Make way for superstock


April 12, 2019

Today, shadow banking is growing, while China’s megacity construction is slowing, but first…
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To stay in control after their startups IPO, founders are squirreling away superstock

Nearly public Pinterest and recently public Lyft are 2 very different companies with contrasting business strategies, growth plans, and profit margins. 

But they share an interesting financial feature: superstock.

Superstock — a separate class of stock with the same value as normal stock on paper, but 20x as much voting power — is becoming a popular way for tech founders to retain a dictatorial degree of control over their companies when they go public. 

Not all stock is created equal 

In a traditional stock structure, one share equals one vote: So when investors buy more shares in a company, they also buy more input into its business decisions. 

But not all corporations are that simple. Public companies can also issue different classes of stock, meaning that shares of equal financial value have unequal voting power

At companies with multiple classes, high-class shareholders may have 20x as much voting power as normal shareholders, and low-class shareholders may not have any voting power at all — even though they’ve all invested the same amount in the company.

The new ari-stock-racy

So, what led to the rise of these anti-democratic stock structures?

Multi-class stock is the kind of thing that makes Travis Kalanick’s wallet stand at attention in his pocket: Split stocks allow founders to call a company’s shots even when they no longer control a majority of its shares.

Between 1980 and 2015, the percentage of tech companies to IPO with multi-class stock never exceeded 20%, but in the past 4 years that percentage has shot up to 50%.

Does the stock market have a class problem?

Multi-class fans argue that founders need consolidated power to prioritize long-term business success. But, a lot of times those decisions only benefit the top dogs. 

Among the world’s biggest tech companies, there’s a split: Facebook, Google, and Snap all use multi-class structures — but Apple, Microsoft, and Amazon all made their fortunes with the one-stock-one-vote model. 

Multi-class structures are possible because the biggest stock exchanges — the NYSE and the NASDAQ — allow them. But a number of investor groups have publicly called on exchanges to require equal voting rights.

Stock it to ’em
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Albertsons joins IBM’s blockchain network to keep better tabs on its supply chain

Last December, Santa Barbara lettuce growers recalled their romaine after it led to an outbreak of E. coli infection that sickened over 50 people across the US.

Well that does it — to prevent future food safety f*ck-ups, Albertsons is joining IBM’s blockchain-based Food Trust network to improve transparency of how food is tracked from farm to grocer.

Bringing companies together in the spirit of transparency

IBM’s blockchain-based food tracking platform, which creates a digital record of every transaction or interaction on the journey to your local grocery store, went live for global retail use in October after 18 months of pilot programs.

IBM’s “solution-as-a-service” cloud platform was created to help promote greater transparency and collaboration, and, ultimately, a safer food supply chain by allowing eyes on a broad range of QC issues.

The more the merrier

With the Food Trust, IBM allows companies from across the food-scape to join and share data to help bring a crystal-clear view of the lifespan of food products (like romaine lettuce) that will help narrow nationwide food recalls into laser-accurate eliminations of certain products.

The more brands that join systems like the Food Trust, the stronger the transacting ecosystem becomes.

» Join the blockchain gang

The ‘shadow banking’ industry has grown 75% since the end of the financial crisis

Non-bank lending, AKA shadow banks, AKA “huhhhhh?” have seen their assets grow to $52T, potentially posing a major threat to the financial system.

According to CNBC, the US sits firmly atop the sector with $15T in assets — though its share of the global market has fallen as China has grown its assets to $8T.

They look like banks, they lend like banks…

But they’re not banks. “Shadow banks,” which include hedge funds and private equity firms, face fewer regulations than traditional banks, allowing them to make riskier investments, including lending to underqualified borrowers.

Even art dealers like Sotheby’s have become shadow banks — making millions of dollars’ worth of loans to trust-fund babies who want to buy masterpieces.

Why it matters 

The sheer magnitude of underregulated lending is cause for concern, as history shows it can decimate the financial system. 

Shadow banking played a major role in tanking the global economy (ever heard of the 2008 financial crisis?). Beyond traditional bank bailouts, the government also had to shovel trillions of dollars into non-bank lenders to support those systems.

What are the specific dangers?

Credit rating agency DBRS identified 3 risks that shadow banks pose in times of market duress:

  • Lack of structure: Shadow banks lack resources to deal with periods of low liquidity and heavy withdrawals (traditional banks have deposit insurance).
  • Lack of experience: What kind of pilot do you want behind the wheel of the money plane during a crash landing?
  • No earnings diversification: If a market deteriorates, shadow banks usually don’t have anything to fall back on.

On the other hand…

Advocates believe shadow banking provides buffers against market stress, which may be true, DBRS says.

But, as history has shown, the potential fallout of shadow banking during an economic downturn poses a much larger downside than the buffers it supposedly provides when markets are peachy keen.

» When up is down

At ‘China’s Manhattan,’ construction slows due to debt and diminished demand

Construction at a massive Chinese development billed as “China’s Manhattan” has stalled as 80% of the complex’s office space collects cobwebs, reports The New York Times.

The gleaming ghost town highlights a new economic reality in China: After years of big-time borrowing, Chinese investors bit off more development than Chinese consumers can chew.

A whole lotta pianos… and no one to play them

Despite the empty buildings, the local government keeps borrowing. Last year, Tianjin and entities related to the local government raised $36 billion through new loans, according to data from the People’s Bank of China, the country’s central bank. Five years later, the city is still largely empty.

Juilliard, the prestigious NYC music school, became one of the district’s few tenants when it committed to open a 2nd campus in Yujiapu. But with growth at a crawl, 150 Steinway pianos sit at a German port waiting to be shipped to an empty city.

In 2018 Tianjin lowered revenue estimates from $150B to $100B, doubling down on debt. The interest that Tianjin borrowers owe is now 12x higher than the region’s economic output. 

Big bets make big busts

Last year, the Chinese economy grew at its slowest rate in 28 years. But multibillion-dollar projects like Tianjin’s “Manhattan” already had so much momentum they couldn’t stop on short notice.

Now that Chinese investors are slowing down, they’re discovering the depth of the hole they’ve dug: The country is speckled with a growing number of empty malls and unfinished skyscrapers.

The diabolical debt dilemma isn’t unique to Tianjin: Debt has risen to $4.5T, according to the Chinese government. Other analysts say it could really be as high as $10T.

» The regular crowd shuffles in…
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shower thoughts
  1. At this point, saying “www.” before a website is like saying “Planet Earth” after an address.
  2. Tissue companies profit off of sickness, sadness and shame.
  3. Listening to a single instrument in a song is like staring with your ears.
  4. The most unrealistic part of Spongebob is that a fry cook can own a home and have so much free time.
  5. Taking candy from a baby is actually a responsible thing to do.
  6. via Reddit
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