Thanks to Carter, and others, who have asked for a clearer punchline to my comment on Gartner and Forrester’s ownership. Rather than ask you to read between the lines, I should point out what these observations suggest to me.
- 1. First, it’s unusual. The ownership of large firms tends to be less concentrated than the ownership of small firms. Smaller firm have fewer shares, which tends to make them less liquid: selling a position in a smaller firm normally has a bigger impact on its stock price than does selling a similar portion of a larger firm, to the point that by the time you start to sell a large position, the price has started to fall before you finish selling. So, given the choice between investing in two similar firms, investors have a strong preference to investing in the larger of two firms. However, in this case, investors have a marginal preference in Forrester, which is reflected by its valuation, dispersal and the ratio of buyers buying in and cashing out. Indeed, the difference between these firms means that they attract investors with different preferences, which is also reflected by the very different equity analyst coverage at Gartner and Forrester.
- 2. Second, the very largest investors have more power over Gartner than the largest Forrester investors have over that firm. Even now, Silver Lake and ValueAct have holdings which are so large that, acting together, they could take effective control of the firm. This changes the decision-making framework for Gartner’s leaders, and brings the concerns of these large investors into the firm. Of course, a very large percentage of Gartner’s shareholding its now represented on its board of directors. Forrester’s board contrasts sharply, in that the only financial specialist on that board is a private equity guru. George Colony, Forrester’s CEO, is also the firm’s acting CFO: a position that we think would not appear at Gartner.
- 3. Third, this suggests that stock prices influence Gartner decisions more than choices at Forrester. Other things being equal, one would expect senior managers at Gartner to be more likely to be rewarded with stock than at Forrester. Of course, the substantial holding of Forrester founder Colony cannot be understated. However, plain vanilla options are not a principal lever at Forrester, and a large grant of option-like rights in March 2005 (and a smaller tranche in April 2006) vest only only three years. The value of the 2005 compensation was under £1m. Over the same period of time, Gartner’s use of options has been far more extensive. The firms’ most recent quarterly reports suggests that Gartner created ten times more options than Forrester recently.
- 4. Fourth, Gartner’s performance has neatly reflected the short term interests of large shareholders. For example, the surge in Gartner’s stock price coincides neatly with Silver Lake’s cashing out of ten million shares. Silver Lake had already flagged out its intention to cash out a part of its holding, and that it no longer wishes to be the largest investor in Gartner. Their selling large a large position could have had a greater material impact on the firm’s valuation had Gartner’s managers not managed their firm’s performance so tightly.
- 5. Finally, therefore, our hypothesis is that this situation means Gartner is too sensitive to its immediate share price, and that this might encourage managers to not focus on the growing the present value of future opportunities. For example, it encourages the sort of pricing tactics that my colleague Hugh Rittner has (irksomely) described as “the money shot” in regard to Forrester. Despite my dissent, the malaise Hugh warned of seems to be unfolding at Gartner.