Staying private paid of for The Economist

Felix Salmon of Fusion writes about how The Economist has increased in value because of its private status.

Salmon writes, “There’s no obvious reason why The Economist, which had a net profit of just $72 million last year, should be worth $1.5 billion. (Or, for that matter, why the FT Group, which has less than half The Economist’s profits, should be worth nearly as much.) Indeed, it would seem that in a contradiction of its venerable name, the valuation of The Economist violates a couple of pretty basic laws of economics.

“For one thing, there’s the whole issue of a ‘control premium.’ People will pay more for control of a company than they will for a noncontrolling stake. Yet when Pearson sold its 50% stake in The Economist for $734 million earlier this month, the sale came with a raft of safeguards designed to ensure that none of the buyers – and no future buyer, either – would ever be able to control the company. Economic theory says that in such circumstances, any stake should be sold at a discount; instead, the final price was some 28% higher than the Economist’s own most recent (and quite generous) internal share price.

“Then there’s the law of supply and demand, which is about as basic as economic laws get. If you have a finite supply of something – company stock, say – then the greater the demand for that stock, the higher the valuation of the company will be. This is one of the main reasons why companies go public. When a company IPOs, the price of its stock is determined in a massive auction: of all of the millions of potential investors around the world, only those willing to pay the highest amount for the stock will end up being able to buy it.”

Read more here.