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Friday, 26 May 2017

Crony Capitalism

The Netherlands is toying with a new idea: protecting stock-quoted companies from unwanted Mergers & Acquisitions (M&A). This idea should help Dutch listed companies (e.g., Akzo Nobel, Unilever) against hostile foreign buyers (e.g., KHC, PPG). The Dutch Ministry of Economic Affairs is considering a 1 year cooling-off period following an unsolicited and unwanted merger or acquisition. This proposal is quite different from the Dutch situation some 400 years ago.

Wiki: “the Dutch East Indies Company, was originally established as a chartered company in 1602, when the Dutch government granted it a 21-year monopoly on the Dutch spice trade. It is often considered to be the world's first truly transnational corporation and the first company in history to issue bonds and shares of stock to the general public.”

Listed companies in any country seem to generate a lot of “noise”: bonuses, IPO’s, M&A, remuneration, severance payments, stock options, and so on and so forth. The majority of all businesses is however privately owned and seldom heard or seen in the news.

The potential delisting of a public company is often accompanied by (wildly) diverging views of stakeholders, like bank(s), buyer(s), customers, employees, government, management, shareholders, suppliers, and trade unions. The (financial) press is often used by one or more of these stakeholders to advance their interests.

Over the last 30+ years, I didn’t develop much sympathy for listed companies. Usually things are over-the-top: ambitions, failing projects, headquarters, in-fighting, politics, remuneration, waste. As a result, entrepreneurship often suffers. Strategic delistings may bring back entrepreneurship. Financially driven delistings often bring excessive debt, excessive cost cutting, fire sales, sale & lease backs etc., to recoup overpriced delistings.

A cooling-off period of 1 year may sound sympathetic but to whom?? Future buyers are scared off, underperforming management buys time, employees become worried and may decide to leave. Stay-on bonuses will have to be paid to the best and brightest employees, some middle managers, and obviously top management.

It's almost funny: during an IPO the well-informed selling shareholders create wealth at the expense of poorly informed buying shareholders. Then management does the same through excessive remuneration and underperformance. Finally, a buyer comes along and then the government restricts shareholders' right to sell.

Once, the stock exchange was an example of Capitalism and a means of raising money for expansion and spreading risks over wealthy individuals (e.g., Lloyd’s). Today you wonder if a stock exchange is a system in which (IPO) wealth is privatised to sellers and future underperformance and bailouts are socialised to share buyers and taxpayers.

The cooling-off period might be an example of crony capitalism. Wiki: “Crony capitalism is a term describing an economy in which success in business depends on close relationships between business people and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, or other forms of state interventionism.”

Game Over (2016) by Cool Uncle ft. Mayer Hawthorne