IPO Leno\'s Quote About Creating an Artificial

IPO

Leno's quote about creating an artificial shortage of fish draws in some lessons about the business world to the old adage. The original adage is the first part of the quote about "Give a man a fish, he'll eat for a day; teach a man to fish and he'll eat for a lifetime." This quote is talking about dependency, where the proverbial man is hungry. If you give him a fish, this is a short-term solution. He eats today, but then tomorrow he goes right back to being hungry with no fish. He needs charity again, because he lacks the skills to feed himself. When you teach him to fish, he then has the ability to feed himself. This is a skill that lasts a lifetime, so teaching the man to fish is a long-term solution to the man's hunger problem.

Leno adds the additional clause to the adage for humor. The clause "Teach a man to create an artificial shortage of fish and he will eat steak" reflects a cynical view of the capitalist ethic. The man, instead of feeding himself, is able to disrupt market forces in such a way that he creates a pent-up demand for fish. As one who can catch fish, he then in is a position to sell his fish on the open market. As at this point the artificial supply problem has created an imbalance between supply and demand, where there is excess demand in the market, the price of fish is higher. The man has earned a profit, and now can afford to eat steak, which Leno is taking to be superior to fish. Leno is apparently not Japanese.

The economics of the issue are simple. The base assumption is that there is enough supply of fish for everyone, and the market is therefore in a state of equilibrium. If an artificial shortage of fish is created, then there is surplus demand in the fish market. Anybody still with supply in that market will benefit from an increase in the price of fish. The buyers are now price-takers, and the fisherman is now able to sell his fish at a profit. With this profit, he indulges in the consumption of steak. At such time as the artificial storage is revealed to be artificial, the market will return to equilibrium and the man will no longer be able to earn a profit of his fish. The Leno quote at this point is entirely out of context, so he could have been referencing any number of different things, but we do know that some businesses benefit from profit-taking as the result of artificial shortages, for example the pharmaceutical industry.

There is also an ethical question raised here. The first clause touches upon the consequentialist ethics of two different methods of helping a man. The second reflects on a situation where a market participant has artificially rigged the market so that he can profit. The problem with this is that usually it is illegal to rig markets in this way. The Department of Justice typically works to prevent market participants from doing things like creating artificial shortages. So this means that the man is actually engage in questionable ethical behavior. If he manages to avoid the attention of the DoJ on this matter, he would do well to develop an ethical code of conduct to avoid having this happen again, because next ethical lapse he might not be so lucky. The Feds could confiscate his steak and send him to Sing where he'll eat Grade P. mystery meat and wish he could go fishing.

There are lessons everywhere. A lot of what we learn in economics or strategy is common sense. The original proverb resonates today because its lessons hold true. We relate to these lessons because they are universal. Now, Leno's quip might not be universal but it is consistent with how markets work and it does illustrate why we have regulations, which is to prevent market participants from rigging the markets to enrich themselves unfairly. It would be interesting to know the context of this quote.

2. Twitter had its IPO this month, and it was perhaps the biggest IPO of the year. The company offered shares at $26 and it closed its first day at $44.90, a healthy 73% pop (Pepitone, 2013). The stock is now trading down at $39.06, which is higher than the offering price but below the first day level.

Prior to the IPO, Twitter had a capital structure that emphasized equity (71.1%). Now, after raising another $1.8 billion, there will be around 89.7% equity. Twitter only has around $89 million in long-term debt and capital lease obligations (MSN Moneycentral, 2013).

It is not yet know what Twitter will do with its money. The company has had trouble monetizing its traffic, earning $316.9 million in revenue last year, but losing $79.4 million in the process. Twitter has never made money, and just two years ago it only earned $28.3 million in revenue. Right now, it is spending heavily in research & development. The IPO will allow it to do more of that, to make acquisitions using either cash or stock, or simply to ensure sufficient cash flows for a few years of operations while it figures out how to turn a profit. At this point, with no earnings, Twitter has a negative P/E ratio, no dividends and all of its promise is for capital gains on the basis of rapidly growing sales.