Public companies have become enslaved

Top Silicon Valley player, Gordon Davidson, says that tech companies should drop the IPO goal and focus on private equity and staying as a private business. Davidson is the lawyer behind the mega deals of the past so his views are important to note. Let's look at his reasoning:

The soft-spoken Davidson, chairman of powerhouse law firm Fenwick & West, has had a hand in more than 100 mergers and acquisitions and some 30 initial public offerings — most of them in tech. He's also a lawyer for Cisco Systems, venture firm Kleiner Perkins Caufield & Byers and others.

So it's a bit shocking to hear him downplay the importance of tech IPOs today. For proof, he cites Facebook, Zynga, Twitter, Yelp and others: None is in a particular hurry to sell shares via the stock market.

"Good companies can go public in any market," Davidson says. "Today, it is easier to be a private company than a public one." Public companies "have become enslaved by the expectations of analysts and shareholders," he says.

Those forestalling public offerings are older, better-known companies that have yet to be enticed by a recent uptick in tech IPOs. For older start-ups, a new breed of private-equity investments are an attractive substitute, especially in the face of the weak advertising market that so many social-media companies depend on for revenue.

Such investments in late-stage start-ups such as 6-year-old Facebook, nicknamed "DST deals" — after Russian investment firm Digital Sky Technologies, which started the trend by funneling tens of millions into Facebook and Zynga — are a recent phenomenon. The money goes to buying shares owned by employees or early investors.

The strategy has been accentuated by several crosscurrents: the lingering effects of the worst bear market since the Great Depression; readily available private equity, in the form of investments by firms such as Andreessen Horowitz and DST; and the costs of complying with public company regulations such as the Sarbanes-Oxley Act,which established new standards for boards, management and accounting firms following accounting scandals at Enron, WorldCom and others.

"It is undeniably harder to be public today than 20 years ago," says Bill Gurley, a partner at venture-capital firm Benchmark Capital.

Consumer spending data is misleading for Canada

With Canada's GST and HST, Economist Michael Mandel's article Consumer Spending is *Not* 70% of GDP may not completely apply. Mandel does go through why shopping is not the be-all and end-all, he also explains the apparent discrepancy between retail sales and consumer spending. Let's take a look.

I opened up this morning’s NYT and see the big headline “Retailers See Slowing Sales in a Key Season.” And I just know that we are about to have another round of “consumer spending is 70% of gross domestic product, so blah blah blah blah of course we can’t recover unless consumers start spending again.” (Not in the NYT story, to their credit, but you can find similar quotes everywhere you look).

Blah blah indeed. As a textbook author, there are few things that frost me more than hearing “consumer spending is 70% of gross domestic product,” because it perpetuates two very large and very misleading untruths.

First, the category of “personal consumption expenditures” includes pretty much all of the $2.5 trillion healthcare spending, including the roughly half which comes via government. When Medicare writes a check for your mom’s knee replacement, that gets counted as consumer spending in the GDP stats.

At a time when we are wrangling over health care reform, it’s misleading to say that “consumer spending is 70% of GDP”, when what we really mean is that “consumer spending plus government health care spending is 70% of GDP.”

Second, an awful lot of those back-to-school dollars are going to imported clothing and school supplies (how many of those laptops and iPods do you think are made in the U.S.?). A dollar of consumer spending does not translate into a dollar of domestic production.

In fact, the whole way that the BEA presents the GDP statistics points the public debate in the wrong direction. GDP stands for “gross domestic product”—that is, domestic production. But the breakdown of GDP is into expenditures categories—personal consumption expenditures, government consumption expenditures, etc.

I think we need to move towards presenting GDP in terms of production, rather than spending. We need a shift from the consumer to the producer as our main unit of analysis.

But for now, we need to stop being so darned obsessed with consumer spending.

Citi selling Private Equity to Stepstone

Stepstone Group LLC said Wednesday that it has closed its acquisition of $4 billion private equity funds from Citigroup Inc. (C) as the investment bank seeks to offload its alternative assets units ahead of U.S. new financial rules discouraging banks from engaging in risky trades with their own money.

Financial details of the transaction weren't disclosed but the package includes fund of funds, mezzanine and co-investment businesses.

A voting machine for good businesses

"The public market is a voting machine in the short term, weighing machine in the long term," said Randall Abramson, Trapeze Asset Management. This quote came from one of Randall's favorite economic experts, Benjamin Graham, who was also one of Warren Buffet's mentors. Randall was going through his company's rational for investing, and running a demonstration of their extraordinary algorithm which made sense. Showing Disney's stock journey over the past few decades, gave a compelling snapshot to back up Randall's view that good investing is about value and digging deep to find undervalued companies. There were many opportunities to buy a seriously undervalued Disney stock and other times when the stock was too over priced to be an attractive investment.
The message was clear: fickle public opinion does not out perform the long term value of a business.
The public market has been a voting machine for future success, based on the talent and innovativeness of the management team and their employees and resources. The long term focus has been damaged though, as bubbles hammer good companies who do not deserve to have their stock reduced due to the foolishness of other businesses forgetting good business practices. The crash hurt sensible, wise investors with its sudden plunges.
This volatility of stock price, which is mostly out of the control of management, is the number one reason given by CEOs for frustration with public markets. Harvard reported that 88% of CEOs preferred running a private business without the pressure.

Jacoline Loewen, author of Money Magnet: Attract Private Equity Investors to Your Business

Succession Planning Should Focus on Selling the Business

Less than 3% of family businesses make it to the third generation. That arresting factoid prefaces Every Family’s Business, a book dealing with succession planning for family businesses. In this book review by Canadian Business expert, Larry MacDonald, he reveals how the author, William Deans, draws on a wealth of personal experience: he is a fourth-generation businessman and ran his father’s 250-employee chemical business for ten years prior to its sale. MacDonald says:

This remarkable book is written in the dialogue style of David Chilton’s The Wealthy Barber. It was first released in 2008 and has sold over 100,000 copies so far. Deans himself is much in demand and has done over 300 presentations around the world. He operates out of Hockley, Ontario and has a website at www.everyfamiliesbusiness.com.

When it comes to succession issues surrounding family businesses, most books and advisors deal with how to transfer control to younger family members. But Deans thinks the focus should instead be on selling the business at fair value whether it is to family or non-family. 

I would add in here that you can sell to private equity either fully or staggered over five to twenty years.

This sale will all chips off the table and not only assures a more secure retirement for the owner but often leaves behind greater wealth to distribute to heirs. MacDonald says:

Many business owners want to hand over their beloved enterprise on easy terms to children as an act of love or because they wish to leave their business behind as a legacy. But for a variety of reasons, as discussed in Every Family’s Business, the transfer often leads to acrimony and dysfunction within the family. It can also culminate in insolvency or a sale at a low price to a non-family buyer.

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