Comments on: More worries about companies staying private A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: traduceri daneza Mon, 29 Sep 2014 13:59:19 +0000 Generally I don’t read post on blogs, but I wish to say that this write-up very forced me to try and do so! Your writing taste has been surprised me. Thank you, very great post.

By: TFF Fri, 25 Mar 2011 18:15:46 +0000 Wow, I never thought of it that way, y2kurtus. That makes perfect sense!

The real value of a company — as long as you own it — is in the cash flow. Market price is only relevant when you sell it (or transfer it to your heirs).

By: y2kurtus Fri, 25 Mar 2011 15:49:47 +0000 Most of my customers run small business or family businesses. Only one or two of my customers work for businesses that would warrent a 100mm market value with a P/E of 15.

I think the reason that they would not want to IPO are many, but largest adversion to going public is extreemly counterintutive… they want to manage and grow their business while maintaining the LOWEST valuation possible.

Why on earth would anyone want to do that? Well if you company is worth 100mm than it’s pulling in an income of 6-10mm annually depending on the valuation you apply. That’s a pretty nice life. If you want to pass that business on to your 2 kids and you are gifting them shares in the business at the max tax free rate of like 13,000/year then it makes a big difference in what your P/E is.

It’s the opposite if you were selling it to a 3rd party… instead of getting the absolute max valuation you can your actually shooting for the minimum valuation. Once some people hit a level of income and wealth their comfortable with their perspective really changes.

If Mom and Dad have two kids then they can only pass roughly $52,000/year tax free. (13k gift exclusion x2 parrents x2 kids) Assuming mom and dad are 50 then they have at most 40 years before they are going to have to pay estate tax… by straight gifting they can only hope to move a couple million bucks worth of a 100 million dollar company to the kids. Add in another 10 million via the gift exclusion and your up to (12ish million out of 100mm)

Upon death mom and dad have a taxable estate worth 88mm x.35… please make that check paybable to the U.S. Treasury in the amount of $30,800,000… your country thanks you!

I have no problem whatsoever with taxing estates… probably the fairest of all taxes if you ask me… but in my mind that’s the largest driver to stay private and keep valuations low.

By: cardinalrules Fri, 25 Mar 2011 03:44:37 +0000 As an executive in a small, private company myself, I fail to see the dire consequences of Mr. Salmon’s observation of fewer companies going public. Weak boards and shareholder apathy are often the order of the day, and as a result the actions of many public companies become motivated more by short term greed on the part of management and their investment bank enablers rather than any drive for long term growth or sense of duty to shareholders. Here’s a quick test I have for executives to gauge if going public is appropriate :
1) Do you see the IPO as the end of the game rather than the beginning of it?
2) When evaluating stock issuance versus corporate debt, do you see the latter as money you need to pay back and the former as money you don’t?
3) Do you see the management incentives dangled by IPO advisors as just reward for all your hard work and success in getting the deal done?
If the answer to any of these questions is YES, you should decidedly NOT go public, and those that do anyway should be considered investment hazards. Executives in private companies with “skin in the game” can be expected to act more responsibly than those in public companies playing with other people’s money.

By: TFF Thu, 24 Mar 2011 18:45:52 +0000 Lilguy, I agree that getting good data on IPOs is difficult.

My philosophy is that I should never invest in anything unless I’m pretty certain that I will not lose money.

Without good data, you can’t be certain about anything.

Thus I have no regrets over passing on any and every IPO.

By: newthrash Thu, 24 Mar 2011 16:25:22 +0000 We are talking about a period encompassing a huge tech bubble, a spectacular bust of the tech bubble (lots of failed companies), then a period of stagnant IPOs while credit financing was incredibly cheap and led to many buyouts of public companies. In the last few years, the stock markets have been extra volatile, which scares away a lot of IPO plans. Not sure I’m willing to accept there’s a major trend away from public listings yet.

By: Lilguy Thu, 24 Mar 2011 16:09:19 +0000 First, if you find yourself continuing to think the same way as Tim Geithner, you may want to seek professional help.

Second, I’ve long believed that the reason large companies (& especially hedge funds) go public, it is because they believe they have squeezed out all the “alpha” their company can generate. Going forward, they see their company just matching the market, so they sell out.

As a general rule, I don’t invest in IPOs. That said, one I (and we all) should have invested in, however, was GOOG. So my view is not universally accurate.

I guess you do have to look at the specific objective merits of an IPO, but getting good data is difficult.

By: MainStreetMuse Thu, 24 Mar 2011 13:51:25 +0000 “Ryan forgets, here, that a larger share of workers did invest in defined-benefit plans, for most of the stock market’s heyday. And that during those years, defined-benefit plans did pretty well, considering.”

Couple of things – the crash of 2008 has made many small investors quite leery of the stock market, which seems to many to have become Vegas-like in its operations.

The quote from Felix above is interesting re: the debate in Wisconsin over defined-benefit pension plans. Wisconsin has one of the more stable and well-funded pension plans, but they were socked by the crash of the markets and needed to tap into other funding sources for the pension benefits. Now the fixed benefit plan is being painted as a drag on the economic resources of the state by the GOP leadership.

And frankly, the defined benefit plan is nothing that has ever been offered to me from any employer – are they widely offered today? (I tend to enjoy working for rogue small businesses…)

Finally, the focus on shareholder return seems (to me!) to incent the C-suite to focus on short term gains that don’t necessarily benefit the long-term goals of the company. With so many publicly traded companies swirling in the toilet these days in sectors that include airlines, newspapers, banks, autos, etc., it is not clear that being traded on the stock market is actually good for the company.

By: TFF Thu, 24 Mar 2011 12:46:56 +0000 “New capital must be drawn into the markets for many years to compensate for this loss and a new generation of the saving public will have to be the source of this new savings, right?”

DanHess, if I understand the economics of this situation correctly, we are looking ahead to a couple decades of restrained growth (at least in Japan/US/Europe). As you say, capital outflows are likely to outpace capital inflows — and since that is essentially a logical impossibility, it implies that the exchange price will be lower than what we’ve become accustomed too. In short, P/E ratios will trend lower.

This will have the effect of boosting future returns for people buying at the lower prices, but it isn’t really good news for current shareholders. The primary driver of increased (future) returns for the market as a whole will be declining (present) prices. Or more likely, price stagnation while earnings creep upwards at a historically slow pace.

There is still strong real growth in parts of the world, but only some companies will benefit from that growth sufficiently to offset stagnation in their developed markets. The key is to figure out which companies these will be — and become accustomed to evaluating companies on their free cash flow (and dividends!!!) rather than their earnings growth prospects.

Speaking of which, it puzzles me how Felix talks on the one hand of “zero real return” investing and on the other hand is consumed with excitement over companies like Facebook. If you believe we are approaching decades of slow growth, then growth companies are the **WORST** investment choices. The instant that their growth is curtailed by economic malaise, their P/E and share price will plummet.

In contrast, companies such as P&G, Coke, and J&J will return solid value to their shareholders even if the global economy comes to a dead halt.

So which do you really believe, Felix? Do you believe in the unrestrained exponential growth on which that Facebook valuation depends? Or do you believe we are very close to achieving a “maintenance” economy that year after year continues to do “more of the same” with little change?

By: DanHess Thu, 24 Mar 2011 02:57:01 +0000 Many good points by TFF.

“If you forget about gains (trust that to chance) and work on minimizing the potential for losses, the portfolio will be fine.” That is a fine point!

If you believe that in the future, there will always we a glut of savings, then returns may be poor for the public markets. But if you believe that in the future, capital will sometimes be in short supply, then returns in the public markets definitely have a bright future.

New capital is formed when countless individuals consume less than they earn and save the difference. Public markets are where this new capital gets put to use, often replacing capital that is exiting.

We are faced with the largest exiting of capital in history, the retirement of the enormous cohort of first-world baby boomers globally. New capital must be drawn into the markets for many years to compensate for this loss and a new generation of the saving public will have to be the source of this new savings, right?

The earnings yield on the S&P is 6%. The public is certainly getting an okay yield.

I totally agree that possibilities in the private world of business are better, but if a company is private and you are an owner, don’t you actually have to *do* something? Like, um, run the company? Or maybe have a smart family member who is charitable enough to carry the load while you ride on their work?

I rather enjoy dividends and capital gains rolling in while I do *absolutely nothing*, even if the upside is limited.