Middle Aged Spread

In his most recent Washington Post column Robert Samuelson reveals that he has just now become aware that big, old companies in the U. S. have become lazy and are holding the more general economy back:

Bolstering the case is a new study, published in the Journal of Economic Perspectives by Kathleen M. Kahle of the University of Arizona and René M. Stulz of Ohio State University. The scholars examined all U.S. public companies over a 40-year period, from 1975 to 2015, and found pervasive evidence of a two-tiered capitalism. Companies are sorting themselves into the strong and the weak.

(Recall: A public company has shares that are traded, typically on a stock exchange. Private firms, including most small and family businesses, are not publicly traded.)

Profits became more concentrated, especially among large tech firms. In 2015, Apple, Google, Microsoft and Amazon had combined profits of $82 billion, fully 10 percent of all profits of publicly traded companies. In 1975, 109 firms accounted for half the profits; by 2015, 30 companies did. More disturbing, companies below the top 200 reported negative earnings as a whole; many of these firms had significant losses.

A similar story applies to corporate investment in buildings and machinery (computers, vehicles). From 1975 to 2015, this capital investment has dropped from 8 percent of corporate assets to 4 percent. Interestingly, this decline in investment was mostly offset by increases in corporate research and development (R&D) — reflecting the need to develop new digital products and programs, say Kahle and Stulz. But the R&D spending was heavily skewed toward bigger firms. Half of publicly traded firms showed no R&D.

Big companies are older now, have grown through mergers and acquisitions, and are paying more out in dividends than ever before (although at typically low rates relative to capitalization).

While I’m glad that the scales have fallen from Mr. Samuelson’s eyes, it’s too bad it couldn’t have happened 15 years ago. Small companies’ business plans consisting of being acquired by, say, Microsoft are hardly new. It was commonplace 25 years ago.

Here’s a revolutionary plan for addressing whatever problems the dominance of large companies produce. Stop subsidizing them. Enforce the anti-trust laws. Let them succeed or fail based on their own efforts and merits rather than on how much the politicians and regulators like them.

An idea so crazy it might work.

2 comments… add one
  • TastyBits Link

    Apparently, the universe began in the 1970’s.

    In a financialized economy, assets are leveraged to create new assets with a greater value than the underlying asset, and this is facilitated by the government.

    Money invested in physical assets would increase the Return on Investment by leveraging existing assets. Stocks are assets, and therefore, they can be leveraged. In a financialized economy, increasing the price will increase the amount of leverage possible. Increasing the price as cheaply as possible leaves more money to be leveraged.

    Leverage would be magic if it were applied to the real world. If Ford functioned as a financial institution, one brand new truck would enter the factory, and with no additional materials or labor, three brand new trucks would exit the factory. One truck would be sold, and two brand new trucks would than be brought into the factory. Each one would produce three brand new trucks. For each of those two trucks, one truck would be sold, and two brand new trucks would than be brought into the factory.

    Other than upkeep, there is little reason to invest in the factory. I forgot to mention that the factory is nothing more than a line on a ledger, and the trucks are the numbers.

  • Guarneri Link

    M&A activity and return of capital (dividends) are classic responses to perceived lack of growth opportunities or excess risk. Investment is not. The dour perception has a variety of sources. Yes, it can be tired or dull management. Economic sluggishness and, especially, regulatory drag are a problem for sure. Getting squashed by your government favored competitors does not scream invest. And for those larger companies, yes, when you can rely on the government to give you a leg up you eventually become tired and dull.

    But I have to tell you, as someone whose career has been spent putting the zip back into companies, given a blank slate holding back those horses is a bigger problem that whipping them to run. They can produce investment lists as long as your arm in no time at all. “Down boy” is heard more than “or its the glue factory for you.” We have to make sure these people are adequately heeding the reality of their environment, at least in the $50MM – $400MM revenue market.

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