when they need to. And the more prudent investors will only invest in sure things because they will be locked in for five years. No, this is a bad idea.
2. (Pedantry) Execs themselves cannot *vest* stock options. In the context of stock options, vesting refers to the process where, usually slice-by-slice, the options become eligible to be *exercised* (that is, eligible to be used to buy (or, in the more general case that isn't applicable here, buy/sell) the relevant shares). Five years might be a bit much for the first slice to vest, but for normal employee stock options, it's common to have to wait at least a year, so I'll put this on in the "open for debate over details" category.
3. I hope you don't mean that literally as it is written, that all employees get N options to buy at price X (variations on X subject to e.g. date of grant and its effect on the opening share price), with N and X being the same for everyone who gets a grant on a particular date - but I suspect that you do indeed mean that. N*X is likely to be small, then. Worth investigating but I suspect this is unworkable.
4. This is already an (effective-against-activist-investors) option for companies that can afford it / afford to borrow for it. It tends to make uninvesting difficult (because there isn't an effective/efficient/orderly market for the shares, aka the shares cease to be a liquid asset). The shares remain an asset for shareholders, but that asset is now hard to sell, and hard to price (because of that hard-to-sell nature).
All in all, these suggestions smell strongly of a (probably unwanted) result that the innocent are punished to make sure the guilty get hit. You know, like copy protection crap on software, which is based on the assumption that any and/or many of the customers are thieves. ("Because any of you *could* be a thief, and lots of you *are* thieves, we will inconvenience *all* of you by forcing you to have to have the original disk in the drive when you run the software, and to have to buy a new copy if you lose your original disk and want to keep running the software.")
Excellent rebuttal. Right on point. You left out a bit though. It's the bit that goes:
"If you're not a shareholder then what companies and shareholders do is none of your bloody business"
Having said all that, as someone who encounters people running and working for tech companies on a regular basis, all I can say is I'm amazed at what a bunch of clueless chair-warmers most of them are!
and I'd like to add my 0.02:
In the US of A, there is no statutory obligation, either federal or state, for a corporation, to create value - i.e. monotonically increase its stock unit price - for the benefit of its shareholders, or anyone else's. This story that a corporation is legally required, or has a fiduciary responsibility, to make its shareholders rich is a lie, concocted by activist investors, Banksters and their Business Thinker shills, frequently featured mouthing off on CNBC.
A corporation may, at its sole discretion, pay dividends on shares issued.
A corporation is not even legally bound to be profitable. It is perfectly legal for a corporation - again, in the USA - to break even every quarter, and post no profits at all.
The only statutory obligation of a corporation, other than obey the laws, is to be able to pay any and all legitimate claims against it: employee salaries, pensions, loans and bonds.
The problem is that the interests of the long-term shareholders is at odds with the get-rich-quick types who, flush with cash from their previous exploits, can come in, buy up shares, extract value from the business and then move on to the next one, leaving the other shareholders much poorer for the experience. This is not a sustainable model, although modern society seems to favour the quick and easy gains over a longer-term investment that builds for the future. Then there are the employees, who end up bearing the brunt of the asset-stripping, either by losing their jobs, or being expected to pick up the work of those who have. Customers suffer because the customer service is pared to the bone and sometimes beyond, and cost-cutting can compromise the quality of the product, so that when the activists have moved on, what they leave behind is in a death spiral.
Then they should sack the Board. They have the majority of the votes, or the activists would be running the company.
It's also not true that they always leave the company screwed. Apple and MS have been hoarding money for no good reason. It's up to the board to justify why they're holding on to all of that. They couldn't. So they were made to hand some of it back to its owners. That's what shareholder means. In the UK it would probably have been via dividends.
Plus it stops the board being tempted to blow a few billion on a Whatsapp...
>In the UK it would probably have been via dividends.
No in the UK, like elsewhere I suspect, depending upon the amount, it would of been a combination of repayment of capital (ie. share buy back) and dividends. Enabling both company and shareholders to benefit from the differing taxation that applies to these two forms of payment.
Share options and so forth are usually a tax-efficient sweetener, not a realistic way of providing an incentive to do well.
We do need to reduce the liquidity of the stock market (though that's another issue). Five years may be a little long. One day would be an interesting experiment to kill HFT. Five years minimum for vesting of exec options might be reasonable, though.
I'd have thought some sort of revenue / profit calculation would be used if you were doing things properly.
While shareholders do technically own the company, a company is not a real "thing" and split ownership is not comparable to property rights. Try repeatedly buying and selling a car within milliseconds. Limited liability is also a problem, of which the activist investor is only a small part. Abuse of both facilities is far too easy and more regulation is required.
Investors and speculators are both shareholders but their interests are often mutually exclusive. There tend to be fewer speculators but they're usually louder and more often the ones being catered to.
Related: If the execs are pushing EBIDTA numbers as the headline rather than a footnote, SELL! Someone is trying to obscure the real health of the company
So if shareholders own the company, does this mean they have to pay up if the company collapses owing money to employees, suppliers & customers ? No ?
I guess that explains why it makes sense to load a company with debt while transferring value to the shareholders - its a zero risk strategy.
"It’s called selfishness and greed." - it's called capitalism. Po-tay-to, po-tar-to. I agree that short termism is bad. But as you said, people invest with their eyes open, or should at any rate. They choose based on dividend expectation or capital growth, the two don't usually coexist so the choice isn't that hard.
Execs are employed by the shareholders, so investors are right to shake things up if the execs are making a hash of it. This doesn't happen enough in the cosy boys' (and girls') club of boards, execs and institutional investors. Activist investors may be self-serving pains in the arse, but if the result is a better performing company with less bad managers making bad decisions but still raking in the bonus cash, then what is the problem? Company value is not the execs' to waste.
Capitalism is based on self-serving decisions balancing out, and the financial markets are one place where this should actually work. The problem isn't duration of investment, it is complacency of investors and uninformed speculation.
Some good comments but I really don't see your point.
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