B-Schools (Try To) Predict What 2021 Will Look Like

Will Tim Cook and Apple see big changes in 2021? Oxford professor Ludovic Phalippou thinks so

Big changes are not expected in 2021 at the so-called “Magnificent 7” publicly listed companies — all tech companies, and all big employers of MBAs — though they should be, writes Ludovic Phalippou, professor of financial economics at Oxford University Saïd Business School.

All $bn Enterprise Value  EBITDA EBIT Total Current Taxes
Apple 2100 77 66 9.9
Amazon 1600 41 20 0.8
Microsoft 1550 71 56 8.7
Google 1150 48 35 5.1
Facebook 750 33 24 6.4
Alibaba 700 22 15 3.7
Tesla 600 4 2 0.1
Total 8450 296 218 34.7

“These are the 7 largest publicly listed companies in the world,” Phalippou writes. “And several striking facts come out of this simple summary table:

  1. These 7 companies together are worth a total of $8.5 trillion. What is $8.5 trillion? It is what it would cost to buy every single publicly listed European company (UK included)!
  2. Their value is about 30 times EBITDA. A normal company has been valued, historically, at less than one third of that (8x).
  3. The 7 companies are in the same sector! We have not only never seen such a concentration of wealth in the corporate sector, and even less so observed all the largest companies operating in a similar sector
  4. All these companies are full-on various regulatory loopholes:
    1. $34.7bn of taxes paid – 16% of their EBIT and 0.4% of their Total Value
    2. Potentially predatory acquisitions; for sure they are huge conglomerates; and seem to have some anti-competitive strategies in place.

Oxford’s Ludovic Phalippou

“They have avoided a lot of taxes, and I do not see how they will manage to continue to operate like this in the long run. But I do not see this stopping next year. The conglomerate and massive concentration angle, however, may be corrected sooner. It would not take long for American competition authorities to go back to a point in time when they were rejecting many proposed acquisitions, and when they were breaking down large companies (remember AT&T among others?). The public would probably benefit more than it would suffer from having Facebook being a separate entity to WhatsApp and Insta. Similarly, Amazon is a retailer of sorts, but also an IT company competing with IBM for the big business of cloud computing, and it is also growing a video producing and streaming business competing against Netflix and Disney. These activities do not have a direct link, we are facing here a 1980s style conglomerate, which ended up being split up. I expect action there as early as 2021. And when that happens the issue of common ownership will be even more center-stage: you may break down a company but if the different pieces are held by the same shareholders, then did you rally break down these companies?

“Another important element is that at least two of these companies could be seen as natural monopolies: Amazon and Google. This notion means that they operate in a segment where it is most natural to have a single operator. Historically, the solution to this situation is to nationalize the natural monopoly or to have a special tax on it (e.g. by auctioning the monopoly right). I do not think we are close to such a regulatory intervention, but it should happen in the medium or long run. 

“The valuation of these companies is wild, and it is difficult not to see a correction, especially if the tax and competition authorities are more active next year. As these companies have some positive organic growth that is higher than that of the average company, I would not expect their value to be divided by three as suggested by their simple valuation ratio, but anywhere between a one third decrease and a one half decrease over the next two years would be logical.”

MORE THOUGHTS ON THE DIGITAL FRONTIER

Oxford’s Martin Schmalz

Martin Schmalz, associate professor of finance at Oxford Saïd, adds that “There’s an ever greater wedge between how data-driven (‘tech’) business models are employed in China and the West, because of a wedge we drive between technical possibilities and what regulation allows (perhaps for good reasons) — and because we’ve been behind for a decade and don’t seem to care to catch up.

“One worry is that due to imperfect regulation, we get a lot of the bad parts of tech in Europe  (like U.S. tech giants violating our privacy and transferring wealth to their shareholders) while we don’t get the benefits in terms of convenience Chinese users enjoy. Another worry is that government-business cooperation on tech (think ‘backdoors’) concentrates power to an ever larger degree.”

And Michael Barrett, Cambridge professor of information systems and innovation studies, adds that the pandemic has accelerated the uptake of digital in virtually every sector, bringing to light “the level of readiness and maturity of different organizations to adapt to the future. 

“In 2021,” Barrett writes, “we can expect to see more clear winners and losers as we have started to see in the retail industry. Those organizations with little investment or capability in evolving to becoming a digital enterprise will likely be banished as dinosaurs of the pre-Covid era. Those already well positioned with digital maturity will sprint faster, making make even bigger competitive strides. While customer power can be expected to energize this digital trend, it is less clear how flexible organizations will be with their employees in the emerging era.

“On the one hand, the pandemic has provided a long-enough runway for new work routines to become legitimate out of necessity – but what recalibration might we expect in sectors where digital does not easily allow for measurement and control of worker productivity?”

MUCH WORK TO DO IN 2021 & BEYOND

“Across graduate business education, we are seeing an increase in interest in our programs — which is to be expected in an unstable economy when people take the time to gain new skills and recalibrate their careers so they are ready for what the future holds,” says Elie Farhat, associate dean and chief admissions officer at Georgetown University’s McDonough School of Business. “If anything, we are sure that the future will be different from the world we lived in pre-quarantine, and the challenge for business schools will be to prepare for this new reality while also addressing immediate challenges. My prediction for 2021 is that the business schools that continue to innovate and look past the pandemic will have the most success in the new year and that Georgetown McDonough will be one of those schools. Since March, our MBA launched a deferred enrollment program, achieved strong employment results, launched new scholarships, and implemented a Certificate in Sustainable Business and a new STEM-designated management science major. Our Executive MBA rolled out a new curriculum this fall that adds more customization for students and enhances the program’s focus on the nexus of business and policy here in Washington, D.C., and around the world. And, the school launched a new M.S. in Business Analytics, with the first cohort of students starting in January.

“In 2021, schools also will deepen their commitment to diversity, equity, and inclusion. At McDonough, we continue to build our curricular and co-curricular offerings in this area, in addition to creating a DE&I Standing Committee and a task force specifically focused on the student experience. I’m incredibly proud of our graduate admissions teams, who recruited our most diverse classes ever across all of our graduate programs this fall. This success is a testament to their commitment to building a diverse community, as well as the ways in which our leadership has created a true sense of community and support throughout the school. We have much work to do in the coming year and beyond, but guided by our Jesuit values and commitment to social justice, we hope to inspire change through our own actions and those of our students and alumni.

“When multiplied by the other leading business schools with this same mission, I hope we will make a real difference in the world.”

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