Sunday, February 11, 2007

Hutton's Private Equity Hysteria

Hutton has turned from poor quality analysis of China to ridiculous hysteria over the prospective private equity purchase of Sainsburys. Apparently the purchase portends a new Dark Age and "marks a new low in the history of corporate greed. This is bizarrely unhinged.

"It is a roll call of the City of London's sharpest. There are the elite 'private equity' companies: KKR, CVC and the Blackstone Group. And there are their bankers: Nicholas 'the Stud' Jones from Lazards, not to forget Barclays Capital, home to Britain's Roger Jenkins, on a cool £40m last year. All last week, their numbers apparently swollen by the arrival of the private equity division of investment bankers Goldman Sachs, they have been dissecting Sainsbury's business. Dare they be part of a £10bn bid to take over one of our most famous high street names?

So what? The possible deal might interest the readers of the business pages, but there is no point in becoming too exercised. For most people, it's just more impenetrable financial shenanigans and another takeover in which extremely rich men get even richer. This is just capitalism, isn't it?"

Yes, the people who head banks and private equity funds are both very well paid and very intelligent. They are crucial parts of the mechanism which decides where capital should be directed to be used most productively. This decision is of massive importance and it is entirely right and proper that we pay extremely well to ensure that the best people we can find are making it. Socialist sniping at 'fat cats' is just idle envy.

"Wrong. This is not just about the technical protocols of take-overs. This is about how democracy works in a capitalist society and, as such, affects each one of us. Sainsbury's will be the highest-profile example of an alarming trend. If the so-called 'private equity' investment companies succeed in their planned joint takeover, financed largely by loans from our big banks, Sainsbury's will no longer have the responsibilities of a public company that go with a Stock Exchange quotation. It will go from being a public to a private company and our chance to hold it to account for its actions will be greatly reduced. Its sole purpose will be to pay back the £10bn spent on taking it over and create a profit besides; its owners will disclose as little as possible about what it is doing and why."

This is ridiculous. It's purpose before wasn't some kind of vague notion of the public good but to maximise returns to shareholders. Maximising the financial return to its owners remains the goal. This is how the capitalist system works in basic, Smithian, "not through the benevolence of the baker" terms. Stock exchange responsibilities have everything to do with ensuring that a broad swathe of owners can assess the quality of their investment and very little directly to do with the public good.

As for the public holding a new Sainsburys to account, that can be done through public policy creating a legislative framework or through public pressure at the tills. Shareholder revolts are over threats to shareholder value, they are again nothing to do with defending the public good, and the reason they won't take place under private equity ownership is that the owners will have more direct means of controlling management.

Hutton then rambles on about Turkey farms for a bit in a pretty strained attempt to come up with a way that supermarkets, proving cheap food to often poor people, are hurting the public.

"This will concern everyone in the food business. Public companies such as Tesco and Marks and Spencer are trying to maximise their profits by driving down costs and the more suppliers such as Matthews can squeeze costs and industrialise farming, the better. But there is a trade-off. Public companies have to watch their reputation and their share price and they know just one death from eating infected food could wreck their business. And they have frequently to disclose information to their shareholders, especially if anything goes wrong, like the chance of food being infected. You may not like aspects of what Tesco or M&S do, but they are out there as public companies in the full force of publicity and disclosure and that forces them to manage the trade-off with the maximum of responsibility."

This is ridiculous. Share prices come under threat after a public health scare because shareholders know that a company's future earnings can be affected by the public being scared off buying or politicians imposing new regulation. These threats worry private equity companies in much the same way. Shareholders and private equity firms both care about earnings.

"Sainsbury's, even when owned by private equity companies, will also suffer risks if it squeezes suppliers too much, but the terms of the trade-off will change. It will not need to provide so much information and can run the business with less responsibility. And when it is trying to pay £10bn of debts to the bankers who will have financed the deal, it will need to."

Again he cites an entirely imaginary set of duties to disclose information. Stock market regulations are for financial information which is of interest to shareholders which will certainly be disclosed to the new owner.

Hutton then discusses private equity. He uses public and private in a similar manner to Cameron arguing that his youthful indiscretions are private. In finance the meaning is somewhat different. A public company is simply one in which anyone can freely buy and sell shares of its ownership. Trying to paint private equity as some kind of shadowy netherworld just because it is 'private' therefore misses the point; all they do is take capital from fewer sources.

"What the pack is eyeing at Sainsbury's are its property assets. If the new owners could sell its stores for £7.5bn and then require Sainsbury's to rent them back, they would own the balance of Sainsbury's for £2.5bn. If they could squeeze wages and suppliers, they could boost its profits and then float the company on the public markets for £5bn. Not only would they make a profit on the deal, but they could cream off as much as 10 per cent in fees, charges and commissions. Hence Roger Jenkins's £40m salary. But at Barclays, we know his salary because, as a public company, it is disclosed. There is no such disclosure from private equity companies."

Ah, ha! I've got you, you snake in the grass! This is really about the socialist belief that the wages that a company voluntarily pays to its senior staff is a matter of public concern and should be public knowledge. Even if private equity companies do pay their staff too much those companies will pay the price themselves. All socialist arguments return, in the end, to envy.

"Will Sainsbury's be stronger after this? No. Unlike Tesco's, which owns its own property, it will have to pay fat rents to its new landlords. Will Sainsbury's be more responsible or more likely to build an environmentally sustainable business? No. That hits short-term profits. Will Sainsbury's workers be better off? Hardly; their terms and conditions of work will be subordinate to the goal of reducing the debt. Will Britain be fractionally more at risk from contamination of its food chain? Yes. The only winners will be the private equity companies."

Public ownership, in this context, thankfully doesn't mean nationalisation. Under public ownership shareholders own Sainsburys and these shareholders have just as much interest in profit as private equity companies. If you really think the only thing defending Sainsburys workers from immiseration and Britain from bird flu is the good will of shareholders then you should be rather pessimistic. Shareholders are often institutional investors themselves, such as pension funds, and many have not just an interest but a duty to do all they can to make sure they choose firms that maximise profit. Shareholding is an investment and there is no reason to expect that investors should behave altruistically.

"Public companies are at the heart of good capitalism. I think the accountability mechanisms should be stronger and their owners more strategic and patient in their ambitions. But unless we protect the notion of a public company, a great Enlightenment invention, no such improvement can even begin. Private equity opens the door to a new Dark Age. It's time our mute political class spoke out."

The public company is an entirely practical institution devised in order to pool resources for investment projects too large for private capital, the railways were a prominent early example. Ascribing some great, moral Enlightenment purpose to them after the fact is disingenuous. That private capital is increasingly able to tackle larger investments is no cause for alarm. Companies will still be disciplined by the business imperative to protect their reputations and, if this fails, regulation still has exactly the same powers to reform or abuse private companies as it does public ones.


Anonymous said...

I drove the Sainsbury’s store in Wandsworth yesterday. They have introduced a pay and display parking scheme.
The plan is that you put coins into a machine, get a ticket which eventually the cost of the parking is deducted from the shopping bill.
What a great opportunity to introduce nostalgia into the shopping experience.
We can now go shopping and use cash!
Not just notes but coins. How very retro chic.
It has been a long tome since I have used coins in shopping. Unfortunately I was unprepared to use coins on Saturday.
I did go to the automatic telling machine at the site but they have not caught on this radical new development and only dispense notes.
Perhaps Sainsbury’s could take this up with the banks.
Sainsbury should be commended in taking the risk of loss of the coins from the machines by theft or staff pilferage.
They should be commended for employing more people at the Wandsworth store to administer this exciting development.
Unfortunately I had no coins on me. I then left and drove to Waitrose across the road. I parked undercover got the ticket, which was deducted from my purchase and I paid the total shopping experience with a debit card.
This was simply less stimulating than fiddling around with coins in a snow swept open parking lot.

Please relay my thanks to the board for widening my experience.

Anonymous said...

How can anyone as intelligent as Will Hutton be so deluded? Surely it's obvious that the only way to efficiently allocate and manage resources is towards endevours to which I, and millions of others, freely choose to hand over our hard earned cash.

What's his alternative, socialism whereby someone else apprpriates my money before I can spend it, takes their cut, and wastes the rest?

The guy is truely an idiot.

Jackart said...

Check out some magnificently unhinged comments under the Hutton article on the guardian site. I especially like the Marxist Poetry.