The topic of banking has been in the news due to the collapse and subsequent bailout of Silicon Valley Bank. Two of the nation’s top economic policymakers said they were focused on determining how the failure of Silicon Valley Bank had happened and suggested changes to federal regulation and oversight might be needed to prevent future runs on American banks.
The discussion of stricter oversight by Jerome H. Powell, the Federal Reserve chair, and Treasury Secretary Janet L. Yellen came as lawmakers, the financial industry, and investors are working to figure out why Silicon Valley Bank and Signature Bank failed and as policymakers try to ensure other firms don’t suffer the same fate.
Mr. Powell criticized bank executives, who he said had “failed badly,” but also conceded that Fed supervisors had not been effective at preventing the bank from sliding into insolvency. He said he expected the central bank’s own report to outline concrete steps to avoid a repeat of the crisis.
“Clearly we do need to strengthen supervision and regulation,” Mr. Powell said. “And I assume that there’ll be recommendations coming out of the report, and I plan on supporting them and supporting their implementation.”
I’m always amazed at how politicians and federal officials react when there is a crisis. They always want to hold hearings to, “Get the truth” and “determine how we can prevent another crisis in the future.”
I believe there should already be mechanisms and policies in place to PREVENT a crisis in the first place.
What About Shareholders?
Watching the Silicon Valley Bank saga got me thinking about the challenges faced by shareholders. To help me ensure that I get the facts correct related to the topic of shareholders and stock, I spoke with LISA J GOODALE. Lisa and I have worked together in the past on several topics. Lisa is exceptional in many ways.
When institutions and individual investors purchase stock, they primarily do so to make money. However, when executives and regulators don’t do their jobs and they make bad decisions, shareholders lose money. In some cases, shareholders lose all of their investment.
I believe shareholders need to become smarter at how they interact with the companies they invest in. Why? Because shareholders are what make it possible for publicly traded companies not to have to take out asset-backed loans. Let me explain.
This link will take you to a page that provides a breakdown of Amazon stock and other financial information. According to the Table, Amazon has 10.5B Shares Outstanding – the number of shares held by all shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders.
Market Cap – or market capitalization – refers to the total value of all a company’s shares of stock. Amazon’s stock price is $98.13 as I write this newsletter. This means Amazon has a Market Cap of $1.01T.
The money raised from selling stock is in effect a cash infusion for a company. They can use the capital in any number of ways such as paying off existing debt and funding growth plans they can’t or don’t to finance with new loans. When a company takes out a loan from a bank, they have to back the loan with assets (collateral) and they also have to pay interest on the loan; interest payments can reach hundreds of millions of dollars depending on the size of the loan.
Stay with me now.
Amazon has a Market Cap of $1.01T but this isn’t Amazon’s Net Worth. The $1.01T is actually a no-interest loan courtesy of the shareholders who invested in Amazon.
Logically speaking, any person or institution who invests in a company is or should be interested in the performance of the company. When a company performs well, the stock price will increase. When a company performs poorly, the stock price will decrease. Amazon currently isn’t performing well and their stock price is depressed from its historical highs.
I believe shareholders should mandate that all publicly traded companies must display their Earning Per Share (EPS) via a live feed on their websites. In addition, shareholders should mandate that they be provided visibility into how a company is allocating the capital they raise from stock. In other words, provide an exact breakdown of where the money is going and the performance of the investment.
For example, the Chief Financial Officer of Tyson Foods is John Tyson. John is the great-grandson of the company’s founder, John W. Tyson. John was arrested on November 7, 2022, when he was found asleep at 2 a.m. in the bed of a home he didn’t own. Apparently, John got drunk, kicked in a door, and then went inside a stranger’s home and passed out. John is still the CFO of the company after receiving a “vote of confidence” from the Board of Directors. Note: Tyson goes on trial in 2023 and he should be considered innocent until proven guilty.
Let’s assume that John, who has already demonstrated a lack of maturity, comes up with what he considers to be a “brilliant” idea – Opossum on a Stick. In John’s opinion, it will “revolutionize the protein industry” and generate millions in sales. Since John is more than just the CFO, he is related to the founder of the company, John is able to convince the board to approve an initial investment of $500M into Tyson Foods’ hottest new product – opossum.
Alas, from the beginning, things don’t go as well as John hoped. Raising and butchering opossum is harder and more expensive than planned so an additional $100M is allocated to the project.
Much to the surprise of John, when Opossum on a Stick hits the market, sales lag. John determines that the price is too high so the price is lowered to the point where Tyson loses money on every pound of opossum they sell. To increase sales, Tyson triples the marketing budget. It doesn’t help. After 12 months and a loss of nearly $1B, all Tyson has to show for their efforts is a freezer full of opossum meat and no customers.
Yes, what I just presented about Opossum on a Stick is parody. However, many publicly traded companies invest the capital they raise from shareholders in programs that lose millions and even billions of dollars. My argument is this – the earlier shareholders are aware of programs that are losing money, the sooner they can raise their concerns to the CEO and CFO of the company.
One more time – the money raised from investors is a no-interest loan. Corporations should be required to provide much more transparency in how they allocate their capital.
Note: I understand the importance of R&D. I understand that most new programs fail. I understand that corporations want to protect their first-mover advantage when they invent a new product or create a new service. I want safeguards put into place that will protect corporations if what I recommend is enacted. Nonetheless, there needs to be a better mechanism in place to ensure corporations are investing the money they raise from stock as wisely as possible.
After all, would you want to eat Opossum on a Stick, or buy a self-driving car that has a tendency to crash while the driver is sleeping? Yes, that’s a slam against Tesla and their ridiculous and expensive self-driving not actually self-driving cars. How many millions of dollars has Tesla wasted?
Amazon and Whole Foods
Should Amazon have been able to acquire Whole Foods Market for nearly $14B without demonstrating to shareholders that they had a strategy in-place that would ensure the investment generated a positive ROI? I can make an argument that Amazon didn’t know what they were doing when they acquired Whole Foods. I can also state without hesitation that Amazon didn’t follow the recommended grocery strategy that was provided to them.
For example, this was the first article that recommended to Amazon to acquire Whole Foods. The article, actually it’s a research paper, was written in 2013. The author of the paper states that if Amazon acquires Whole Foods, they’ll need to also acquire Target, and open Whole Foods Markets inside Target’s stores. The author invested over 200 hours researching the topic. How do I know? I wrote the paper.
Amazon is in a world of hurt when it comes to its grocery business. Whole Foods is all about fresh food, but Amazon chose to launch ‘Amazon Fresh’ stores. If Whole Foods is the leader in fresh food, why the need for Amazon Fresh stores? Amazon launched a banner that will eventually compete against Whole Foods. I continue to recommend to Amazon to kill the Amazon Fresh brand, and rebrand the stores as ‘Whole Foods+’ to take advantage of the Whole Foods brand. Whole Foods+ stores can sell the best of organics plus also sell Tide, Coke, PepsiCo snacks, and other brands consumers love.
I have also recommended to Amazon that if they can’t or won’t acquire Target, they should at least approach Target about acquiring their grocery business. This will allow Amazon to open Whole Foods Markets inside Target’s store. Target sold their pharmacy business to CVS Pharmacy in 2020. Selling their grocery business isn’t out of the question.
You read it hear first. If Amazon can’t come up with a better grocery strategy they’ll be pressured to divest Whole Foods. Who should acquire Whole Foods from Amazon? Target.
Until next time,
Brittain Ladd
