STOCK MARKET WATCH -- Friday, 1 November 2013

[Demeter]

50. The new American capitalism: Rise of the distorporation

WHEN EVEN THE ECONOMIST TAKES NOTE, YOU'VE GOT A REAL PROBLEM

http://www.economist.com/news/briefing/21588379-mutation-way-companies-are-financed-and-managed-will-change-distribution

A mutation in the way companies are financed and managed will change the distribution of the wealth they create

AT THE beginning of the 1980s capital was flooding into the American oil and gas industry. Apache Corporation, an erstwhile conglomerate spanning steel, dude-ranching and car sales, sought to tap into the flow in a novel way. It wrapped a bunch of private oil and gas assets into a new ownership structure that was akin to a partnership but was publicly listed. It was a useful idea—until steep declines in tax rates and energy prices put the Apache Petroleum Company to rest in 1987.

This time round the master limited partnership (MLP) structure which Apache pioneered is no longer just a footnote. In the 2000s such companies allowed the capital-intensive energy industry to attract vital funds even during a devastating financial crisis. Kinder Morgan, a complex entity built around interlocking MLPs, has an enterprise value (its market capitalisation plus its debt) of $109 billion. The collective market capitalisation of MLPs recently passed that of Exxon Mobil, the most highly valued energy company on the New York Stock Exchange.

The new popularity of the MLP is part of a larger shift in the way businesses structure themselves that is changing how American capitalism works. The essence is a move towards types of firm which retain very little of their earnings: “pass-through” companies which every year pay out more or less as much as they take in. Many of the standard rules that corporations which retain their earnings have to follow when dealing with shareholders do not apply to such firms. And, crucially, so long as they distribute their earnings such set-ups can largely avoid corporate tax. Mindful of that last point, the American government has in the past restricted the use of such structures. But these restrictions have eased, and more and more businesses are now twisting themselves into forms that allow them to qualify as pass-throughs. The corporation is becoming the distorporation. Collectively, distorporations such as the MLPs have a valuation on American markets in excess of $1 trillion. They represent 9% of the number of listed companies and in 2012 they paid out 10% of the dividends; but they took in 28% of the equity raised. And these statistics underplay the true scale of the shift. Structures like MLPs are used to house the management of big private-equity companies, thus sitting atop industrial empires of much greater worth. Among all firms, in 2008 pass-through structures accounted for 23% of companies and 63% of profits, according to the latest data available from the Internal Revenue Service (IRS). Widely cited research by Rodney Chrisman, a professor at Liberty University School of Law, says such businesses account for more than two-thirds of new companies.

The shift to the distorporation comes at the expense of the “C” corporation, the formal name for the familiar limited-liability joint-stock structure that emerged a century ago (see chart 1 AT THE LINK). The newer structures still protect investors from liability. But the requirement for partnerships to pass through their money blocks the accumulation of earnings. In C corporations retained earnings can be used to fund investment and growth, assuring persistence. Without them, pass-through businesses have to be far more intertwined with investors. Staying alive means routinely inhaling capital, as well as exhaling...


CALL IT BY ITS REAL NAME: CRONYISM