For company executives who hold a large part of their personal network in shares in the companies they run, a falling market means falling net worth.
This is a significant concern, particularly for company founders who tend to hold large share holdings.
Over the past year, the Fukishuma nuclear disaster and the resulting movement away from nuclear power has cost John Borshoff at Paladin Energy 64.6% of the value of his shareholdings. His shares were worth $38.7 million, down from $109.4 million a year earlier.
While very few executives are likely to see such a large decline in their wealth, a falling sharemarket saw the total wealth of returning members of the BRW Executive Rich list fall 7% in 2011.
The consolation? The All Ordinaries fell 14% in the same time, proof that savvy executives do find ways to minimise their own losses.
Another management challenge; a falling sharemarket can often prompt concentration in industries, as merger and acquisition activity becomes more attractive.
Cheap companies are easily acquired by private equity, competitors or other investors. Selling their shares can be a good way for shareholders to recoup some of their lost wealth, and it can take all the charisma and negotiation of a company’s management to stop a hostile takeover. While most hostile takeovers fail, Spotless was recently sold off to private equity against its management’s wishes.
Of course, this isn’t always a bad thing. Companies can prepare for this by sparking a bidding war. For example, Hastings Diversified Utilities Fund is currently fielding offers from both consortium Pipeline Partners Australia and APA group.
Some companies welcome being bought out, recognising the opportunities this can bring. Industrea was recently approached by GE. While shareholders have yet to approve the deal, CEO and managing director Robin Levison told LeadingCompany he was delighted with the offer.
As always, bad times present opportunities for the well-prepared and the lucky.
For cashed-up companies, a falling sharemarket can be the ideal time to acquire other companies.
The ASX is reportedly in talks to buy share registry Link Market Services, while commodities titan Glencore is seeking to acquire both grain company Viterra and iron miner Xstrata.
Myriam Robin is a journalist with LeadingCompany. You can follow her on Twitter at @myriamrobin.
This article first appeared on LeadingCompany.
Andrew Sadauskas is a former journalist at SmartCompany and a former editor of TechCompany.
