Ichiro Suzuki
Earlier this month, there was a headline that read “Saudi Aramco overtakes Apple as the most valuable corporation.” This is a sign of the times. On surging crude oil prices, fossil fuel extractors, demonized and designated as public enemies, are making a staggering comeback. Nonetheless, there is a problem on this headline. A stunning 98% of Saudi Aramco’s outstanding shares are in the hands of the government of Saudi Arabia with only 2% being freely traded in the market. In contrast, Apple is the most liquid corporation, with least percentage of outstanding shares owned by insiders. (When Steve Jobs was ousted from Apple in 1986, he dumped all but one shares, which allowed him an access to an annual report copy. The Apple shares currently owned by Laurene Powell Jobs were awarded to Steve in his second stint with the company.) With only 2% free-float, Saudi Aramco’s value is considerably inflated. This is literally a comparison between apples and oranges.
Inflated value due to suppression of free-float shares has not been uncommon, especially outside the United States. Reagan-Thatcher neoliberalism and the Washington consensus in the 1980s created a wave of privatization of government-owned assets. Government-owned monopolies were taken public in a wide variety of industries that included telecom, mining, energy, electric utilities, post office, postal savings bank, etc. With a large chunk of their shares remaining in the hands of governments, these corporations’ value was driven to higher levels than would otherwise have been the case. In a commodities boom in the fist decade of the 21st century, state-owned energy monopolies crowded the list of the world’s largest corporations. (Saudi Arabia did not decide to sell a tiny fraction of Aramco to the public until 2019.) Besides large government stakes, Japan has had a notorious practice of inter-locking shareholding system among corporations within the same business group and other friendly companies, for the purpose of defending themselves against unsolicited takeover proposals. This practice considerably contributed to ballooning of the value of Corporate Japan as a whole in the 1980s. (As it turned out, the system proved to be good as long as share prices were rising. Once the market moved to the other direction for a sustained period, it posed adverse effects to their financial health, especially when the share price dipped below the stated cost.)
Inflated compared to intrinsic value of corporations, such stated value makes their shares currencies for transactions. Overvalued shares allow corporations to gobble up smaller competitors more easily, especially those in the overseas market. During the earlier commodities boom, mergers and acquisitions heated up among miners and fossil fuel producers.
The 2012 acquisition of Nexen by China National Offshore Oil Corporation (CNOOC) was one of such deals. CNOOC paid $15 billion for the Alberta-based energy company that was spun off from Occidental Petroleum. The Canadian government eventually gave a green light to the deal though it did not please the U.S. It was an easy deal for CNOOC that was back then worth twice as much as today’s $70 billion equity market capitalization. So the deal went through as CNOOC took advantage of inflated share prices.
Few remember that the first publicly-traded corporation to reach the $1 trillion mark was PetroChina in 2008. Today, it is a shadow of former self, being worth only $130 billion. The company back then was busy buying energy interests in the developing world. While their activities were primarily in Africa, its purchase of a large stake of Petro Kazakhstan, publicly listed in the NYSE back then, probably was their largest deal. Paying top dollars in the middle of a boom has its price, even if the deal was made for strategic, not financial, purposes. Over-priced acquisitions weaken balance sheets, especially if they are not generating sufficient cashflow. The largest shareholder, the state, does not grumble, but failure to keep other shareholders satisfied eventually weighs on the company. While state-owned enterprises still remain inflated in their value through large government stakes, such inflated value no longer gives the kind of might as it once bestowed on them.
The same is true outside of commodities industries. President Xi Jinping’s ‘common prosperity’ policy has considerably reduced the value of once high-flying tech industries, through a highly uncertain regulatory environment that is at the whim of the dictator. Having initially caught the wrath of Mr. Xi, Alibaba is now worth only $230 billion, less than a quarter of Amazon that also came crashing down in the latest tech rout.
Chinese equities’ dismal performances over the last 15 years has weakened the value of currencies to be used in overseas acquisitions. Low share prices constrain what they can offer. On top of it, the Cold War 2.0 makes it almost impossible for Corporate China to acquire what they want in the developed world. Even in the Global South, to a group of countries that chose not to condemn Russia on its invasion of Ukraine, weak share prices would make China look not as potent as in the past. An easy access to Russian crude at below market price for the foreseeable future makes one forget about consequences of weak share prices. Nonetheless, China’s financial power has seen its best day.
About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.
