Going Public, Going Down

In a bull market, it’s next to impossible to resist the allure of taking a company public. Although an initial public offering does require a much-heightened level of disclosure, and although it means that in some sense you now have thousands of, if not bosses, then at least annoying gadflies who will pester you if your company doesn’t perform, an IPO also means that tens or hundreds of millions of dollars are going to flow into your company’s coffers, at what must initially appear to be essentially no cost.

But taking a company public is sometimes a mistake, both for investors and for the company itself. The exigencies of quarterly reporting, the constant need to explain your decisions to investors, and the pressure for consistent and rapid earnings growth (even in an over-inflated market) mean that a company cannot be run in its old, comfortable way (which, it has to be said, isn’t always a bad thing). More to the point, it’s possible that there are some companies that should never have been taken public because they will never be able to deliver the things outside investors want. Metro-Goldwyn-Mayer, the floundering Hollywood studio, is one of those companies.

Since MGM went public last year, selling off less than 12% of the company for a couple hundred million dollars, the company’s stock has stagnated, while the studio’s business has been as singularly unimpressive as almost everyone expected it to be. Last week, billionaire Kirk Kerkorian, who owned 65% of MGM after buying it in 1996, bought out his partner, Australian broadcaster Seven Network (that’s a company, not a person), paying a 50% premium to the extant share price and essentially letting Seven Network leave Los Angeles without having lost any money. Although MGM’s shares were trading between $15 and $16 at the time of Kerkorian’s purchase (down from the IPO price of $20), the generous financier shelled out $24 a share for Seven Network’s 25% stake. That sent the company’s stock price soaring, at least momentarily. It also gave Kerkorian a 90% stake in MGM.

Now, there’s clearly something wrong about the idea that the so-called culture industry works best when its major companies are essentially fiefdoms governed by the whims of incredibly wealthy men who have so much money that losing a couple hundred million on a movie or a magazine or a book advance just doesn’t matter. While the discipline that public ownership imposes is often onerous, and while a singleminded focus on the bottom line is probably not the ideal future for book publishing or moviemaking, existing because the public likes your product is surely a better state of being than existing because you’ve won the favor of the lord of the manor.

Still, having said all that, a company like MGM, stuck in an industry that appears to be beset by a combination of irrationality and a near-impossible mission (trying to win the hearts of American movie viewers on a consistent basis), would be better off as a private company. With the exception of Disney in the post-Lion King era, no movie studio has been able to offer investors consistent earnings growth over any extended period of time. Making popular movies (even tasteless ones) is hard, and it’s especially hard to do it with any regularity. As a result, investing in a movie studio is always going to be incredibly risky, and the possible reward is simply not that great. Movie studios function well as arms of larger conglomerates–Sony or even News Corp–where their earnings fluctuations can be smoothed out (often by very creative accounting) or as tightly held, and tightly supervised, enterprises (as most of the studios were in the prewar era). We’ve come to think that every company should be public. But if Kerkorian really wants MGM to stay afloat, he should just buy back all the shares, and run it for himself. It’s just not worth anyone else’s time or money.