Sunday, March 28, 2021

"The ascent and demise of the listed company, and where—for better or worse—private equity will lead business next"

 There are two crosscurrents in the public vs private evolution of corporations. 

On one hand you have SPAC mania bringing public hundreds of companies.

On the other you have the almost insatiable growth of private equity as owners, often in industries that absolutely should not be subjected to PE's modus operandi of consuming the life force of their acquirees and then, at the next downturn in general business conditions, leaving only the husk.*

Think hospitals as just one example that comes readily to mind.

From Prospect Magazine:

RIP PLC: the rise of the ghost corporation

rom the mid-19th century to the end of the 20th, one form of economic organisation seemed to be displacing all others—the limited liability corporation with widely dispersed share ownership. Indeed in the 1980s, partnerships—investment banks, estate agents and legal firms—converted to corporate form, enriching the lucky individuals who happened to be partners at the time, while disappointing the hopes of more junior employees (the “mezzanine layer”) who had aspired to a future share of profits. Something similar happened as mutual building societies and insurance companies also became public limited companies (PLCs). State-owned industries such as telecoms, gas, water and electricity were privatised, and even agencies such as Companies House and the Royal Mint—which necessarily remained under public control—were restructured into corporate form.

But if the 1980s was the zenith of the listed corporation, the decade also saw the emergence of a very different trend. The buyout of food and tobacco conglomerate RJR Nabisco by private equity firm KKR was at the time the largest ever takeover bid, a drama of greed and ambition that inspired a bestselling book and then a film. Since then, the number of companies with shares listed on public markets that can be bought by individuals with modest savings has fallen sharply, at the same time as private equity has grown in importance. The trend continues to gather pace. In 2020, insurer RSA, bookmaker William Hill, and telecoms provider TalkTalk have been “taken private.”

What is all this about? Is private equity another scheme for enriching financiers and executives, or a better mechanism for governing companies? A means of avoiding tax, or of facilitating long-term investment? An arrangement by which managers can function in the dark, or one which enables investors to have a better understanding of the activities in which they are placing funds? It can be all of these things, and often is.

At the same time, should we ask whether the public corporation with widely dispersed share ownership was perhaps a creature of the 20th century, whose days are drawing to a close? I think it probably was. To understand why, we need to appreciate how both business and corporate form have evolved, and how they are continuing to do so.

orporations have a long history. The word has Roman origins. The legal doctrine of corporate personality defines an entity that can make contracts and own property, just as an individual can. The corporation has an identity that can survive changes in governance and form, and any particular individuals who might be associated with it from time to time. 

When the European Convention on Human Rights was negotiated in 1949, delegates debated whether a corporation could enjoy human rights; the conclusion was that it could. Until 1965, a British company was taxed as if it were a person. More recently, the US Supreme Court has concluded that corporations have rights of free speech and religious freedom.

Many people find these extensions of corporate personality a stretch. In the US Supreme Court, the late justice Ruth Bader Ginsburg, dissenting from the upheld right of a corporation to express the religious convictions of its dominant shareholder, asked why incorporation seemed to allow proprietors to shed personal obligations while retaining personal rights. It is a good question at any time, and one that presses harder when business is finding new ways to shake off certain obligations—and while the relationship between business and society is a subject of debate.

Early corporations were typically municipalities, such as the City of London Corporation. The modern business corporation began with trading and colonial companies, such as the Virginia and East India Companies. These were created by royal warrant, or subsequently an act of parliament, which limited the personal liability of participants for the corporation’s debts. The shares of these enterprises could be traded—the London Stock Exchange claims to have originated in Jonathan’s, a 17th-century City of London coffee house.

In the 19th century, the construction of railways and railroads required amounts of capital beyond the resources of any particular individual or small group. Britain’s railways were funded by middle-class savings; from the parsonage in Haworth, the Brontë sisters participated avidly in the speculative railway mania of the 1840s. Initially each project required its own particular act of parliament, but in 1855 legislation made limited liability freely available to any business enterprise. Subsequently this model of enterprise was extended to mining companies, retail banks and eventually manufacturing companies. Large amounts of capital were needed to finance the plants required by modern assembly line production, and the new model was an effective way to provide the requisite finance. The combination of limited liability, a stock exchange on which shares could readily be bought and sold and the rise of a professional managerial class defined the organisations that dominate our economy today—or, at least, did so until very recently....


Warren Buffett, who himself is running a public private-equity operation has nothing but disdain for the PE shops that compete with him—thus raising acquisition prices, but without the ongoing costs of maintaining a viable business on any timescale longer than, say, five years:

``You can sell it to Berkshire, and we'll put it in the Metropolitan Museum; it'll have a wing all by itself; it'll be there forever,'' he says at the February meeting.
``Or you can sell it to some porn shop operator, and he'll take the painting and he'll make the boobs a little bigger and he'll stick it up in the window, and some other guy will come along in a raincoat, and he'll buy it.''
—Warren Buffett
June 25, 2008
See also:
Berkshire Hathaway as Idealized Private Equity

*I always think of this Wired story:

Absurd Creature of the Week: The Insect That Devours Its Mother From the Inside Out

Ah, motherhood. I don’t know anything about it, but I heard there’s a lot of, like, sacrifice and stuff. Not only do you have to bring the brat into the world, but then you have to feed it for at least 18 years or you get in big trouble. That’s a lot of pressure.

But with all due respect to human mothers out there, their sacrifice is nothing compared to a momma strepsiptera. (Cue phone call from my own mother in 3...2...1...)....