As I wrote in an earlier blog, (Blog 5/26/16) the world is awash in personal savings accounts, what Ben Bernanke calls a “global savings glut.” (“Private Desires, by Geoff Colvin, Fortune, June, 2016, pg. 54.) In a recent essay, Geoff Colvin points out this sea of cash is changing the way some corporations are doing business. Fewer of them are going public and others, like Dell and Safeway, are buying back shares and going private. They no longer have to rely on Wall Street to raise cash. They can borrow from private equity firms that are hungry to invest their excess capital; or these businesses can fund themselves by issuing bonds at little or no interest rates as Unilever did recently.
In the past, a start-up that made its way to Wall Street had a right to be proud. Selling shares in their company allowed them to raise capital to grow. In the industrialized era, when manufacturing required heavy equipment, large sums of money were needed to upgrade. Today, technology requires little of that kind of investment. According to Colvin, “asset-light” enterprises account for 31% of all the profits of Western companies. That’s up from 17% in 1999. (Ibid pg. 53.)
Going private has many advantages No more oversight by Sarbanes-Oxley and Dodd-Frank laws. No more public scrutiny of CEO salaries and best of all, no more threat of takeovers by investor activists. That’s why people looking to reap profits as shareholders in hot companies like Uber, which chooses to remain private, are likely to be disappointed.
Of course, advantages remain for businesses that choose to go public. Raising large sums of cash is the plus when seeking growth through mergers and acquisitions. Facebook and Google are innovators of this kind and won’t be going private anytime soon. The down side of staying in the market is that a company remains subject to those pesky government regulations.
Bob Dylan courtesy of yahoo.com
Many people are unaware they have ties to Wall Street via their retirement plans. Nonetheless, this shift from public to private entrepreneurship can affect how those plans will perform in the future. With Labor unions and their large pension funds in decline, one wonders who will be watching the hen house. Certainly Bob Dylan’s refrain comes to mind: “The Times They are a Changing.”
See how far we’ve come already. In 2008 the financial crisis was due to a lack of money. Today, we are awash in the stuff with too many dollars chasing the few places where it can grow.
