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Another Benefit of Deflation: Companies Going Private

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Best Buy, The New York Times, and Chinese elevator-television maker Focus Media are all reported to be considering or in the process of going private – selling their shares to private investors who will then manage the companies without the trouble and scrutiny of the stock exchange.

They actually make all Best Buy employees do those exercises.

All three companies have been brought to the brink of privatization by the healthful shift toward value that is occurring in the American economy despite the best efforts of the Washington/Wall Street axis. 

Best Buy, a subject of countless business obituaries, is now a target to be taken private by founder Richard Schulze. According to USA Today's Matt Krantz

Schulze is offering $24 to $26 a share for the company, which before the bid, was trading for $17.64 a share. The deal is far from done, as the company must not only approve the offer, but Schulze must line up all the financing to pay for it.

The move is [an] effort to save what was once a powerful force in consumer electronics, but has lost ground amid competition from Internet-based rivals, such as Amazon.com (AMZN). The company reported a net loss of $1.2 billion in the 12 months ended March, the latest data available from S&P Capital IQ.

Meanwhile, as noted earlier at Reason 24/7, Bloomberg's Edmund Lee is speculating that the parent company of The New York Times may retire from the hurly-burly of Wall Street (the company has seen its valuation fall by $7 billion since the beginning of the 21st century) and return to family ownership: 

"Now would be a good time for the company to go private," said Reed Phillips, managing partner and co-founder of DeSilva & Phillips, a New York-based investment bank that focuses on the media industry. "The Times and other print newspapers are at an all-time low in valuations. They have been 'cleaning up' the business by selling off orphan assets for some time now."

And Shanghai-based Focus Media, which markets flat-panel advertising displays in elevators, movie theaters and other locations, is looking to leave NASDAQ with a pan-galactic investor group that includes Carlyle Group, China Everbright and Focus Media CEO Jason Nanchun Jiang. Focus Media has seen investors turn bearish after a negative report on its bookkeeping practices by Muddy Waters LLC. 

Focus Media is one of 19 Chinese companies looking to leave the American stock market this year. Thirteen did so last year. T.H. Capital Research analyst Tian Hou tactfully tells The Deal Pipeline's Chris Nolter that U.S. investors need to get with the hyperinflation program: "If the negative sentiment against Chinese stocks in the U.S. markets doesn't change," she says, "we are going to see the trend continue."

I say let it continue – if it actually is a trend. (Krantz notes that the number of privatizations is actually below where it was at the start of the credit unwind, pointing to "the reluctance of lenders to take chances.") 

Deflation is good.

In the Keynesian universe, a trend toward taking companies private would be catastrophic. On planet Earth, not so much. It's true that a private company lacks access to the big capitalizations available in the public markets. But it also gets away from the stupidity of crowds and has a better chance of understanding what amount of value it's generating. Better that all these brands get a fighting chance under management by investors who have some stake in the outcome of the company. 

To be clear: Other than Focus Media, I'm not sure these companies have much of a chance in any case. If Reed Phillips believes "print newspapers are at an all-time low in valuations," I'd advise him to wait six months. Best Buy's secular and cyclical problems are familiar enough that I don't need to recite them here (though as an occasional Best Buy customer I would rate my experience as fair to good). 

But that's the point. Schulze and Jiang and the Sulzbergers deserve a chance to try and make money without having to lie to Wall Street about how much potential they have. If there has been one shining lesson of the last six years, it's that we are all, individually and collectively, worth far less than we were led to believe. That goes for companies, it goes for employees, it goes for cities, counties, states and nations, aunts, uncles, nephews, nieces, pills, planes and artillery pieces. 

Even "Counterfeiters" sounds classy in French.

In that environment it's more merciful to be managing a business without having to go through the overvaluation process that – at least since the dotcom boom – has become the public market's reason for being.

I don't want to get nostalgic for the best practices used by our founding fathers under the buttonwood tree, but one habit with relevance to the private/public company question has vanished entirely within the last 20 years. It used to be that when you did the opposite of what we're talking about here – when you took a  private company to the stock market for the first time – shares were supposed to close the first day of trading at about where they were when the trading started. If shares went up sharply after the IPO, that meant the deal had been undervalued. 

During the dotcom boom this was reversed, and an IPO was supposed to see double-digit gains in its first day in the market. A generation of Henry Blodgets got rich mooning about the red-hot performances of newly issued tech stocks when the only sound you should have been hearing was the IPO's underwriters howling about all the value they'd lost by not pricing shares higher in the first place. (That Goldman Sachs and other IPO giants didn't howl tells you that at some level they understood what massive swindles they were perpetrating.) 

That mentality never really went away, even in hard times.  A newspaper monopoly can still be a profitable enterprise, yet in the public markets it will never be anything but a dying business. Add the federal attention you get from the SEC and whatever new jackbooted authorities Dodd-Frank has created and you have a good question for Mark Zuckerberg and other recent IPO washouts to ponder: Why would anybody want to be in the stock market at all? 

By the way, I'm speaking against self-interest. As a reporter it's much easier to deal with publicly traded than privately held companies. 

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  1. So, if I have this right, the Sulzbergers, having skinned the public for $7BB dollars, have now driven the value of the NYT down to the point where they can afford to buy it back.

    1. All they need now is a new president who will inspire panic in the stockholders. A puppet! A proxy! A pawn!

      1. Way better movie then O brother were art thou or The Big Lebowski

        1. Yeah but they ruined the movie with the posters. They had a fucking hulahoop(you know, for kids) on the posters.

        2. Mind helping out those of us who may be interested in said movie, but have no idea what anyone’s talking about? (I thought it might be The Producers, but there were no hulahoops to be seen).

          1. The Hudsucker Proxy.

            1. Do people actually speak with that accent in real life?


        3. Way better movie then O brother were art thou or The Big Lebowski

          Meh.

          1. I prefer Hudsucker, myself.

            1. I hope we all agree Raising Arizona is their best comedy.

              1. O Brother edged it out for me.

                Neck and neck, actually. Hudsucker was interesting and not a bad movie but left me with a bit of a “huh” feeling.

                Lebowski is definitely one for the cult foot locker.

                I liked Barton Fink when I first saw it, but it gets more depressing with each subsequent viewing.

    2. Your pal Rupert Murdoch bought the WSJ/Dow for many multiples well over its real value. There is some justice in the world.

      1. The Sulzberger’s sold the NYT for many multiples over its present value. Where’s the justice, again?

  2. I’ve always been a fan of this ‘going private’ trend, and sometimes I admit I’m not always able to fully articulate why.

    Fun fact: Richard Schulze was the former CEO(?) of Best Buy when we was forced out after he got caught tappin’ one his employees.

    Funner fact: They just fired my boss for that.

    Funnest fact: I have a knack for working under the finest management.

    1. I’m still trying to figure out why the author is a fan as well. Hyperinflation?

      1. I think Tim articulated it pretty well. One might disagree, but:

        In the Keynesian universe, a trend toward taking companies private would be catastrophic. On planet Earth, not so much. It’s true that a private company lacks access to the big capitalizations available in the public markets. But it also gets away from the stupidity of crowds and has a better chance of understanding what amount of value it’s generating. Better that all these brands get a fighting chance under management by investors who have some stake in the outcome of the company.

        It’s been said that Steve Jobs’ success with Apple was that he largely ran it like a private company. He used his gut instincts about products and how to bring them to market, and he largely ignored shareholders.

        It’ll be interesting to see where a company like Apple goes now that it’s undoubtedly being run by the frustrated cabaal of yes-men (now able to make their own committee decisions) that worked for Jobs.

        1. The costs (both ongoing compliance costs, and shareholder strike suit costs) of being public are quite significant.

          The public equity markets are so thoroughly trashed right now by hedgie algo trading, front-running high-frequency trading, Fed manipulation, fraudulent naked shorting, and so forth that I would hesitate to throw my company into them.

          1. And this in spades.

          2. Even for a multi billion dollar payday?

    2. he got caught tappin’ one his employees.

      You aren’t allowed to screw your employees?

      When did this happen?

      1. I was wrong. Schulze wasn’t doing the tapping, his CEO Dunn was doing the tapping, and Schulze, chairman, resigned as a result. Shit folled uphill.

      2. You aren’t allowed to screw your employees?

        You are until something goes horribly wrong.

        Example: Boss is tapping the underling, all her coworkers who hate the fuck out of her find out. Morale in the department sinks wildly creates huge disruptions in productivity. Coworkers passed over for promotions start making noise in HR about suing. Hell yeah you fire the guy for hittin’ it.

    3. Because publicly traded corporations have principle agent issues that create legal requirements designed to protect stockholders that have the side effect of encouraging their executives to make senseless and shortsighted decisions?

      Basically, a private CEO can pretty much do as his conscience dictates, a public corporation is much more constrained by the need to pursue shareholder value, so a private corporation has more capacity for ethical behavior. I suspect there’s also a tendency for private CEOs to be much more closely tied to the organization (either they built it, came up in it, or stay in the same industry, etc.) whereas publicly traded corporations are more likely to treat all business as generic, such that you have toothpaste executives running video game divisions or telecom executives running auto manufacturers.

      For libertarians, a lot of it will come down to private corps being more individualist and public corps being more collectivist, but I would imagine that the latter are also much more receptive to corporatism than the former, which are often just incredibly successful small businesses.

  3. If there has been one shining lesson of the last six years, it’s that we are all, individually and collectively, worth far less than we were led to believe.

    My dad used to have a saying (which he may have cribbed from someone else): Most employees are worth about half what they’re paid.

    1. He was being generous.

  4. I am completely baffled by the Cult of Wall Street. Unless you just want to cash out and go away, why go public?

    1. Worked for Zuckerburg.

    2. It used to be that you’d raise capital for growth initiatives but these days it’s more about paying off your early investors.

      The kind of IPO to buy is NOT a mature company like Facebook but rather a scrappy startup that shows promise but needs more capital.

      But they can get capital elsewhere these days a lot easier. Used to be hard to raise 70M but you can do it in the valley now days as a Series D or even Series C, so why go public.

    3. I am completely baffled by the Cult of Wall Street.

      Huh?

      Washington has access to regulate and tax while Wall street has access to Washington for bailouts, subsidies and changing the laws to squash the competition.

      This arrangement is very profitable for those on the inside.

  5. Shrike’s take on all of this should be very interesting.

    Note: i say “should” and not “will”.

    1. I am glad to see Reason finally admit there is no inflation and deflationary effects are somewhat evident.

      The housing market is deflated and CRE is seeing lower valuations as well.

      There are some NYSE companies selling for less than their cash on hand. Of course a company like Nokia may piss away their cash while trying to survive so it makes sense.

      However, most companies just ignore shareholders anyway so I don’t buy that there is a nuisance in running a public company.

      1. However, most companies just ignore shareholders anyway so I don’t buy that there is a nuisance in running a public company.

        Some do, some don’t, but after going through one, it’s apparent to me that the whole IPO thing is an ugly set of machinations.

        I’m sure there are smaller companies you’ve never heard of that have fairly uneventful, straightforward IPOs, but on the higher profile front, it seems like a den of con-artists run the show.

        1. Yeah, the Google IPO was the classiest one ever.

          Google’s initial public offering (IPO) took place five years later on August 19, 2004. At that time Larry Page, Sergey Brin, and Eric Schmidt agreed to work together at Google for 20 years, until the year 2024.[46] The company offered 19,605,052 shares at a price of $85 per share.[47][48] Shares were sold in a unique online auction format using a system built by Morgan Stanley and Credit Suisse, underwriters for the deal.[49][50] The sale of $1.67 billion gave Google a market capitalization of more than $23 billion.[51] (Wiki)

          It went on to hit $700. The complete opposite of Facebook in terms of IPO valuation.

      2. Shrike, stil not seeing how one can have monetary inflation and deleveraging/deflation at the same time.

        Think on it. It will come to you.

        1. There is no price inflation. That is what counts.

          The Fed increases the monetary base to compensate for deleveraging/deflation. That is how it works to prevent depression in the capital cycle.

          I know – gyno-man from Texas does not know this either.

          1. Except prices are going up however slowly captain dipshit.

          2. No Shrike, price inflation is not the only thing that matters. And deflation is no the boogeyman you and the Fed make it out to be. Assuming it is not a natural result of rising productivity, deflation is the result of economic turmoil, not the cause of it

          3. Gas up to fo’ dollahs a gal up in this piece. Respect.

        2. Shrike, stil not seeing how one can have monetary inflation and deleveraging/deflation at the same time.

          The increase in the monetary base has been sequestered in excess reserves via IOER, so there is no increase in the money supply yet.

          It’s a historically unique situation and and imo unsustainable one.

          But up to now there hasn’t been any real inflation.

          1. So, to be clear, the fed isn’t just increasing the flow of money but crimping the hose so that when the IOER is ended or made insufficient by economic recovery, the inflation will be almost audible? Am I right?

            1. Yes,

              That is if you think a damn bursting is audible.

  6. I don’t much about big business enterprises. I do own my business though and have considered expanding, so I do have an idea how soon the ass-raping starts. One employee. Just by myself I get groped for an $800/year fee just to have a CA based corporation. When I hire one, just one, full-time employee I have to make any pension savings plan I’ve set up for myself available to him and I have to buy worker’s comp insurance. I just have to marvel at anyone who ventures into a 15 or 40 employee business, where the diversity gang-raping starts, let alone raises capital.

    1. California is the worst. There is absolutely no question why jobs are leaving the state. It’s almost as if they have designed it to encourage all the business to leave.

    2. My god. I always think it’s bad, then I hear actual evidence that its worse.

    3. This is why the only startups in CA are government-related companies. Diversity-training consultants, for example.

      1. You have obviously never heard of Silicon Valley.

        1. Depends how the workers are employed. Most of the tech talent is hired as contractors. Could probably get all the back-office help from temp agencies.

          And don’t ignore how many of those Silicon Valley startups are government-related. Lots of education-based Silicon startups, for example. If government is a prime target customer for the startup, then it’s government-related in my book.

    4. When I hire one, just one, full-time employee I have to make any pension savings plan I’ve set up for myself available to him and I have to buy worker’s comp insurance.

      Set up a separate corporation that handles your pension. I realize that’s not viable when you hire one person but it definitely is by the time your up to a dozen.

  7. Chinese elevator-television maker Focus Media

    Is it just me, or is that a really bizarre mix of product lines?

    1. I’m sure it sounds cool in Chinese.

    2. Oh, I see. They make display screens to put in elevators. I read it as a company that makes elevators and also makes televisions, and was trying to figure out how expertise in the one translates to expertise in the other.

      1. My first thought was televisions on hydraulics that can elevate, or somesuch, like you’d see in “futuristic” executive offices in 1950s and 1960s movies.

    3. GE is the only US company I can think of off-hand that still handles that kind of product range. The German company, Siemens, does too. But it seems to be common for Asian companies to do this.

      1. If it was a ton of stuff that included elevators and televisions, ala GE, I would have gotten it. It was just the idea of a comapny that makes JUST elevators and televisions that was weird to me.

  8. (Krantz notes that the number of privatizations is actually below where it was at the start of the credit unwind, pointing to “the reluctance of lenders to take chances.”)

    Perhaps those lenders are concerned about not getting an appropriate risk premium in the era of Bernanke-suppressed interest rates.

    1. http://members.chello.nl/m.jon…..inker.html

      ‘I am keeping the water from running out,’ was the simple answer of the little hero. ‘Tell them to come quick.’

      It is needless to add that they did come quickly.

      I think you were wrong about that, Mary Mapes Dodge.

    2. Bankers can add on whatever risk premium they want on private debt. They’re not forced to lend at the fed funds rate.

  9. I don’t want to get nostalgic for the best practices used by our founding fathers under the buttonwood tree, but one habit with relevance to the private/public company question has vanished entirely within the last 20 years.

    Profitability?

  10. I had to re-read the name and Google it after just to be sure, but its true: There really is a gang of honky beancounters named ‘Muddy Waters, LLC.’

    1. And they actually do some interesting beancounting. Check this paper out:

      http://www.muddywatersresearch…..ePaper.pdf

      Well worth a scan if not a read.

  11. So free market price discovery is now “the stupidity of crowds”? I didn’t realize I wandered into Kos. As Ben Graham says, in the short run the stock market is a voting machine, in the long run it’s a weighing machine.

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