Why this economy is so rotten to the core.
Jim Clifton, Chairman and CEO at Gallup, which incessantly surveys what consumers and companies are up to every moment of the day, nailed it when he lashed out at his fellow CEOs, for their way of doing business.
Their companies are “failing to grow organically,” he said in a blog post. Instead of investing in growth-producing activities, CEOs go out and buy other companies, particularly their competitors.
Buying competitors – effectively getting rid of competition – takes pressure off these companies to innovate and perform, and they’re all hoping to gain some pricing power with these strategies. This has worked miracles in healthcare, where prices have shot up as consolidation has become a pandemic strategy, no matter how large and unwieldy the company, or how concentrated and monopolistic the sector.
“Shockingly, boards of directors encourage this,” Clifton wrote, adding:
Acquisitions is the current growth strategy of Forbes Global 2000 companies. As a result, the number of publicly listed companies traded on U.S. exchanges has been cut in half in the past 20 years – from about 7,300 to 3,700.
According to the World Bank, the number of listed companies on all global exchanges – currently 44,000 – has flatlined since 2006, with a recent two-year decline.
The herd is getting pretty small. At some point, this acquisition strategy hits a wall. It makes you wonder how long we’ll need the New York Stock Exchange and Nasdaq.
In a perfect, growing world, the market would have doubled the number of big public companies instead of halving it.
So there’d be about 15,000 US-listed companies by now, not 3,700. They’d be smaller and nimbler. There’d be more competition too, more innovation, more emphasis on investment in productive activities and people to achieve organic growth.
And this organic growth is precisely what is missing in the US economy. Acquisitions contribute nothing to the overall economy. In fact, they’re often sold to investors on the pretext of “efficiencies” and “synergies” – so layoffs, shutdowns, product consolidations, and the rest of the Wall Street lexicon liberally used to twist these acquisitions into a positive light for investors.
But beyond huge compensation packages for the executives of the acquirer and the target – at least someone is getting more spending money even if they don’t spend it – acquisitions are a net negative for the economy.
The Microsoft-Nokia fiasco is a textbook example of an acquisition being a net negative for the economy that has now come full circle … After Losing $11 Billion on $9.4-billion Nokia Buy & Axing 27,650 Jobs, Microsoft Dumps Consumer Smartphones.
And despite the endless acquisitions, Microsoft’s sales and profits are shrinking. IBM and many other companies are in the same miserable category: they’re tech companies, and they’re supposed to be innovators. But with a razor-sharp and relentless focus on financial engineering, they’re binge-buying other companies and paying what Clifton calls “unrecoverably high prices for acquisitions.” And their total revenues continue to shrink.
Organic growth, however, is a net positive for the economy. But that’s hard to do. It’s a lot easier to connive with Wall Street and buy each other out.
So S&P 500 companies are now in the middle of reporting Q2 earnings in what is shaping up to be another quarter of earnings declines – the fifth in a row. And revenues have a chance of hitting a sixth quarterly decline in a row. Not only is there no organic growth. There is organic decline!
The acquisitions strategy simply doesn’t produce results, except for executive compensation packages, which get fatter and fatter, as are the compensation packages of board members. So maybe it’s not so “shocking” that “boards of directors encourage this.”
Every aspect of Corporate America has become financialized. Financial engineering – with everyone’s knowing consent and even encouragement, a phenomenon we’ve come to call “consensual hallucination” – is the top corporate strategy to support the top corporate goal: inflate the stock price at any and all costs. Nothing else matters. Not even sales and profits. Just the stock price. That’s a perversion of a perversion.
So if companies aren’t tied up buying the shares of each other, they’re buying their own shares. In 2014 and 2015, US companies blew $1.1 trillion on share buybacks, according to FactSet data. In the first quarter this year, share buybacks amounted to $166 billion, up 15% from last year. And to finance these buybacks, even as revenues and earnings are declining, companies are issuing bonds and loading up on debt – without adding productive activity to deal with this debt.
That’s the genius of share repurchases: They drive up stock prices. And debt. Wall Street loves them – and makes money off fees coming and going.
But imagine what companies could have done with the nearly $3 trillion they blew on share repurchases since 2010, and with the many trillions they blew on buying each other out. It might have actually produced a vibrant economy.
But enough is enough. Erstwhile bond bull Jeffrey Gundlach makes a U-turn and goes “maximum negative” on Treasuries – and just about everything else. Read… “Stock Markets Should be Down Massively,” but Investors “Hypnotized that Nothing Can Go Wrong”