The $400 Million Pat On The Back
Autotrader.com recently decided to borrow $400 million for a brand new venture.
Was it in the field of research and development? Nope.
New marketing studies to explore an emerging niche in their core business perhaps? Not quite.
Issue a one-time $400 million dividend to their private shareholders and executives just before the IPO? Bingo!
The ones who will be paying for the principal and interest on this debt will be the upcoming shareholders in the form of lower earnings, a lower market valuation, and one other not so little thing hidden in the prospectus.
They will have no voting rights. In a move oddly reminiscent of a typical one-sided contract between an estate owner and a sharecropper, the new shareholders will have absolutely no say so in the affairs of the soon-to-be public enterprise. Even though their financial resources will pay for a big part of it.
There have been plenty of other Wall Street sponsored ventures that have voyaged down this path with questionable results. The sports entertainment enterprise, World Wrestling Entertainment, used a similar family focus when it came to voting rights. Although The Rock, Steve Austin, and a multitude of other big stars have returned to the square circle between the IPO and the present day, the stock has plummeted nearly two-thirds from the IPO price.
Closer to home, Ford decided to concentrate their voting rights with the Ford family and historically, it harmed the company’s ability to reform itself during World War II, the recession of the early 80’s, and even in good times. Such as the last great strong automotive market of the mid-2000’s.
Ford and Autotrader are just two of dozens of automotive centered companies that pursue policies that protect ‘special’ investors and executives over the interests of public shareholders. Poison pills, white knights, and certain industry standards often keep the seas of change at bay when it comes to a publicly traded company. Until it is too late.
Just ask Roger Smith and Ross Perot.
Should we invest in them? Should anyone?
As much as I warn folks about Craigslist being the Wild Wild West of retail car sales, it looks like the culture of grabbing ill gotten gains is not solely a matter of the retail world when it comes to cars. Corporate greed, in the nastiest of incarnations, is still alive and apparently doing quite well.
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"pay for placement" is the Autotrader mantra. This part is like the Monopoly game as well. Proof is that when the cars.com rep comes by to sell advertising, the first thing he says is "don't drop AutoTrader" just don't buy so much of their more expensive "pay for placement" packages. I think this will be a successful IPO because AutoTrader certainly has an actual existing revenue stream with all the "hotels it owns on the Monopoly board".
Eh, business as usual in the corporate/Wall St. world (I've seen this and much, much worse). If the average American really knew what was going on in the boardrooms, there would be riots in the street (or maybe not, due to apathy or acceptance).