Month: November 2015

Where Have All the Public Companies Gone?

The U.S. Listing Gap

The number of public companies in the US has declined significantly since the late 1990s. This is the subject of a working paper, The US Listing Gap by Craig Doidge (Toronto), George Karolyi (Cornell) and René Stulz (Ohio State). While recognizing that Sarbanes-Oxley has increased the costs of being a public company in the US, they still find the extent of the decline in the US numbers to be “puzzling.”

Marc Hodak, a reader and contributor to the JACF, agrees that the numbers of public companies have declined sharply but thinks the cause is fairly evident. On his blog, he says,

Well, it’s not puzzling if you use a more realistic model of what would be driving those results. The model I have used for over a decade is quite simple:

A company will choose to be public when the benefits of being a public company exceed its costs, otherwise it will not join, or will exit, the public sphere.

The way it exits is of secondary importance.

His entire post is worth reading.

Marc addressed some of the costs of being a public company on the US in The Growing Executive Compensation Advantage Of Private Versus Public Companies in the Winter 2014 issue of the JACF, (Volume 26 Number 1).

Icahn’s Major Gains Come from Positions Held 7-10 Year or Longer

Icahn Says all of His Major Gains Have Come from Long-term Positions

In addition to Stanley Druckenmiller, Andrew Ross Sorkin interviewed legendary activist investor Carl Icahn at the Dealbook conference this week.

Sorkin asked Icahn whether activist investors contributed to managerial short-termism. The conventional wisdom is that investors like Icahn take major positions in certain companies, enjoy a jump in the share price from the surrounding publicity, and then sell off those shares after management has been forced to take actions not in the long-term interest of the firm.

Icahn replied that description simply wasn’t accurate. Far from reaping profits from short-term positions, Icahn said all of his major gains have come from positions held for 7-10 years or even longer. Mentioning specific companies he has held, Icahn described how he has interacted with managers at various companies in which he has been a shareholder. Shareholdings he continues to maintain include the following (with years held):

    ACF (31 years)
    American Railcar Industries (23 years)
    Federal Mogul (14 years)
    PFC Metals (17 years)
    Viskase (14 years)
    XO Communications (14 years)
    Vector Group (13 years)
    American Casino (11 years)
    National Energy (11 years)
    WestPoint Home (11 years)

The link to the interview is here.

For an explanation of how and why Carl Icahn became an activist investor, read The Icahn Manifesto by Tobias Carlisle in the Fall 2014 issue of the JACF (Volume 26 Number 4). For a broad discussion of corporate capital allocation issues, see Capital Deployment Roundtable: A Discussion of Corporate Investment and Payout Policy with Paul Clancy, Michael Mauboussin, John Briscoe, Scott Ostfeld, Paul Hilal, Greg Milano, John McCormack and Don Chew in the same issue.

Druckenmiller Says Earnings per Share Don’t Count

NYT Dealbook interviews Stanley Druckenmiller

On Tuesday of this week, the New York Times-sponsored Dealbook conference featured a particularly fascinating interview by columnist Andrew Ross Sorkin with well-known hedge fund manager Stanley Druckenmiller. Druckenmiller’s remarks dealt with several important issues the JACF has addressed over recent years.

On the subject of whether meeting Wall Street earnings expectations was a good thing—and “missing” earnings was a bad thing, Druckenmiller expressed great admiration for Amazon but not for IBM:

…the last 19 quarters, Amazon has missed their quarterly earnings nine times. They don’t give a damn…IBM has missed three quarters since 2006. They really care about their quarterly earnings.
[IBM] are under major attack from Amazon, Palantir, all these companies out there are eating away…Their R&D has shrunk in absolute terms and as a percentage of their sales.”
Oh yeah, I love Amazon because they’re investing in their future.

Druckenmiller said the same holds for Netflix:

“Same thing. I only heard 30 seconds of [Netflix CEO Reed Hastings]… but he said, ‘If you manage for quarterly earnings, you’re dead.’ Then somebody on CNBC says, ‘Well, it’s easy for him to say with a stock price like that.’ Well, why do you think he has a stock price like that? Because he thought about the long term and not cared about quarterly earnings and all this short-termism the whole time.”

It is unfortunate that so many business people seem to find Druckenmiller’s well-founded opinions surprising.

For a more formal and extensive treatment of exactly this topic, please read Three Common Misconceptions About Markets (or Why Earnings Smoothing, Guidance, and Concern About Meeting Consensus Estimates are Likely to Be Counterproductive) from our Summer 2013 issue, by Tim Koller, Bin Jiang, and Rishi Raj.

Some of the same ideas were expressed earlier in the JACF and actually put into practice at General Electric. See Financial Planning and Investor Communications at GE (With a Look at Why We Ended Earnings Guidance) by GE’s then CFO Keith Sherin in our Fall 2010 issue.