Todayâ€™s NYT has a sobering article entitled Public Companies, Singing the Blues. The article discusses a question raised by Daniel Loeb, a famous hedge fund manager, at a dinner of buyout kings in Davos, Switzerland (the site of the World Economic Forum).
Loebâ€™s question: â€œWhy can buyout firms take public companies private and make enormous returns, while the same type of returns seem out of reach for public companies and their shareholders?â€? He went on to say that buyout firms â€œwere essentially arbitraging the public markets and â€˜are appropriating profits that should belong to public shareholders.â€™”
As the article states, there are various advantages to being private: less regulation, fewer pesky shareholders, bolder and more useful boards, less focus on the short term, etc. Buyout funds take public companies private to capture these advantages. But are they fleecing public shareholders in the process as the article suggests? They canâ€™t be, at least in the long term. My guess is that Loeb was just being sensationalistic. If there really is an easy arbitrage opportunity in the buyout market resulting in abnormal positive returns, a lot of money will flow into buyout funds (as it has been), more money and funds will be chasing deals, buyout premiums will increase, and the easy arbitrage profit will disappear.
And another thing: By what absurb metric does “the public” not share in the profits of the private companies they spawn? Isn’t it “the public” who receives the takeover premium paid by the buyers in the first place?
Although the (very brief) article tries to suggest otherwise, every “cost of being public” cited by the executives in the article is a function of regulatory or legislative excess. Compliance costs and independent boards, obviously. But the real peril cited by these guys is mandatory-disclosure-enabled meddling by shareholders and other stakeholders who shouldn’t. Downward pressure on executive pay is (surprisingly) an issue, so are other constraints on managerial decisionmaking. In a forthcoming post on disclosure, I’ll say a bit more about this, but the basic point is: If you make it less expensive for shareholders to exert influence, you make it more likely, as well. Despite what the corporate democracy folks say, this can be costly. And, of course, fundamentally, if the problem is that the takeover game isn’t being played by public companies, one need surely look in the direction of the Williams Act.
Oh–and for my money you left out the best quote:
I wonder if he’s referring to anyone in particular.