Newspaper article The Evening Standard (London, England)

Shocking Thought on Company Life for Share Buyers

Newspaper article The Evening Standard (London, England)

Shocking Thought on Company Life for Share Buyers

Article excerpt


IF ONE were asked to name two companies that epitomised the modern economy and were destined to prosper in it, Sony and Microsoft would probably fit the bill. Everyone has heard of them, most people at some time use their products and are generally pleased with what they get.

They seem to have it made.

Yet both are in trouble. Bill Gates at Microsoft has embarked on a farreaching programme to work out what Microsoft does for an encore.

Sony is going through an even more traumatic self-examination as it seeks to restructure and make itself relevant for the future.

The fact that these two giants have problems raises an interesting question about modern business. Earlier generations have grown up in the knowledge that once they get to a certain size companies have the ability to perpetuate themselves. They are around for the long term - indeed, they go on for generations.

But the lesson of Sony and Microsoft - and indeed many others - is that no matter how big and famous a company may be, survival is much more difficult these days and should not be taken for granted.

One should perhaps go further and say survival is impossible because the modern economy moves so fast and the pace of innovation and adoption so rapid that no big business can be nimble and receptive enough to new ideas to stay in front. The moment organisations get to a size where they create hierarchies and structures, the less adept they are at fostering innovation.

There was an example of this last week when a company offering a particular smart telephone went public. The entrepreneur behind the business got the idea when he was a low-level worker for BT but could not interest his bosses in it so eventually went off to do it on his own.

Perhaps that is how the modern economy will regenerate itself. There is abundant capital looking for new ideas and it is more than ever possible to outsource everything from manufacturing to distribution. This means that the person with the bright idea or invention can create what is in effect a virtual company to bring the product to market and do so at a pace and with a flair that leaves established companies trailing.

So it may be that the natural life of a company today is five to 15 years, not 50. Perhaps we should not expect companies to last and the norm is for them to be one-hit wonders. If this is even half true, it has serious implications for investors, for pension funds and for the idea that if equities are bought and held for 30 years it will all turn out right in the end.

Pension consultant John Ralfe did his best to puncture this idea in a letter to the Financial Times yesterday, pointing out that if an investment bank was asked to write a put option for 20 years on an equity portfolio it would charge between 20% and 25% of its value for the insurance. …

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