Wall Street Tries to Get What it Wants

Seth Godin wrote a post today titled Wall Street gets what it wants about what happens when a company goes public.  This brings several points to mind:

1. Founders never seem to understand that when they sell their company, they don't own it anymore.
1. After the sale, the founders have the money and the buyer has the company.  That's why they gave you that money.  Does the car dealership still own a car after they sell it?
2. The buyer will often say that they won't change anything after the sale.  They might even mean it.  There is usually a honeymoon period of stability, but things always change.
2. Public companies require growth to satisfy shareholders. But infinite growth is not sustainable. Therefore, investments in public companies are not sustainable and are suitable only for speculation.
3. In the search for growth, companies will often do stupid things that hasten their demise.
1. This is often because the best course of action is to "stay the course", but shareholders insist that you try something different.
4. Wall Street does not want reliable incremental growth.  Reliable incremental growth can be discounted to a present value and doesn't change.  You would be better off owning a bond.  People buy stocks because they are hoping for a surprise on the up side. Infinite up side surprises are not possible, let alone sustainable.
5. Over time, private or hybrid companies will replace public companies as investment vehicles.
1. We are already seeing the move to private equity.
2. Venture capitalists are extracting more the of the value from new companies.  This is demonstrated by the trend of large IPOs.
3. Hybrid companies such as Google have two classes of stock.  One class is for the founders who will continue to control the company, and one class is for investors who are allowed to come along for the ride.  These companies will outperform pure public companies because they can avoid much of the pressure from shareholders.
4. Further evidence is provided by Michael Dell taking his company private again.  He actually cares about the company.  That correlates well with success. He is now publicly commenting on the dumb things companies are forced to do by "activist investors".
6. Another variation of private companies is employee owned companies.  I really like this method of ownership because it aligns ownership with the people who have the most skin in the game (employees).
1. With liquid markets, shareholders can jump in and out of a company many times a minute.
2. Employees incur massive transaction costs in switching jobs.  Therefore, employees have much more skin in the game than the putative owners of the firm, which flips many of the theories of capitalism on their head.
3. Ownership of private companies is fairly illiquid, so owners of private firms do have skin in the game.  In fact, they may have higher switching costs than some percentage of their employees, which led to many of the theories of managing the firm, agency issues, etc.