May 29, 2012

Prophets and losses: it’s always someone else’s fault

It’s almost impossible to open the financial pages of a newspaper and not read about someone blaming someone else for their own mistakes.

Adam Schwab — Business director and commentator

Adam Schwab

Business director and commentator

It’s almost impossible to open the financial pages of a newspaper and not read about someone blaming someone else for their own mistakes. Be it investors, highly paid yet poorly performing executives, or protesting Greek citizens -- it’s always someone else’s fault. According to some, the initial public offering of Facebook, the world’s largest social network, was a failure or even a disaster. Andrew Stoltmann, a litigator leading a class action, told Bloomberg that the float is "the latest in a long string of events that is eviscerating the confidence investors have in the market". That is, of course, to completely misunderstand the purpose of the float. A company will sell shares in itself for two main reasons. The first is the "good reason" -- that is, the business needs capital to expand its activities and importantly, the return able to be achieved on that new capital is high enough to justify the cost of raising it. The second reason is the "bad reason" -- that is, the owners of a company want to cash out as much as their stake as possible to someone who knows less about the business than they do. (This is what happens when a private equity firm floats a company). In Facebook’s case, there was probably a combination of both factors (and also a rarely seen third reason, that is, Facebook was hitting the limits of the number of shareholders set by the SEC). In any event, from the seller’s perspective, the Facebook float was extraordinarily successful -- it received a price for its shares that was more than what the market is saying they are currently worth. Apparently, investors (technically, they are speculators or gamblers) who purchased Facebook shares are unhappy that the market value of their investment has slumped by 18% in a week. These investors have blamed the Nasdaq (for a minor trading glitch), the underwriters (for not disclosing lower revenue target) and even Facebook itself (who knows why). Apparently, those who gamble on IPOs should have some guaranteed put option -- that is, they should only be able to make money, rather than lose it. Of course, investing in Facebook, with an earnings multiple of about 100, was always going to be a huge risk. Morgan Stanley’s decision to lower revenue forecasts is of minimal relevance to the current valuation of Facebook -- compared to current earnings, it’s massively expensive anyway. But Facebook has a unique network effect and a virtually impenetrable barrier to entry. If Facebook is able to get its  search right (Google is understood to be very fearful of Facebook’s potential to encroach in its search realm) or if it can generate large transactions businesses (which is certainly possible), the company is capable of generating far more earnings that what it does from its over-priced display ads. Patricia Arroyo, a psychologist who apparently "manages her own investment" told Bloomberg that "what shakes my investor confidence more than the [IT] glitches is to see all the institutional insiders and favoured clients get all the advantages". Someone should tell Arroyo that insiders have been getting advantages for more than a century on capital markets, and a so-called botched Facebook float isn’t going to change the status quo. Closer to home, a conga line of complaining executives, from Myer’s Bernie Brookes, to the Financial Review’s list of all-star executives, are demanding another federal poll -- apparently, it is politicians' fault that Australian corporates are suffering from lower profitability. The irony of Australia’s captains of industry apt to criticise politicians shouldn’t be lost on anyone. A skilful executive would not blame a political landscape for their company’s woes. For all but highly regulated businesses, government policy has little or no effect on a company’s total earnings. If a company needs to rely on government largesse or policy, it’s reasonable to opine that the company is not one that deserves investor funds. The claims of Brookes last week were most amusing. Brookes claimed that Myer had been "talking to a lot of investors in the UK and US and Asia, and they are saying they don't have a lot of interest in Australia at the moment because of political uncertainty in the mining tax, the potential perceived and actual impact of the carbon tax". Sorry Bernie, one suspects the major reason for investors’ reluctance to invest in Myer has nothing at all to do with the carbon tax (which will have little or nothing to do with Myer), but rather the retailer’s sales last quarter dropping another 2%, and profit forecast to be down 15% as customers flee to cheaper online competitors. And it’s a bit rich for Brookes to complain about taxes when the former owners of Myer (which were actually shelf companies domiciled in tax havens such asd the Cayman Islands) siphoned off more than a billion dollars of profit without paying a cent in tax. Meanwhile, Myer was happy to benefit from the Rudd government’s $43 billion in stimulus spending, which came from other people’s taxes, just not Bernie and his Cayman Island based mates. Then we have the bizarre attitude of the protesting Greek citizens, unhappy about their government maintaining an "austerity" budget. Austerity, of course, is simply a fancy word for trying to spend less than one earns, not exactly an unreasonable request. And in Greece’s case, they can’t even do austerity properly, with Greece still running a budget deficit of 7% of GDP. Meanwhile, the austere Greece still pays its public servants multiples of what private sector employees receive, and still has a retirement age of about 50 for women (and only slightly higher for men). Let’s not forget, Greece was only admitted into the euro after it enlisted the help of Goldman Sachs to come up with some complex cross currency swaps and other derivatives to hide debt from its balance sheet to meet EU requirements of having a budget deficit of less than 3%. Greece should long ago have been removed from the euro instead of being propped up with printed money -- Europe has spent two years trying to remove its Band-Aid -- there would have been far less pain had it been ripped off in one hit. You don’t hear successful investors or executives complaining about governments, or even worse, government inaction. Successful executives and investors will succeed despite government intervention, not because of it.

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8 thoughts on “Prophets and losses: it’s always someone else’s fault

  1. bjb

    Adam – another great article. Good work on pinging the CEOs who blame the government for their problems. Rather than whinge, most of them should start doing something to actually earn the vast amounts they pocket.

  2. Bill Hilliger

    Bernie Brookes – the former owners of Myer did their cutting and gutting of Myers, many people lost their jobs and, as expected, so too, quality of service went out the window. The former owners onsold a gutted Myers; investors were sold a dud. Quality of service at Myer is abysmal – maybe that is part of the reason why your organisation is not doing so well. Anyway soon you’ll also be able to blame the carbon tax as a reason for your problems. We all know there are many fairweather CEO’s and company executives who will always blame some other factors for their poor showing in business, afterall its the Australian way isn’t it?

  3. fozziewossie

    Many good points Adam. Now we just need most media to ignore the whingers and we’ll all be much more productive for it.

  4. mikeb

    Cato the Elder used to admonish the Roman people that “Carthage must be destroyed”. Said often enough the Roman people came to believe the same thing. Hitler blamed the Jews for the German malaise after WW1. Unemployed timber workers blame greenies for the pulp timber market collapsing. It’s natural that people would rather blame others for their own misfortunes or mismanagement. This time around it is the federal government.

  5. Stickey

    I just like the way Adam “takes the pith out of them” and makes a valid argument. Suggesting a change of government disqualifies them from running any business. It’s time shareholders took these executives apart. Given recent exemplary failures it seems these same incompetents can’t ask for three simple figures every Friday – turnover, profit, and, bank balance !!

  6. shanghai

    Great article.

  7. Alister Cyril Blanc

    Great article, as usual Adam, but about Greece we probably should admit to the fact that…JP Morgan estimates that only €15bn of the €410bn in new “aid for Greece” actually went into their own economy….the balance merely looped through their system back to their creditors…

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