Investors Create Modern Prosperity By Reselling Their Shares For Larger Profits
Companies Make It Happen Through Mergers And Acquisitions
As featured in my recent essay, there are multiple stages of development at which companies receive investment from outsiders. The first is at the early stage where angel investors who have confidence in their principals, the efficacy of their ideas, the risk capacity to lose, and a low time preference invest smaller amounts. The next layer are the professional investors who deploy large amounts of pooled risk capital. These are venture capital (VC) firms who take stakes in younger companies and private equity (PE) firms that invest in more profitable enterprises. In both cases, they have aggressive growth targets, take minority (VC) or majority (PE) control, and have relatively short time horizons for a liquidity event (4-7 years).
The free flow of capital for mutual profit is morally defensible and practically constructive for everyone in the long run — even with the obsolescence of creative destruction. In the third stage of a company’s growth, the roles of merchant bankers and investment bankers becomes crucial.
In the case of merchant bankers, they become active in the management of family businesses, medium sized corporations, and may specialize in specific industries. One such private investment firm is Best Merchant Partners of Dallas, Texas, whose mission is affordable higher education for hundreds of thousands of students around the world. Primarily, they leverage technology in a global portfolio of privately managed education businesses through their in-market teams stationed in high-growth regions that include South America, Africa and Europe.
On the other end of the spectrum are investment banking firms. To understand how they work, I will highlight two recent transactions that affect investors either directly or indirectly.
Morgan Stanley recently advised FOX Corporation on their acquisition of Roku and its streaming platform. In a deal that reaches 100 million homes worldwide, Roku shareholders received $160 in cash and stock in a transaction that priced out at $22 billion. More specifically, Morgan Stanley financed $12 billion of the $14.6 billion cash portion and FOX delivered almost 1 share of Class A shares for each share of Roku.
For Roku shareholders, this represents a nearly 34% premium over the unaffected share price. And for FOX, this represents a major shift from content creation to digital distribution. If quality and cost efficiencies are achieved, this also represents more, better and cheaper for consumers. But for politicians, this represents grandstanding opportunities over competitive practices and the campaign contributions they can garner from that.
But most likely and importantly, this is about a lean distribution system for live streaming and targeted advertising capabilities. As the MirrorReview reports, the combined companies will be in third place behind Disney and YouTube for American viewership:
Because Roku and FOX have a smaller footprint in international territories . . . regulators lack the leverage to stall the deal. While it gives the media empire the scale needed to handle the steady decline of traditional cable TV, it leaves rival streaming services worried about the future of platform neutrality.
Yet, “platform neutrality” is not a well-defined concept nor is it easily applied to media companies. In a vain attempt to regulate internet providers as public utilities, contradictions are inevitable. Those include ranking search results that are naturally discriminatory, vertically integrated companies that favor their proprietary product – and social and political content that trigger internal watchdogs to satisfy the whims of regulators and activists.
Fortunately, “platform neutrality” does not apply to investment management firms. Their regulators are not thought and speech police, but they have other regulatory nightmares such as anti-money laundering (AML) rules and diversity (DEI) compliance standards. Ultimately, the goal of the firm is to make money for shareholders. The goal of the firm’s employees is to make money for customers. And for the companies that are owned by the firm’s customers, their goal is to make money for shareholders, etc.
In another deal that is 1/10th the scale of the FOX/Roku transaction, Goldman Sachs Asset Management (GSAM) acquired Innovator Capital Management earlier this year for about $2 billion. For GSAM, this increases their exchanged traded fund (ETF) asset base from about $50 billion to about $80 billion and expands their expertise to the defined-outcome ETF market that was pioneered by Innovator.
What is similar is that GSAM has gained greater exposure to the rapidly growing and streamlined delivery system of exchange traded funds (ETFs), diversified its revenue sources, and improved their market share position. According to Forbes, they move from the 45th largest ETF manager to the top 10 — and that came with a price. Buying Innovator at 7% of assets is steep if you consider that other large ETF businesses are priced at less than 1.5% of assets:
Innovator’s success has inspired imitators, and buffer funds now claim more than $75 billion in assets. First Trust, another Wheaton-based asset manager, has emerged as Innovator’s chief competitor, and Allianz and AllianceBernstein have launched similar funds.
That is a far greater premium than what FOX paid for Roku, so what is GSAM getting for their cash besides bragging rights and the efficiencies of scale? They are getting bubble protection and strong profit margins. They are buying insurance for their revenue streams in the event of a major market correction.
After all, Innovator’s defined-outcome strategies are also known as buffer ETFs. Their shareholders are protected from market losses with insurance derived from the purchase and sale of call and put option contracts. In turn, these assure the ETF shareholders a total return within a range (the buffer) that is determined in advance.
And if this is the confidence investors seek without knowing their spending and risk capacity or funding status (as you would know using The Moneyball Method), it is possible with relative ease, low cost and liquidity.
In summary, whether it is Best Merchant Partners investing in technology-driven higher education, Goldman Sachs investing in streamlined risk management, or FOX investing in entertainment streaming services, the benefits that accrue to everyone have one source: the earned wealth that was saved and put at risk before confiscation by government and before any finished product was created or sold.
