Not everybody has to sell their shares. That depends on the company’s bylaws and securities laws in its domicile. But when people actually take over companies that way in the US, what’s called a tender offer, they usually only have to get a majority of the shares*. Then the other shares get cashed out at the tender price involuntarily, generally. In some cases companies have provisions to require super majorities in tender offers to make it harder to take them over. There can be legal battles over a host of details. But to think about it, if you had to offer the price the very most reluctant shareholder would require, companies would never be taken over that way.
But it’s true the tender offer price as a rule has to be set above the current market price. The current market price is where, typically, a small % of shares are willing to sell, the most willing to sell. Most shares are only on sale for more. Likewise the market bid at a given moment is for a size a small % of the total shares, most non-shareholders are not willing to pay the market price to become shareholders.
The issue of gigantic size and price to attract a majority of shares is illustrated by Elon Musk’s controversial (and perhaps illegal, it will generate an SEC investigation) statement yesterday he was ‘thinking of’ taking Tesla private at $420 a share and financing ‘secured’. That’s a sizable premium to the price before the statement (or now when it’s back to $352). That part makes sense: the price to attract most shares is likely significantly higher than than to attract the few most willing to sell shares, ie the market price. But who is going to ‘walk in’ with even the $66bil or so it would take to buy out Tesla at $425 (give or take Musk’s own holding and his suggestion it would become some kind of hybrid public/private corp where other shareholders didn’t have to cash out, but that would probably again violates securities laws). There are few obvious candidates who would pass muster from US regulatory authorities (for example if it passed control of Tesla to Chinese interests, that’s not happening). With Apple, at a reasonable premium to $1tril to attract a majority of the shares, the clear answer is nobody can ‘walk in’ with that much who would be accepted as a buyer.
*of course it’s shareholders making that decision not the shares themselves, but just to keep clear it’s based on number of % shares tendered, not % of shareholders.
Given that Apple has something like $240 billion in cash, you wouldn’t even need to raise $1.2 trillion. Or to put it another way, right after spending $1.2 trillion to buy out Apple, you’d own the company and a $240 billion pile of cash.
As I remember the days of the leveraged buyouts, the raiders particularly loved buying companies with lots of cash on hand, or overfunded pension plans, since that money could be raided to finance the takeover.
If I was CEO, I’ll ask him to wait at the penthouse with a few “executive assistants” who need to ask him “sensitive” but necessary questions (take a much time as you want.) I meanwhile, will call all the major shareholders of the offer, and ask them to wait for the CFO’s estimate. If the CFO thinks 120% of the current market capitalization is the best value within 5 years, and there are no other hindrances like antitrust laws and labor implications, I’ll recommend that all shareholders immediately cash in.
The previous post was just me, of course. A real CEO will consider it a lot longer. Even if this guy owns the money and can dispose of it in any way he wants, he has to be made fully aware of what he’s getting himself into. There has to be a reputable intermediary, an investment bank who will conduct a due diligence (and ask for 3% of the whole deal.) Lawyers on both sides have to confer. Labor, Government regulators, even the stock market have to have some kind of heads up.
It will eventually, its just a matter of how long. Who knew car companies would get into deep doo doo fifty years ago? Or airlines? Or Sears?
Yes, that’s why I said again.
Wealth creation - even if its just through stock market turnover, is an important part of creating a strong economy. However, the way we are going about it right now, a strong economy isn’t necessarily a FAIR economy.
I think Voyager’s point is that moving money around doesn’t automatically create wealth. If money just automatically created wealth then there would be no point in investing; your money would just generate wealth out of itself. The point of investment is that you’re moving money from an area where it isn’t producing wealth to an area where it will produce wealth (or from an area where it is producing wealth to another area where it will produce more wealth).
And once you say that’s a thing, you have to also acknowledge the opposite is possible; you can move money out of an area where it’s producing wealth and into an area where it isn’t (or from an area where it’s producing more wealth to an area where it’s producing less wealth). The basic pillar of capitalism that says people can make good decisions also requires that it’s possible for people to make bad decisions.
But a lot of people fail to accept this. They subscribe to what I call the rah-rah theory of capitalism. When you try to say that somebody is making a bad decision with their money, they refuse to admit that’s a possibility; “They can’t be making a bad decision. It’s capitalism! And capitalism is always right! So every decision is the right decision!”
Microsoft is very different from GM in that it uses relatively little in the way of capital. Apple may use more, but still can ramp down employment rapidly in the case of a sales decrease, preserving cash.
I worked for a computer manufacturer when the bubble burst. Things were bad, but almost all our manufacturing was done by External Manufacturers, and they got stuck with parts inventory, not us. A benefit of just in time for the buyers if not the EMs.
While a strong market is better than a weak one, the rich getting richer from the market doesn’t add that much to consumption. If the money went into true investment instead, it would lead to more jobs and better productivity. And more fairness too.
Money spent on infrastructure, public or private, stays with us. Money on over-inflated stocks can vanish quickly.
And Apple’s trillion dollar market cap is on paper. If everyone decided to cash in, it wouldn’t stay a trillion dollars for long, would it?
Also known as homo economicus. Not just bad decisions, irrational ones. That people do make irrational economic decisions has been experimentally demonstrated.
But the main point, as you caught, was non-optimal investment decisions.
The point you responded to was that
“Wealth creation - even if its just through stock market turnover, is an important part of creating a strong economy.”
Which is basically true. I’d only quibble with that in pointing out that stock market turnover is not itself wealth creation, or consumption or investment. If somebody who owns $10mil of Apple sells it, they have $10mil more cash and $10mil less Apple. The buyer has $10mil more Apple and 10mil less cash. The reason you need free trading of assets is to continuously discover the price in the market, which is not a perfect gauge but superior to any given 'panel of non-self interested, non-partisan experts'. And knowing the most accurate value gives the best answer to how much ownership existing shareholders have to give up to attract a given amount of new investment, ie by new issuance of stock not secondary trading. And, how the issuance of debt affects their ownership prospects. Which is how both in theory and manifestly in practice in general, investment flows toward companies with better prospects and away from ones with worse, despite the latter perhaps being more popular for various political reasons (who, where and how many people they employ typically, what red blooded US politician ever admitted GM was on its way down the drain? the market was saying that was likely eventually for a long time).
The freedom to deploy capital toward the most productive uses, including smart and stupid decisions, will beat the decisions of even theoretically politically disinterested experts with no skin in the game, who don’t exist anyway. Either markets or the political system will deploy capital. The political system’s ability to do that is strictly limited though not zero. It is pretty much zero though for something like creating a whole new industry market like Apple. The political system always favors existing interests, because people don’t vote for future interests they don’t even know they could have. That said, there is also the problem of monopoly and the tech giants might be creating a new version of it now.
And one of the points of capitalism is that it is a good thing overall. Because those who make poor decisions fall by the wayside. Which is where socialism comes in: we want to help those people get back on their feet and back as productive members of society. Because one day it might be we who make a poor decision. Errare humanum est. I’ve been there. I stumbled. And thanks to the UK’s safety net I was able to get back on my feet.
And admittedly, shrewdness at stock trading isn’t what we really want to select for in the human race as a whole. The question is where you draw the line because “nobody deserves to fail” isn’t limitlessly supportable.
There are many counter-examples to the wisdom of markets. Enron? Pets.com? But there doesn’t seem to be a better way, since any person or set of persons betting won’t do that much better.
Wealth creation, however, does not necessarily involve selling stock, at least not psychologically. If your portfolio triples in value you will feel wealthier even without selling anything and you will have different consumption patterns, which might involve only selling a fraction of your portfolio. Ditto for wealth destruction in market tumbles.
That is unless you say that wealth only involves cash and cash equivalents.
I said already that venture capitalist investments and the like are productive uses of capital. Apple putting its cash in product development is also. Buying Apple stock might make you money or it might lose you money, but it is not improving Apple’s productivity one whit. Even if it is Apple doing so.
Government can deploy capital raised through taxes productively also. The interstate highway system is the most obvious example.
Which is more productive - a dollar spent bidding up Apple stock, or a dollar spent on road improvements which improve the productivity of thousands of workers by getting them to work quicker, and prevents the equivalent of window breaking by making it less likely that their cars get damaged by bad roads?
You might conceivably need more than 1.2 trillion, if your purchasing activities drives the price of the outstanding shares up (which, IIRC, it probably would).
Yes, but the point was that whatever the purchase price is, you can subtract the $240 billion from it.
And if you look at how Elon Musk is proposing to take Tesla private, he’s not planning to buy up all of the shares. He already owns something like 20% himself and if the four biggest shareholders cooperate, he will have something like 45-50% of the outstanding shares on his side. The estimate is that he would need “only” $10-20 billion to take Tesla private.
I learn from a quick Google search that the three biggest institutional investors in Apple own slightly less than 16% of the company, so if a private buyer got them to cooperate, he/she would need only to get 34% of the outstanding shares to approve the buyout.
Exactly. Quoting examples of bad decisions of private capital is meaningless unless one has a better way of making those decisions in those specific cases. It’s pretty obvious there isn’t one.
Again in that case you are comparing two completely different things. If one person buys Apple stock in the secondary market (not a new offering of stock by the company), somebody else is selling it. Somebody has $100mil more cash than before and $100mil less Apple. Somebody else has $100mil less cash and $100mil more Apple, like I already said.
That’s ‘apples and oranges’ (no pun) compared to investing $100mil in an actual physical project, be it a public or private one.
However free trading in financial assets is critically important to price those assets. That’s what allows people to make a rational decision whether they want to invest $100mil in a new issue of stock by a company and get say 10% interest because the market values the company at $1bil. Without that market price they’d be depending on their own or ‘panel of experts’ valuation of the company to see if $100mil should give a 10%, a 1% or a 50% interest in the company. That’s one of the things making it so hard buy and sell small private companies, you don’t have a ‘crowd sourced’ valuation reflecting lots of different opinions. So secondary trading is necessary, but it’s not to be directly compared to net investment. One person’s secondary trade investment must be an existing holder’s disinvestment for the same amount.
As far as ‘roads and bridges’, lots of countries Americans tend to view as more ‘left’ than the US have more private financing of infrastructure than the US does. And a lot of US infrastructure is or isn’t public just based on convention, and politics, like what contractors or workers will be used, because in the US the politics of freer less free market tend to line up with the politics of union v anti-union, minority set aside v never heard of it, etc. In other rich countries that’s less true. It’s not really that ‘govt is better at funding infrastructure’.
Anyway, there being no particular evidence roads can’t be mainly privately financed (especially as technology to charge by the mile used etc keeps advancing), it’s obvious govt’s cannot create whole new industries, back to front, like an Apple. They might fund creation of new basic technologies, but the part where you turn that into a new market, it’s virtually never govt that does that. Once the decisions get complicated, the noise factor of non-economic political considerations overwhelm the signal.
But once again, somebody buying stock in a tech company that an existing shareholder sells them is not net investment. Net investment is new capital raised by tech (or any other) company, by primary stock issuance, venture capital etc. Or taxes collected by the govt and spend on things which are really investments (as opposed to the trend in political sloganeering now to call all social spending ‘investment’, public old age pensions as ‘an investment in our seniors’ etc, which is consumption, nothing evil about consumption but confusing consumption and investment is another problem with politically decided public ‘investment’).
Your examples show how “investment” is misused by both sides. Roads and bridges are real investments, social security likely not. Venture capital, as I said before, is real investment, buying a share of Apple stock is not.
On the other hand I think you can make an argument that funding education is real investment. I funded my kids’ college education and neither of them had to move in with me.
The point is not to do away with markets, which would be pretty stupid, but to maybe fund public investment from private “investment” which does not advance productivity - things like higher capital gains taxes, share transfer taxes, etc. Perhaps it would make sense to give tax credits for real investment, but some of these taxes wouldn’t hurt investment and might reduce volatility.
I have a reasonable amount of money in the market, but I couldn’t tell you what companies I’m invested in without a bunch of work - and even then it would be pretty spotty. I’m sure that is true of most people.
