The Freeman 1989 - The Ludwig von Mises Institute

18 THE FREEMAN. JANUARY 1989little or care little about the business of theircompanies? Doubtless they have, as owners,the right to sit in judgment over the directors oftheir companies, but is it not ludicrous to envisagethem as intelligent or informed judges ofthe directors' performance? All this may be true(though it must be subject to at least partialqualification in the case of pension fund, mutualfund, and other institutional shareholders).However, true or false, it has little bearing onthe matter before us.Performance vs. ExpectationsWhat counts is the difference between theperformance of the existing management andthe expectations of the "predator." Hence,prima facie, if the "predator" is able to offerthe shareholders a buy-out price above the currentstock market price of their holdings, and toexpect a profit for himself, it must follow that atleast he, putting his money where his mouth is,and therefore acting with at least some circumspection,has confidence that the management'sperformance can be bettered. However, thismay be too simple a view, and so we mustexamine the contentions of those who criticizetakeover activity.First, it is loudly asserted that the typical"predator" has a short-term perspective; thathe is primarily interested in a fast getaway withshort-term gains, often by dismemberment ofhis "victim" companies and a sell-off of theirparts. But why is a short-term perspective necessarilybad and a long-term perspective necessarilygood? If a company is irrevocably headingfor bankruptcy, a very short-term perspectivemay be right. On the other hand, if acompany's perspective is such that a particularinvestment in research and development is unlikelyto recover its costs in less than a century,then the long-term view is almost certainlywrong. The correct view will be somewhere ina range ofperspectives. It will be determined bythe expected pay-off of an investment, discountedby the rate of interest over the period ofexpectation, long or short. In principle a relativelylong-term perspective has no specialsanctity over a short-term perspective.But is it not true that the typical "predator"often dismembers companies, selling off·partsof them soon after his takeovers? Does it nottherefore seem to be true that his perspectivetends to be undesirably short-term? For may itnot be true that the value of a company may begreater than the sum of the market values of itsparts?In the first place, it is not true that dismembermentis an automatic or prevailing practiceof the "predatory" process. Certainly it oftenhappens, but that is because companies whichare the object of "predatory" attention are oftenless successful than they might be preciselybecause they have parts which they would dowell to get rid of. Indeed efficient managersoften divest their companies of parts of theirassets even though there is no threat or likeli-, hood of a takeover bid. Thus in such cases divestiture,with or without the promptings of a"predator," is a necessary step toward optimumwealth production.Furthermore, the purchasers of dismemberedparts must believe that their productive potentialexceeds in value the prices to be paid forthem. Thus on both sides the process of dismembermentcan reasonably be expected toraise, not depress, the wealth-creating capacityof the economy. If, however, it is true that thevalue of a particular company is greater than thesum of the market values of its parts, only aninexpert "predator" would proceed with dismemberment,and inexpert "predators" are notlong survivors. For in such a case the predatorwould find that the market value of the retainedcore of the company would fall. Then the resultof dismemberment would be a net loss, not aquick gain.But in any case is it true that the typical"predator" is predisposed to seek quick, shorttermgains, whether by dismemberment or otherwise?This is one of those myths which easilygain popular credence, especially where the impugnedcharacters are held up to public obloquyby those considered to be more respectable thanthey. In this type of case the respectable charactersare supposed to be the businessmen inestablished charge of substantial companies,who are affronted by the pretensions of the"predators." Often they are regarded as the pillarsof the business community, while the"predators" are new men, to whom the epithet"smart" is applied in a pejorative sense.