What would you do with $3.2 billion in cash? This is the problem — if you can call it a problem — that Kerry Stokes has today after yesterday’s announcement that the Seven Network (ASX: SEV) has entered into a joint venture with U.S. pirate equity firm Kohlberg, Kravis, and Roberts.
The new venture will be called Seven Media Group. And it’s now got money to spend. Granted, $2.5 billion of the total $3.2 KKR paid is in debt, not cash. But in today’s market, debt spends just as well as cash.
The question now is what can Seven Media Group buy with its war chest? We have no idea. It’s already hard enough to find undervalued assets…on the stock market...the bond market…even the real estate market. So much cash and credit, so few bargains. What is a capitalist with a boat-load of money to do? How about this... go private!
We realize now we’ve gotten this private equity thing all wrong. We were looking at as an exercise in creating or extracting latent value from underachieving corporate balance sheets. Last night, however, our friend the Barefoot Investor Scott Pape pointed out that the surge in private equity deals is really a counter attack of the world’s capitalists.
The last ten years have seen the capitalists given ground to shareholders. The stock market, once the domain of the already rich and powerful, has been effectively democratized. Through superannuation schemes or do-it-yourself plans, any man on the street with a grub-steak can own a piece of a publicly listed company’s future cash-flow.
Having shareholders means being accountable to them. It means transparency in your business dealings and financial reporting. It means going to jail if you lie to your shareholders. Just ask Jeffrey Skilling and Ken Lay, may he rest in peace.
Today’s public companies are managed for the benefit of shareholders, not the benefit of the capitalists who started them or own large stakes, and perhaps not even for the benefit of customers. It must be supremely annoying for Warren Buffet to have get up in Omaha, Nebraska every year, play a ukulele, drink a Cherry Coke, and pretend he cares what the shareholders of Berkshire Hathaway think of his investment genius. Buffett plays the role because he has to. He has to because his company is publicly owned. That leads to the inevitable spectacle of him pretending to be an ordinary man instead of one of the richest men in the world.
Who knows, maybe Buffett does care, and treats shareholders as co-owners. And maybe he’s an ordinary guy at heart. And maybe we’re a billionaire ourselves... But we realize now that the private equity movement is sort of like a counter-reformation in the war over who is entitled to the profits of public companies.
The capitalists are not going to take the advances of shareholders lying down. Instead they are going to take back their companies by taking them off the public markets and out of public scrutiny and accountability.Are there other benefits? Maybe. For example, private companies are not under the relentless pressure to meet the ridiculous quarterly earnings per share benchmarks that drive the CNBC news cycle.
Would it be such a bad thing if companies were run with a longer-term perspective than this quarter’s EPS performance? It might even eliminate some of those absurd incentives which have led executives to cook the books in order to boost compensation by manipulating earnings. Not that we think the motives of the pirate equiteers are pure. We are just thinking more about the phenomenon and what it might mean.
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
