Paul Danos, Dean Tuck School of Business at Dartmouth.
Earlier this month I sat down for a web video interview—stay tuned to this space for more on its launch—to make sense of the investment climate in light of the recent subprime mortgage crisis. The timing was significant. On the day we talked, the Dow Jones industrial average dropped nearly 400 points and central banks in the United States and Europe injected more than $150 billion into the financial system to keep it afloat. Here’s a partial transcript of our conversation:
Most of us thought of public markets as something that just is and always will be. Indeed, many of our financial and economic theories depend on public information about companies. But the recent wave of privatization—in part, a response to the current regulatory climate—may change how we perceive the balance between public and private. In this post-Sarbanes-Oxley era, the U.S. Securities and Exchange Commission and other regulators examine corporations with greater scrutiny, shaping both how boards monitor management and how management monitors itself. The legal penalties for violating rules have also changed. The question is whether the pendulum has swung so far to the reporting and auditing side that the publicly-traded company is now at a disadvantage.
Until recently, it appeared as though private equity firms could take almost any company private, their cheap credit a viable alternative to the vast pools of investment traditionally opened through public financing. With public markets continuing to dominate the vast amount of investment worldwide, in the future we are likely to see a blend of public and private markets. This is a good thing. A healthy private equity section of the market keeps people focused on creativity, efficiency, and stockholder returns. It is good for CEOs to feel that pressure.
But like public markets, the death of the initial public offering is also greatly exaggerated. Late ‘90s-era valuations, of course, are a thing of the past. But good companies—and good ideas—will always have buyers. This is true even when the IPO market isn’t strong, as is the case today. Major corporations have no shortage of cash on their balance sheets and will often acquire smaller competitors or those with complimentary technologies and products. One company’s growth strategy is another’s exit strategy.
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