The merits of being privately held

The merits of being privately held

If I were Sunil Mittal I would probably take my company private.

Of course, it also limits the company’s ability to use its stock as a currency—stock swap transactions involving privately held companies are notoriously messy—but few Indian companies use their stock as a currency anyway, for several justifiable reasons, instead preferring to use cash.

The debate inherent in these opening lines isn’t new.

It’s been around for some time and I am aware that because this is the second time I am bringing up the issue in this column—in an entirely different context, of course—I run the risk of being labelled a radical capitalist, but look at the evidence.

A company announces a bid for a significant global acquisition, one that it must make if it wants to remain profitable and grow. And the stock markets react by beating down the stock. I don’t have an issue with analysts who are, by the very nature of their business, short-termists; however, I find it very strange that the breed labels nine acquisitions out of 10 “overpriced".

Illustration by Jayachandran/Mint

Being privately owned also allows a company (and its promoter or promoters) to take strategic risks without being unfair to shareholders.

Last year, the well-respected CEO of a large IT firm told me that while at the personal level Ratan Tata was his friend, he believed that the well-regarded chairman of Tata Sons (and Tata Motors) had maybe been just a tad unfair to shareholders by championing his auto firm’s acquisition of Jaguar and Land Rover.

“Both are 10-15-year plays," the CEO told me. “And I don’t know whether I would have gone out and made such an acquisition when I was 70."

Ratan Tata is now 72 years old.

I didn’t really see the issue the same way because the Tata group has successfully managed several acquisitions and it always seems to find the right people to do so (and this argument is reinforced by the news earlier this year that the group had embarked on a global search to find Tata’s successor).

Still, I am sure the CEO wouldn’t even have raised the issue had Tata Motors been privately held.

There are enough people who advocate the merits of being privately held.

And privately held, family-owned and managed enterprises will usually end up adding value for their shareholders (the family) in the long term, goes another theory (but we will deal with that in another column).

PS: I do realize that some companies go public to raise money to fund their ambitious plans and that, over the past decade, equity was probably cheaper than debt in the country.

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