I call it the Corporate Growth by Chain Letter.
Have you ever noticed how a company, say a restaurant company, will spring up over night and before you know it, they're building outlets everywhere? And then they become the darlings of Wall Street so an Initial Public Offering follows, and the original private stockholders pocket a big profit.
And then you'll drive by the new outlet that they built near your house, and for awhile it will be packed with customers every time you do. Then before long you'll be commenting to others that you don't see how the place stays in business. There are rarely more than a few cars in the parking lot.
Interestingly, that same scenario is happening almost everywhere in the U.S where that company is building its restaurants. It becomes the out-place almost as fast as it had become the in-place.
Yet the stock value continues to hold and its shares rise, and the company reports great earnings and growth every quarter. How can that be when there are not enough people in their stores buying dinner, you wonder?
Well, these people developed the Corporate Growth by Chain Letter method long before Enron tried it 
out. In fact, Enron learned it from them.
The restaurant corporation, the clothing outlet, the auto parts store, etc., forms a building company and, while it is a separate corporation, all of its stock is owned by the parent corporation.
The parent corporation contracts with the building corporation to build its stores. The building corporation borrows the money from the bank to build the stores, and then when they are finished, they are sold from the building corporation to the parent corporation with a marked-up profit.
That profit is booked in as income to the building corporation, and the new store is put on the company's books at its inflated value. Then, of course, the building corporation pays a dividend to the parent corporation. That becomes a part of the parent's profits along with any that it made on the sale of food.
So in reality, the parent corporation is really in the business of building its stores. It hopes that as they are built, each will at least break even. When one doesn't, there's even more pressure put on the parent corporation to build more stores.
But like a chain letter, at some point the piper has to be paid. The market is saturated with stores, and there is no demand to build more. At that point, the parent corporation no longer has a source for profit. So unless the parent corporation has diversified into some other scheme to replace that source of income, within a short time it must be sold or merged with another corporation, or take bankruptcy.
So if it can't find a buyer, everyone looses his shirt except the original stockholders who got rich at the time of the IPO.
Here's your homework. See how many businesses you can list that are obviously operating a Corporate Growth by Chain Letter scenerio. I'd give you some hints, but I don't want to be sued.
Comments(6)