The age of the trillion dollar company
A week ago I posted a simple poll on Twitter, asking people to estimate the number of trillion dollar companies that will exist in ten years. The answers surprised me.
I was most surprised by the 80 respondents who expect that there will be fewer than 20 companies valued above $1 trillion in ten years. Three public companies are worth more than a trillion dollars already: Saudi Aramco, Apple and Microsoft. Two companies, Amazon and Google, are close enough to the mark and growing reliably enough that for them, it’s only a matter of time before they cross the threshold. Looking beyond the largest companies, we can identify dozens of companies currently valued in excess of $100 billion that have a credible shot of growing 3x to 10x over the next decade. I’ve included a partial list of candidates at the end of this post.
It won’t take heroic growth for many of the companies on the list to hit a trillion dollars in market cap by 2030. Here’s the compound annual growth rate needed to get to the trillion dollar mark in ten years, from four different starting market caps.
From $500B: 7%
From $250B: 15%
From $100B: 26%
From $50B: 35%
Implications
Governance: The largest ever acquisition of a company by private equity was the $45 billion purchase of Energy Future Holdings in 2007, a deal that was about 3% of the current market value of Apple. The largest active PE fund, Blackstone VIII, has only $26 billion in capital. Barbarians are unlikely to storm the gates of a trillion dollar company any time soon.
The public markets, too, will struggle to supply accountability. The largest activist hedge funds command assets under management of $40 billion or less. To accumulate even a 1% position in a trillion dollar company, the largest activist funds would have to be willing to allocate up to 25% of their portfolios to a single position — something few have done, and fewer still successfully.
Even the largest mutual funds, like the Fidelity Contrafund or the Capital Group Growth Fund of America, can barely accumulate a 1% position in a company of the size of Apple, given their regulatory requirements to hold diversified portfolios. Of course, a one percent position is not a strong basis for winning a proxy fight. In addition, most companies worth over $100 billion can finance themselves from free cash flow. With no dependance on Wall Street for net new issuance of debt and primary equity, they are immune to another source of accountability that has traditionally kept companies in check.
The largest outside owners of today’s mega cap companies are, unsurprisingly, index funds and ETFs. Historically, institutional passive investors have been even more complacent about governance than their older, active cousins. As more money flows into passive strategies every year, this power imbalance between issuer and investor will only grow wider, resulting in a class of companies so large that no outside shareholder is big enough to hold them to account. Today’s would-be Godon Gekkos command so little capital relative to their targets that they are no more powerful than gadflies like Evelyn Davis.
When passive investors controlled 5% of the market, they could credibly deny or deflect any role in governance as antithetical to their mandate. When they control 50% of the total AUM in the market, as they now do, they can no longer credibly duck that role, nor can they claim that politely asking public companies to file sustainability reports each year is a sufficient means to discharge their duty. A new, hybrid form of passive ownership needs to emerge, passive in security selection but active in corporate governance. This development will require a new set of tools and frameworks — new forms of communication and collaboration, new forms of responsibility from ETF and index fund sponsors to their investors, new job descriptions and sources of budget that will be hard to fund on 10 bps per year, and potentially new forms of regulation.
Regulation and antitrust: The enforcement of antitrust in America, built on century old laws, already struggles to adapt to companies that can exploit the power of platforms and networks, At least one candidate for president has noticed that problem and has made platform regulation a key part of her campaign. If there are twenty, or one hundred, or two hundred one trillion dollar companies by the end of this decade, antitrust is going to get even more complicated. Will regulators approve the merger of any two companies of this scale? How do you regulate commerce to prioritize the interest of consumers, when the gap between the power of any one consumer and a trillion dollar company has never been greater?
While the enforcement of antitrust may be the government’s most dramatic tool for regulating big business, workaday bureaucratic decisions can be equally impactful. In recent years, the government has made decisions regarding net neutrality, fiduciary standards, and automotive emissions that favored big business over consumers. Given the stakes involved, it’s surprising how little companies spend on lobbying. The largest individual spender in corporate America, Amazon, spends only $12 million a year. If Amazon wanted to, it could spend ten times that amount without hurting its annual earnings. A decade from now, there will probably be dozens of companies spending $100 million a year on K Street. Imagine what they can buy with a budget like that.
Compensation and inequality: Sundar Pichai, recently elevated from the CEO of Google to the CEO of the broader Alphabet conglomerate, has reportedly been granted a compensation package worth a quarter of a billion dollars. This grant is on top of three prior grants in excess of $200 million, making Pichai one of the few people to earn a billion dollars leading a public company that he did not found. He may be in rare company today, but in the age of trillion dollar companies, there are going to be a lot more CEOs like him. Even CEOs who create tremendous value for customers, employees and shareholders alike — as Pichai has — will be targets of resentment in an already populist age. Unable to hide their wealth due to disclosure requirements, billionaire hired gun CEOs will be easy targets for politicians eager to point out that you didn’t build that.
Investor returns: Among venture capitalists like me, it’s become common to argue that regulation drove away opportunities for small investors to participate in the growth of the world’s most exciting companies, which are staying private for much longer than before. However, if the ceiling for how big a company can get on the public markets is now one, or two, or three trillion dollars, that argument is manifestly not true. A buy and hold investor who purchases an IPO at a $1 billion to $10 billion initial valuation has the opportunity to make hundreds of times their money over time. In fact, today’s markets are so large that early stage VCs can make a 100x return on an IPO that then goes on to make a 100x return on the public markets. May you live in interesting times.
Wrapping up
In most countries, financial services have grown faster than GDP for decades. So it’s odd to admit that as fast as finance has grown, something else — the growth of the largest companies in the world — has grown so much faster that this class of companies now exists beyond the reach of the financial sector’s influence. If we’re not careful, the largest companies will grow so big that government itself will struggle to adapt.
The solutions will feel as strange and unsettling as the problem itself. Maybe the world needs a ban on M&A for any company above a certain arbitrary size. Maybe the world needs charismatic activist investors who work inside Vanguard and Blackrock. Maybe the world needs a constitutional amendment to reverse Citizens United. Regardless of whether you think trillion dollar companies are good things or bad things, they’re coming, and there are going to be a lot of them. Be prepared.
Candidates for the 2030 trillion dollar club
Large, oligopolistic companies
Visa
Mastercard
Boeing
Airbus
Comcast
Charter
Verizon
AT&T
Disney
Pharma
Pfizer
J&J
Merck
Banks
JP Morgan Chase
Bank of America
Citigroup
Wells Fargo
Consumer Tech
Netflix
Enterprise Tech
Adobe
Salesforce
Intel
Oracle
SAP
Brands
P&G
Pepsico
Coca Cola
Retail
Costco
Starbucks
Home Depot
Walmart
China financial services
Bank of CHina
China Merchants Bank
China Construction Bank
ICBC
Ping An
China Internet
AliBaba
Tencent
Conglomerates
Berkshire Hathaway
Insurance
UnitedHealth