America isn't big on state-owned enterprise.
After all, our economy is built around the idea that the government should intervene as little as possible in the market. And historically, conservative administrations have promoted policies which align with this laissez-faire ideal.
So you can imagine investors' surprise when U.S. Attorney-General William Barr suggested earlier this month that the U.S. government should buy controlling stakes in two large telecommunications equipment firms.
Foreign firms, no less.
Believe it or not, the Trump administration is considering large investments in Scandinavian telecom tech firms Nokia (NYSE: NOK) and Ericsson (NASDAQ: ERIC) in order to reinforce them in the battle against China's Huawei for 5G market dominance.
The U.S. doesn't have a homegrown competitor to Huawei — and Finland's Nokia and Sweden's Ericsson seem like the best available bulwarks against a Chinese-led 5G infrastructure market.
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What would this government ownership of stocks look like? And what would it mean for investors? Today we're taking a closer look…
How Would the Government Buy Nokia and Ericsson?
Barr left open a number of possibilities as to how this investment would actually work.
He has proposed that the U.S. should buy a “controlling stake” in the two European companies — meaning a majority or at least a plurality of shares — “either directly or through a consortium of private American and allied companies.”
The former option would obviously involve the government using Treasury funds to buy and hold the stock — while the latter could be a more complicated arrangement in which the government uses incentives (such as tax breaks) to encourage other private companies to buy stakes.
In the event that the first plan comes to fruition, we'd expect to see a sharp increase in the share prices of the two companies as the government announces its plan to buy in with public funds.
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The second would likely be more nuanced and have less of a dramatic market effect, as government-allied firms would likely buy up small stakes over a period of months or years.
What Does This Mean for Nokia and Ericsson Investors?
In the short-term, this plan doesn't mean a whole lot for current shareholders.
News reports of Barr's comments led to small, single-digit-percentage bumps in the share prices of Nokia and Ericsson — a welcome development among Nokia shareholders after the firm's rough end to 2019.
It's also worth noting that the White House does not seem totally united behind the plan — Vice President Pence has already pushed back against Barr's comments.
Nonetheless, the idea seems to hold some clout in the Trump administration — and the wider Republican Party. Similar proposals for public ownership of telecom infrastructure were seen in a leaked 2018 National Security Council memo and a 2019 op-ed by Newt Gingrich.
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So what would government ownership actually mean for investors?
As we discussed, in the short term it could bring a substantial boost to share prices.
But in the long term, history has not been kind to state-owned enterprises.
The share of global market capitalization held by state-owned enterprises has slumped from 22% in 2007 to just 13% today. Earnings have similarly shrunk among government-owned firms compared to private firms around the world.
And in recent years, corruption scandals at Brazil's Petrobras and Mexico's Pemex have revealed the many governance issues associated with this ownership model.
In sum, if the U.S. government does the unthinkable and becomes an institutional investor in Nokia and Ericsson, shareholders should enjoy the short-term gains but consider moving their money elsewhere for the long-term.
Until next time,
Samuel Taube
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