The Stock Market’s Revolving Door

September 25, 2013 Current Commentary Comments Off
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Chrysler may go public again, while Blackberry and Dell want to escape the stock market and go back to being privately held. Maybe, as the old saying goes, the grass always looks greener on the other side of the fence.

Or maybe these moves are more systematic than we assume.

Going public was once seen as a gateway to business success. Now it looks more like a revolving door. New, or at least newish, businesses emerge onto the public markets once they have achieved a measure of success, preferably bolstered by a big dose of name recognition. Public companies that have lost their footing may seek to escape the glare of market scrutiny by ending their public listings, often (but not always) accompanied by a change in management.

And as Chrysler (like General Motors and others previously) may demonstrate, even a company that has had a near-death experience can put itself back into good enough shape to go public for a second, or even a third, time.

Going public allows promising young companies to raise money by selling more shares, and it permits early shareholders to more readily turn their investment into cash. Chrysler, of course, is no startup; it is a century-old brand that operates in a mature industry. In Chrysler’s case, going public – or almost going public and then changing its mind at the last minute – can establish a market value for its shares. This may help settle a dispute between Chrysler’s majority owner, Italian automaker Fiat, and the United Auto Workers union retiree fund, which holds a large minority stake. Fiat wants to gain sole control of Chrysler and essentially merge the two carmakers, but has not been able to agree with the union on a price.

Such “price discovery” is another important function of public stock markets. On any given day, something is worth whatever two parties are willing to exchange it for. That figure is much easier to determine when shares are bought and sold every business day.

On the other hand, public companies incur a lot of direct and indirect costs. The direct costs mostly result from compliance with legal and regulatory requirements. Indirect costs include many restrictions on what the company can say, and when and to whom it can say it. Top executives may face fines and jail time if they are found to have breached these obligations, even inadvertently. A lot of criticism of public corporate reporting involves Monday-morning quarterbacking focused on overly optimistic treatments of problems and risks that are much more visible, and measurable, in hindsight.

The bottom line is that there are good reasons for private companies to go public, good reasons (on occasion) for public companies to go private, and good reasons for private companies to stay private, especially when ownership and management reside within a relatively small and self-contained group.

I believe good management makes a much bigger difference than the venue in which a company’s shares trade. IBM and Apple were struggling public companies when Louis Gerstner and Steve Jobs, respectively, turned them around. Neither went private. Each had a leader who brought vision, focus and discipline to an organization that had lost those qualities.

Google has continued to thrive as a public company, dominating a fast-changing industry. Its sometime-competitor, Facebook, was severely criticized for a “failed” initial public offering last year, when the stock price plunged by about 50 percent from the IPO price. But little more than a year later, Facebook’s IPO looks like a brilliant success. Shareholders who sold at the IPO price did not leave a lot of money on the table, while those who bought close to the $38 initial price today hold a stock that traded this week at around $49. Facebook reports that its profits and customer base are growing. The stock is still very expensive relative to its current earnings, but CEO Mark Zuckerberg and his team appear to have a good grip on their market and their mission. Going public did not change that.

In the same vein, problems at Dell and Blackberry are hard to blame on the companies’ public status. Their industry changed around them, and they failed to adapt. So did Nokia, which just agreed to sell its handset business to Microsoft for $7 billion. Microsoft itself is an also-ran in the smartphone software business, and it is seeing its overall strategic position steadily deteriorate. But it is sitting on a large pile of cash, much of which is trapped offshore thanks to shortsighted U.S. tax policy. So, in a parting move as CEO, Steve Ballmer is choreographing the acquisition of one corporate brontosaurus by another. I am not optimistic about the company’s prospects, though perhaps the right CEO at Microsoft can turn things around.

Because of restrictions that are meant to protect small investors, most of us cannot buy into most companies until they go public. That does not mean you should rush to buy the next IPO that comes along. Or any IPO, for that matter. While some IPOs are still priced to “pop” in the first days of trading, good investing is not a short-term activity. If you plan to buy a company for the long haul, there is no reason to believe you’ll get a better price from an IPO than from a more seasoned stock in a similar business.

Companies on the way up often go public. Companies on the way down sometimes go private. Yes, it’s a pattern, but the business world is full of ups and downs. You have to be prepared for the ride either way.


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