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SEP 3, 1999

Market Capitalization as a Factor in Business Development: What Is a Company’s Raison d’Etre?

By Yoshito Hori
Copyright GLOBIS

It is extremely popular right now to evaluate corporations in terms of their market capitalization. I received an email from Mr. Origuchi of Goodwill, which just went public, informing me that the market capitalization of Goodwill was higher than Hikari Tsushin when it went public, and is already greater than that of H.I.S. I have also heard President Son of Softbank saying that he expects to be contacted by Nippon Keidanren (Japan Business Federation) since Softbank’s market capitalization already exceeds that of Nippon Steel Corporation.

Now I’m wondering, is it really appropriate to evaluate corporations in terms of their market capitalization? It is true that market capitalization is the No. 1 factor in the U.S., but is this really how it should be? What should determine the relative merits of a company? What are the appropriate indices? The fundamental question I inevitably end up with is this: What should be the goal for GLOBIS?

Japan previously followed the doctrine of the supremacy of high sales, with the value of a company determined by absolute profit. Total assets and number of employees were also important. If you study a little bit of finance, you get the feeling that, since market capitalization is logically the present value of future cash flow projected to be generated and, moreover, is the sum total of shareholder evaluation, it is therefore the most appropriate index for measuring the scale of a company. But should we apply this to GLOBIS?

As the president of GLOBIS, should I aim to maximize market capitalization or should I, perhaps, have a different goal?

Allow me to use the GLOBIS business school as an example. There are two business models for developing a business school.

The first is to procure funds through equity financing and expand by actively increasing investment on the premise of a public stock offering. Obviously, we could very well follow the path of multi-store expansion―that is, opening schools in all major cities outside Tokyo and Osaka, increasing the number of students, offering classes using Internet and satellite broadcasts, and pursuing economies of scale while maintaining quality.

Another method would be to remain private, operate a partnership style of business, and pursue quality with optimum size. In other words, a model that is aiming to be the No. 1 business school in Asia. There are graduate schools such as INSEAD and IMD in Europe that exist without government subsidies and even without authorization from public institutions. They operate as institutions that offer an MBA recognized by society and are evaluated as the No. 1 or No. 2 management school in Europe. Needless to say, GLOBIS could issue our own MBA in the same way, continue to pull in excellent students, raise our quality as an Asian version of INSEAD, and ultimately gain the reputation of being the No. 1 business school in Asia.

Of course, there may be a mixed model that combines the above. If you adopt the point of view that a company’s value is determined by its market capitalization, then you inevitably reach the conclusion that GLOBIS should pursue the first model. Or you could also place higher importance on qualitative factors, such as student satisfaction and public recognition.

On the other hand, venture capital firms also have the option of going public to raise market capitalization, as JAFCO did. But there is also another business model for creating value and returning profits to individuals as a partnership-style firm without going public.

To be completely honest, I don’t think there is one correct answer in the context of both these models. That is, I think it’s OK to pursue either of them, as long as the stakeholders are satisfied.

Therefore, we at GLOBIS are now in the middle of fierce debates on which model to pursue, and which criteria to apply to GLOBIS. These criteria for evaluation are also something that I think we can choose freely.

It might be market capitalization, or it might be a qualitative goal. (If you go public, then obviously you have to focus on maximizing stock value, but remaining private means that you can introduce various evaluative standards). However, you must have a clear direction.

On August 13, the GLOBIS executive committee, which consists of eight leaders representing each business, met and dedicated an entire day to discussing our future direction. We discussed a corporate strategy based on an analysis of our competitive advantages in each business, but we did not reach a conclusion on the issues mentioned above. We decided to schedule another meeting for discussion. Needless to say, opinions will be openly exchanged across all levels of the company.

In facing this issue, we want to begin with the question, “Why do companies exist in the first place?” and discuss the kind of company we want GLOBIS to be. In this context, we will certainly discuss the question of value and the most important means of evaluation.