Chris Johns: Market capitalism is becoming a corporate Game of Thrones

Uber’s less than stellar launch on the US stock market was significant in more ways than one. On one measure it was possibly the least successful initial public offering (IPO) in history; on other metrics it was merely one of the worst.

Investment bankers get paid lots of money and are supposed to know enough about corporate valuation and investor demand to make sure this sort of thing doesn’t happen. One of the many dirty secrets of corporate finance is that it involves as much art as science. The simple question, “how much is a company worth” has many different answers. “How much would you like it to be worth?” is, perhaps, the only honest answer.

Stock markets are supposed to be a mechanism that efficiently matches savers with companies who need funds to grow. Firms have alternative sources of cash: they can borrow, from banks or friends, rather than sell themselves, in whole or in part, to strangers.

But the whole point of a stock market is to provide a cheap and efficient source of capital for firms who can then deploy that cash in the interests of economic growth. That’s the theory anyway.

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One of the many ways in which capitalism is changing – some would say becoming more rigged – is the malfunctioning of stock markets. Uber is an example of a company that, until last week at least, mostly relied on venture capitalists and other private sources for its cash needs.

The point about listed stock markets is that they are public, accessible by anyone and, usually, highly regulated. Public equity markets are supposed to enable anyone to share in ownership and, therefore, corporate profits growth. That’s why equities are also called shares.

Growth

Listing on a stock exchange – the traditional IPO – in principle should offer outside investors the opportunity to share in the next stage of growth. The company is saying that it has identified a growth path, usually requiring capital investment, for which it needs cash. Potential investors are tasked with deciding whether or not the company’s ideas about the future make any sense.

So, in the case of Uber, the investment proposition is that the ride-sharing business will one day make a lot of money. Current losses are massive but temporary. Uber thinks it can see a transformation away from today’s high costs and low revenues.

Sceptics argue there are no entry barriers to the business and that when Uber raises prices and/or cuts the cash it pays to drivers, the basic business model falls apart. Uber, naturally, disagrees. Perhaps it can reduce driver fees by eliminating them altogether: the advent of autonomous taxis.

All of this is good fun and amounts to the normal rough and tumble of investing. It's about trying to guess the future and spot the next Amazon, Facebook or Apple. But two (at least) aspects of this are both new and disturbing.

First, becoming the the next winner-takes-all tech giant is the name of this particular game. Most of the world’s profits growth is now accounted for by the six big US tech companies. They are eating everyone else’s lunch. The likes of Uber want to join this select group.

It’s not about being a competitive firm on a crowded paying field. The objective is to crush all opposition and to be utterly dominant. A corporate version of Game of Thrones.

This is clearly unhealthy. In purely economic terms, it has a more than a whiff of old-fashioned monopoly power. A century ago, these companies would have been broken up. Indeed, calls are growing for similar “anti-trust” activity. The co-founder of Facebook this week wrote in the New York Times a long, compelling essay making the case for breaking up the social networking giant.

Consequences

But it’s not just about monopolies and anti-competitive behaviour. Winner-takes-all has social and political consequences as well. Trump and Brexit and both been facilitated and driven by this brave new world.

Second, and relatedly, Uber-style IPOs are now widely seen as mechanisms that enable venture capitalists and private equity investors to cash out. In a sense, the IPO is the end of a process rather than the start of something new. Seen in this way, initial, private, investors are the smart money and buyers of (some) IPOs are the dopes.

Far from being a mechanism to facilitate corporate and economic growth, the IPO marks, at best, diminished growth prospects. The benefits of growth accrue to a small cadre of insiders. Public stock markets provide the crumbs left on the table for the rest of us.

If this is the way public equity markets should now be viewed, even in part, then something is, indeed, broken. Perhaps – but Uber (and Lyft’s) poor post-IPO pricing and performance could be taken as evidence of markets doing exactly what they are supposed to. Either way, the problem if monopoly power remains: we are just arguing over how much Uber has or is likely to retain.

Europe continues to nibble away at the monopolies, but the Trump administration is more interested in trade wars than dismantling corporate power. Ultimately, however, reform must come because it must. A system that is rigged to produce only a few winners is utterly unsustainable.