Cooking the Books 1: Venture or vulture

According to the GMB and T&G unions,the Sainsbury supermarket chain is under threat. It’s reported that the Sainsbury family – including former Labour minister and Labour Party bank-roller, Lord Sainsbury – want to withdraw their capital and that  “venture capitalists” are grouping to buy them out. That’s what they call themselves. Others have different names for them. A GMB official called them “plunderers” while one from the T&G said they “do not create wealth; they extract it for their shareholders” (Times, February).

A German minister once called them “locusts”. Other choice descriptions are “corporate raiders”, “predators”, “vultures” and “asset strippers”. Socialists apply some of these descriptions to all capitalists, but what have these particular kind of capitalists done to earn such epithets even from non-socialists?

Basically, they borrow money to set up a short-term fund (usually for 5 to 7 years) which they invest in other companies either to start them up or take them over. The venture capitalists then run the business  hoping to make enough money over the period to pay a higher than normal rate of interest to those who put up the money and to make a profit over and over this for themselves. Rates of up to 40 percent a year have been mentioned.

The immediate effect on the business they take over is that its indebtedness increases. Ordinary shareholders only have to be paid a dividend if the directors think enough profit is being made. Lenders have to be paid interest irrespective of whether or not the company makes a profit. Venture capitalists are in effect agents for lenders who take over running the company to ensure that these get their pound of flesh and over a relatively short period of time Then they move on to the next company.

It is easy to see why the unions don’t like this since the main means venture capitalists use to increase the short-term profits they are after is to hive off or close down the less profitable sections of the business with resultant job losses, so as to concentrate on the most profitable ones. The screws are then tightened on the remaining workforce to extract more work – and surplus value – from them than before.

The unions have promised an “ultimate showdown” with any venture capitalists that might assume control of Sainsbury’s. It is not evident that they have the industrial clout to organise and sustain the sort of strike this implies. More probably this is just a bluff to try to deter the venture capitalists from proceeding.

The unions are also lobbying to end the tax concession on the money that venture capitalists borrow; in this they have the support of some ordinary capitalists who feel discriminated against when it comes to taking over other companies.

In the end, nothing much is likely to be done about “venture capitalism”. After all, from capitalism’s point of view, they are not doing anything wrong. In fact, they are only doing what comes naturally to capitalists: trying to make the biggest profit they can.