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Capitalism has several of its challenges waiting for redemption. Subsequent to the global \u00a0financial crisis of 2008-09, even the ardent capitalists are \u00a0wary\u00a0 about the negative social \u00a0impact the system \u00a0has brought during the last few \u00a0decades, \u00a0\u00a0such as \u00a0\u00a0concentration of \u00a0income and wealth into \u00a0a few hands, reckless abuse of environment, and excessive consumerism, to name a few of those negative marks. Though efforts have been taken by various governments to mitigate some of those problems during the last decade and half, a lot more need to be done to find complete salvation, if at all that \u00a0is possible. \u00a0<\/p>\n
Now comes a new twist to this. The proposed mega Initial Public Offer (IPO) by Elon Musk of his Space X tech startup company, slated for the month of June , \u00a0is going to be another\u00a0 litmus test for the capital systems\u2019 credibility. \u00a0The IPO is pegged at US$ 75 billion- the largest potential listing so far \u00a0in the history of the stock exchanges any where in the world. A distant number two in the private sector who raised just one third of this amount is Alibaba. The other two closer examples, again at\u00a0 far less amounts, \u00a0are NTT in Japan and Saudi Aramco in Saudi Arabia, both\u00a0 partial privatization of government companies of mammoth sizes with \u00a0long history of robust financial performances.<\/p>\n
Just to get a real feel for the numbers again, with the listing of this IPO (assuming it is successfully closed) Space X may\u00a0 rank among the tenth \u00a0most valuable companies in the world \u00a0with a market value of approximately US$ 2 trillion. With that Mr Musk himself may have become the world\u2019s first trillionaire!! According to an \u00a0estimate published by The Economist (May 23rd-29th 2026) \u00a0he will be worth as much as all the households put together in his\u00a0 country of origin- South Africa.<\/p>\n
Space engineers and AI experts are still debating the engineering and technological perfection or otherwise of the products, services and the ultimate space mission \u00a0of the Company. As the other two close competitors, both Blue Origin and Amazon, \u00a0also \u00a0have announced similar plans to operate shuttle services to the space with re-usable rocket, several levels of technical evaluations are taking place in AI and space labs all over the\u00a0 world. Even Chinese companies like LandSpace and Space Pioneer are in the race. However as the purpose of our discussion here is not to dwell on these technological aspects, let us give Musk the benefit of doubt and assume technically everything they are offering are feasible.<\/p>\n
But what is notable, and at the same time disturbing, is its financial and economic implications. This IPO has no comparison with any other mega IPOs \u00a0in the\u00a0 past, either in its \u00a0size or in the underlying premises. \u00a0Typically before any company in general, and start-ups in particular, are allowed to offer \u00a0an IPO, there are several financial performance criteria\u00a0 to be fulfilled \u00a0for raising money from the public.<\/p>\n
First, the entity\u2019s profitability \u2013 or ability to become profitable in the near future- is the criteria considered. In Space X\u2019s case, the company is losing more than US$ 10 billion a month, and its recent merger with\u00a0 affiliate XAI and the social network carrier X is taking it to further financial vulnerability. \u00a0\u00a0It is worrying that Musk is asking the investors to trust their savings to a loss-making company \u00a0with hardly credible financial plans. Space X\u2019s business plan as filed with the regulators has the red letter warning \u201crisky\u201d written all over it. The plan says that significant part of its revenue will come from AI. It is not clear whether it will be by creating data centers in the space or by selling data-center services to others. Both are untested and ambitious in that scale \u2013 the revenue\u00a0 estimate\u00a0 is US$ 28 trillion!!; the revenue stream targeted \u00a0even includes\u00a0 income from mining of asteroid.\u00a0\u00a0\u00a0<\/p>\n
One important pre-cursor to \u00a0making a decision \u00a0by \u00a0an entity for \u00a0inviting investment\u00a0 from the public through IPO is its valuation itself. Conventionally valuations are based on potential profitability and \u00a0is measured in multiples of earning \u2013 EBITDA (Earning Before Interest, Tax Depreciation and Amortization. But nascent start-up companies, which are \u00a0not making profit, but have \u00a0high future potential to do so soon, are\u00a0 valued at multiple of revenue instead of earnings, even though they\u00a0 are not making any positive cash generation at present. These revenue multiple can range from \u00a010 to 20 based on the product, industry, location etc. Mesk\u2019s own Tesla is valued at 16 times the revenue based on its current market cap. But in the case of Space X, the valuation is 100 times the revenue- highly ambitious\u00a0 by any \u00a0standard.<\/p>\n
Yet another aspect that is questioning the norm \u00a0is the governance \u2013 or lack of it. \u00a0There is a huge concentration of corporate control in the company in the hands of Musk, \u00a0as disclosed in the filing with the authorities. Conventional corporate control requires effective and independent \u00a0board oversight, risk-based incentives structure for senior and critical executives, and robust succession planning. Musk\u2019s Satar X does not believe in any of these norms. On the other hand, it offers \u00a0a complete \u201cfounder centric\u201d model which allows the company to be governed by the founder\u2019s discretion, though significant investment is raised from the public. The \u00a0problem with \u00a0the proposed governance structure \u00a0is the entrenchment of super-voting equity, by which dual class share structure bypass the conventional (and more fair) \u201cone-share-one-vote\u201d structure of any publicly held entity. Disclosures in the IPO filing states that Musk and his close associates will have ten times the voting right compared to an ordinary share holder. Even otherwise, a \u201ccontrolled company\u201d like this has, under the SEC regulations, exemptions on forming an independent board or constituting a compensation committee.<\/p>\n
Even for the post IPO listing of shares, it is understood that Musk is \u201cshopping\u201d for the least regulated stock exchange, as different states and stock exchanges are vying with one another\u00a0 to be the preferred exchange for this and accordingly offering increased statutory protection for the directors appointed by Musk, \u00a0which will be detrimental to the interests of the ordinary shareholders. Space X is also targeting to list on NASDAQ, the index carrying exchange, where he will get the benefit of its fast entry\u00a0 rule that allows newly listed large entities to enter the NASDAQ 100 index just\u00a0 after 15 trading days as against normal three months waiting period.<\/p>\n
There are several obvious risks associated with these kinds of opaque governance system. These privileges under the rules give Musk and his associates the right \u00a0to appoint any one of their choice as a director, the public\u00a0 share\u00a0 holder having no say at all. With the kind of political clout Musk is wielding it is any body\u2019s guess what the criteria for those appointments will be. Investors are therefore saddled with his future business decisions as well as his not-too- admirable politics with frictions in his own Republican party. He may face a further backlash under the next Democratic administration for his racists leaning, immigration policy, trade tariffs and other similar positions he has taken.<\/p>\n
The corporate world in the USA is comparing him and the kind of risk he is daring to take, \u00a0to Henry\u00a0 Ford and J P Morgan. But the comparison is unrealistic and unfair. Though both the celebrated entrepreneurs took immense risk in their respective field\u00a0 of business , those risks were calculated risks, \u00a0and even \u00a0speaking of \u00a0their time, \u00a0relatively \u00a0\u00a0much smaller in size. Moreover they were acting with lot more certainty of the so called \u201cbrick-and-mortar\u201d business on \u00a0the \u00a0earth compared to the mostly un-chartered and un-seen \u00a0world of the space where\u00a0 Musk is betting his US$75 billion IPO.<\/p>\n
There are other moral and ethical aspects too. As the global \u00a0economy is moving through a depressed phase due\u00a0 to the war and the resulting energy crisis, \u00a0the amount Musk is targeting \u00a0is hard to come by from his friends and associates alone. He and his agents will \u00a0have to tap most every pension fund, sovereign fund, HNIs, private equity funds and even retail investors from financial markets all over the world \u2013 with possible \u00a0arm-twisting of the decision makers at these providers of funds. He may even use the good office of his \u201cfriend\u201d at the White House for this purpose. \u00a0This will be creating a big constrain to the liquidity \u00a0\u00a0in this \u00a0war-effected economy, when every corporate and government all over the world is finding it difficult to make both ends meet.<\/p>\n
A successful Space X IPO will \u00a0take this huge capital from the public and other capital providers to one single person; and what he will do with this money \u00a0is unfortunately\u00a0 will depend \u00a0\u00a0mostly on his personal decision and ambition, making the normal investing public to feel jittery. Not only is this a huge concentration of wealth, it also drives the other critical sectors with potential dearth of money.\u00a0 Obviously alternative investments in education, health care and social sector will suffer, at least temporarily. \u00a0Even bigger \u00a0casualties will be the \u00a0\u201cimpact\u201d\u00a0 and \u201cethical\u201d \u00a0funds for whom attracting funds is\u00a0 a difficult proposition, even otherwise. As the liquidity will be drained with Musk\u2019s IPO sucking $75 billion from the market, these humanitarian funds will be left with very little money for them to attract from the market. The significant development \u00a0\u00a0achieved during the last two-three decades in the area of women-empowerment, environmental protection, energy conservation, soil protection, water conservation, preventive health, reduced \u00a0child-mortality, vaccination, rural sanitation etc,\u00a0 especially in the southern hemisphere and African nations, \u00a0are due to the large amount of funds invested by these ethical\u00a0 and impact funds in these territories. . If they run out of resources, all these progresses will be retarded to the disadvantage of marginalized section of the humanity.<\/p>\n
Doing business and taking risk is all about capitalism and its free market economics. But the time is changing for the capitalists to watch. It\u2019s the populist age where the gen Z and gen Alfa mobilizes their opinion through social media in no time and they change things over night. We have seen its different avatars in recent times- in \u00a0Sri Lanka, \u00a0Nepal, Bangladesh etc.\u00a0 In the US, overwhelming sentiments \u00a0against Gulf war is predominantly\u00a0 created by the youth in the university campuses . The recent phenomenon of Cockroach Janata Party is yet another youth manifestation against perceived injustice. In such a scenario, many people will see this kind of concentration of wealth coupled with unchecked corporate powers in trillion dollars companies- and individuals- as a failure of capitalism. The ever increasing divide between the rich\u00a0 and the poor globally \u00a0is already\u00a0 a matter of great challenge for the governments and policy\u00a0 makers to assuage. But for some die-hard rightists, Musk and his\u00a0 IPO, the ability of the free market to mobilize money\u00a0 of that magnitude and probably turn the improbable in to reality \u00a0can be seen as the capitalism at its zenith of success.<\/p>\n
\u00a0\u00a0As learned economists like Dr Joseph E Stiglitz has pointed out at the time of 2008-09 financial crisis, once you cross the limit you are not only driving your business in to jeopardy, but also taking the capitalism itself in to great \u00a0risk. Musk and his IPO have crossed all limits normally considered as prudent. Greed has been identified as one of the drivers to the crisis in 2008-09. Phony financial products, lack of transparency, lose governance and lack of any regulatory handle were the other major factors attributed to the crisis. Musk\u2019s IPO has all these ingredients packaged in it in required \u00a0proportion. In a sense, this is Musk\u2019s tryst with capitalism!!!<\/p>\n
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C. H. Abdul Raheem is a Chartered Accountant based in Kochi, works as a financial advisor to several public limited companies and is in the Board of many companies as independent director<\/p>\n","protected":false},"excerpt":{"rendered":"Capitalism has several of its challenges waiting for redemption. Subsequent to the global \u00a0financial crisis of 2008-09, even…\n","protected":false},"author":2,"featured_media":727095,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[23],"tags":[49,48,66,306],"class_list":["post-727094","post","type-post","status-publish","format-standard","has-post-thumbnail","category-space","tag-ca","tag-canada","tag-science","tag-space"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/727094","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/comments?post=727094"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/727094\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media\/727095"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media?parent=727094"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/categories?post=727094"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/tags?post=727094"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}