Corporate raiders help the economy when they take over struggling
companies in order to save them. But what can be said of the corporate raider who acquires a failing corporation just to liquidate it and sell off its assets at a profit? “Detestable?”
One such raider of Hollywood lore is in the movie “Other People’s
Money,” based upon the eponymous off-Broadway play. He’s Lawrence Garfield (“Lawrence Garfinkle” in the play), a.k.a. “Larry the Liquidator.”
In the tale, Larry notices that the company New England Wire & Cable’s stock sells at $10/share, but that, since all of the company’s assets minus liabilities come out to $100 million, and since it has four million outstanding shares, the real worth of an outstanding share is $25. Therefore, if Larry can buy up the stock and then liquidate the company, he’ll make a $15-per-share profit.
So isn’t it vile for Larry to destroy a company or even downsize one? Don’t we need laws to protect jobs from such practices, as well as other threats, like foreign competition and job-replacing technological innovations?
It’s widely believed that “all these factors destroy jobs, ”’period.”'” That’s not the whole truth; the jobs they “destroy” are replaced with new ones and, in the long run, they make consumers, on average, richer.
A corporate raider only liquidates a company if its net worth outweighs its projected future earnings. If he thought the corporation still had a chance at succeeding, that would mean it would make ”’more”’ money for him in the future, so he’d better keep it alive.
But isn’t it still unethical to liquidate failing companies, when that
necessarily means firing people? No, because, if a company’s bound to fail, it’ll go broke and those workers will lose their employment anyway. The difference: when corporate raiders liquidate companies, they cut the companies’ losses before the shareholders lose even more money and before the workers futilely waste more time and labor.
When a corporation’s liquidated, its assets are sold off to be used for
other, more productive endeavors, thereby helping other companies improve their productivity in satisfying their consumers. And the money the stockholders make from the sale is re-invested in other activities, too.
Who takes care of the fired employees? The mainstream media frequently scream about mass layoffs, but omit mention of how often laid-off workers find new occupations.
When AT&T downside in 1996, “Newsweek” demonized the company for putting people out of work. But scientist-businessman T.J. Rodgers pointed out that what “Newsweek” neglected to report was that many of AT&T’s fired engineers were instantly hired by his company Cypress Semiconductor and its rival Cirrus Logic. Said Rodgers, “The bad news from big companies gets front-page coverage, but the near-immediate absorption of their skilled
workers is rarely discussed.”
In addition, life seemed hopeless in Youngstown, Ohio, when its steel
mills closed down, creating a horrifying 25 percent unemployment rate. But what the media failed to mention was that smaller companies later moved in, people learned new skills, and now Youngstown has unemployment levels below the national average of 5 percent, with positions that, on average, ”’pay better”’ than the previous ones.
As Federal Reserve economist Michael Cox puts it, “We recycle labor
from unproductive uses to productive uses.”
The same holds true for foreign companies: if they out-compete domestic businesses by offering a cheaper product to domestic markets, then American consumers receive cheaper goods and can use the money they save (what otherwise would’ve been spent on more expensive goods) to invest in industries where America ”’can”’ dominate.
If technological innovations replace some jobs to cut costs, that
lowers prices and saves consumers money too, also to be be-reinvested. Besides, progress must march on. Larry Liquidator correctly noted, “[A]t one time, there must’ve been a dozen companies making buggy whips. And I bet the last one around made the best goddamn buggy whip you ever saw. Now how would you have liked to have been a stockholder in ”’that”’ company?”
Some buggy-whip companies still exist, but they’re not as lucrative. Many investors took their money out of carriage-producing and put it into automobile manufacturing. Carriage-crafters were fired, but a number of them found new jobs, and automakers were hired.
In keeping with the process that economist Joseph Schumpeter called
“creative destruction,” the free market re-allocates resources from where they’re in lower demand to where they’re in higher demand. Inextricably, real-life Larry Liquidators actually help ”’create”’ even more valuable new jobs and thereby provide an important service for us all.
”’Stuart K. Hayashi is the president of the Reason Club of Honolulu and an undergraduate in Entrepreneurial Studies at Hawaii Pacific University, though his opinions do not necessarily reflect that of either institution. He can be reached at mailto:firstname.lastname@example.org and an index of his past editorials for HawaiiReporter.com can be seen at”’ http://reason_club.tripod.com/stuart_editorials.html