Friday, May 27, 2011

For More Corporate Raiders

There’s welcome news that a hedge fund operator - David Einhorn - has bought up large chunks of Microsoft with the intent of forcing the ouster of the CEO Steve Ballmer, presumably replaced with a CEO more responsive to shareholder interest. The end goal is a more productive use for Microsoft’s capital.

I think this is great news. The key here is that the interests of Microsoft’s CEO and the interests of Microsoft’s shareholders are different; and we as a society ought to sympathize more with the interests of Microsoft’s shareholders.

Basically, Microsoft has been earning monopoly rents based on intellectual property that locks in network advantages. Yet Microsoft’s comparative advantages really extend only to the sort of monopolistic domination embodied in their control of OS and enterprise software. Their subsequent ventures in all other areas — Bing, the Zune, .Net, etc. — have on net been catastrophic failures that have cost the company billions of dollars. Microsoft persists as it’s in the interests of Microsoft executives to control as much market; not to deploy capital efficiently.

And not just Microsoft — as various other companies figure out how to market durable brand advantages in tech, other companies too are generating massive profits. Some of these companies, like Amazon, have figured out how to re-invest their profits in new fields to continue generating value in ways that enrich executives, shareholders, and consumers. IBM has transitioned away from hardware to software in a disciplined manner. Other companies, like Microsoft and Cisco, basically sat around burning money at each new trend. Just now, Microsoft decided to spent $8.5 billion on Skype for no good reason.

It's difficult to throw away this much money without having the occasional hit. The XBox wasn’t bad. But the collective impact of many companies simultaneously burning money is substantially weaker economy-wide capital allocation. We don’t want the people who made a lot of money in the ‘90s deciding what to invest in today; in general people and organizations don’t manage to remain at the entrepreneurial frontier all of the time. We want shareholders to take the billions they made from Microsoft and give it to the Microsoft of tomorrow. And that’s just not possible as long as Microsoft remains hideously mismanaged from the point of view of intelligently handling shareholder interests -- as long as they can neither reinvest assets profitably or have the good sense to give money back to the owners of the company.

This isn’t just an issue for a handful of hedge funds — Microsoft has a market cap in excess of $200 billion, and so must of us collectively own a part of the company via a 401(k) or whatnot.

Yet while activist hedge funds and private equity firms have the ability to take on companies like this in a number of fields -- their actions remain constrained. As Amar Bhidé noted in A Call For Judgement, securities laws have severely restrict concentrated ownership and shareholder management. This problem seems to be particularly severe among financial companies -- the one place you'd like to see more institutional investors, say, call for Dick Fuld's ouster.

1 comment:

Barry said...

"We don’t want the people who made a lot of money in the ‘90s deciding what to invest in today; in general people and organizations don’t manage to remain at the entrepreneurial frontier all of the time. "

Last I heard, most of the big Wall St firms are still there, and they are rather powerful. And then we have the energy companies, the military-industrial complex,................