Author: Rocco Huang
Covestor model: Tortoise and the Hare
While dispersed shareholder base and separation of ownership from management have been the norm among modern Western corporations, a small number of publicly traded companies today remain owned and controlled by a single, dominant shareholder.
I'll define "control" as owning at least 20% of a company's voting rights. By this definition, Wal-Mart (WMT) is controlled by the Walton Family, News Corp (NWSA) by Rupert Murdoch, Viacom (VIA.B) by Summer Redwood, Dollar General (DG) by private equity firm KKR, and AutoZone (AZO) by Edward Lampert's ESL Investments.
Having a controlling shareholder is a double-edge sword. There's good and bad about it.
We've heard a lot about the downside risks. Most recently, Rupert Murdoch was accused of treating News Corp "like a wholly own family candy store" for, among other things, acquiring his daughter's TV production company Shine at an allegedly inflated price.
I am well aware of these risks. I own News Corp and Viacom non-voting shares, and the annual proxy statements I receive and the instructions on them (that they are for information only and that I would not need to take any action), are constant reminders of small shareholders' status in a company with a controlling shareholder.
Most investors are aware of them too, and have discounted them in the prices. At 11/18/2011 closing prices, News Corp's non-voting shares (NWSA) were traded at $16.32 per share, a nearly 3% discount to its voting shares (NWS). Viacom's non-voting shares (VIA.B) were traded at $44.45 per share, more than a 15% discount to its voting shares (VIA).
There is no such a thing as free lunch. You have to pay more for a better-protected security. For investors, everything comes down to price. If an investor believes that the price discount he is getting is sufficient to compensate for his risk, then it's a good investment, even with Rupert Murdoch at the helm.
In this article, I am gong to talk a little bit about two bright sides of having a controlling shareholder, which should be factored into as well when one weighs the pros and cons of an investment opportunity.
(1) A controlling shareholder can be the best friend of small investors. A controlling shareholder has his or her incentives relatively well aligned with the company. For every $1 Wal-Mart loses, the Walton family loses nearly 50 cents. They have every incentive and great power to make sure that CEO Michael T.