Tuesday, November 6, 2012

The Vice That's Squeezing GW

by SandWyrm

BoLS actually posted an interesting article yesterday. Where they got hold of some fairly candid comments from GW designer Robin Cruddice. Three points stood out to me...
  1. GW designs new models and then writes rules around them. Not vice-versa.
  2. GW has at least 2 more Codices done and ready to go, but hasn't released them.
  3. We only got one Codex this year because GW has to keep it's earnings steady.
The first we already knew, and it's dumb for a lot of reasons, but I'm going to instead focus on the last 2 items. Because they speak to the vice that GW finds itself in. They have products that are done, but can't be released because of their ownership by institutional investors. How does that work again?

It has to do with the expectations of their investors. We're not the ones that GW has to make happy. A lot of the BoLS comments expressed frustration, but not an understanding of the situation. So I'll break it down as simply as I can.

"What Does It Mean To Be Publicly Owned?"

Myu asked this question in the BoLS comments, and I don't think that most folks in the gamer community really understand the concept.

Being publicly owned means that the company has sold pieces of itself to the general public (folks you don't personally know) via one or more stock exchanges. Such as the Dow Jones or Nasdaq in the US. These pieces are called shares, and the price they go for is called the share price.

When a company "Goes Public", as Facebook recently did, they divide the company up into a set number of shares, keep some (usually), and then sell the rest. This generates a bunch of cash, which the company can then use to fund new projects. Pixar, for instance, used the cash it got from going public to self-fund it's movies. Instead of only getting 5-10% of what Disney sold their movies for (because Disney was paying for everything), they were suddenly able to demand 50+% of the take because they were sharing more of the up-front risk.

So shares get sold, and the company gets some money. Simple.

(From Yahoo Finance) GW's stock price has been rising steadily, and is almost up to £7 now.

Once the company has sold all of the shares it was prepared to sell, the new owners of those shares will either hold on to them, or sell them again so that others can buy them. So long after the company got it's cash, the shares will still be circulating on the exchanges. The price for them will rise and fall each day according to demand. If lots of people want them, the price will rise. If only a few people want them, the price will fall.

So What's The Vice?

Once you go public to get that initial mound of cash, you're beholden to the folks who buy your stock. Because they're now co-owners of the business. In the US at least, you're required by law to look out for their 'interests'. Which in practice means either keeping your stock price up, or paying dividends (cash payments) to the shareholders. Or both. If you don't look out for their 'interests', you can go to jail, or at least be fired from your company if your shareholders get mad (and organized) enough to complain.

If any one investor gets enough of your shares, they can also start putting pressure on you to do what they want. Else they'll sell off their block of shares and drive the stock price down. Then your other investors will get edgy and either sell themselves, or start complaining to the authorities that you're not looking out for their interests.

If one investor, or an organized group of them, can get hold of 51% of your company's total shares, they can essentially take you over. They can't take away your shares, but they can fire you. As Steve Jobs found out back in the 80's. He still owned a big chunk of Apple, but he no longer had a job or a position in the company.

In the extreme cases, you might fall victim to a guy like Mitt Romney; who used to partner up with others to take over public companies by buying up 51+% of their shares. He'd then carve them up into pieces, restructure this and that, and then sell them off for a tidy profit.

So How Does This Affect GW?

Well, lets look at who owns them.

These numbers are from GW's latest annual report, plus 2 updates they've posted on their investor relations site. So right now they're 51% owned by 4 institutional funds. These are companies that pool the money of investors, pay them a set return, and keep whatever they make over that as profit. Often they're feeding public or private retirement funds.

Last time I looked, GW was 68.5% owned by 5 institutional investment funds. Make of that what you will. I blame/applaud the recent dip in GW's dividend payments and their rising stock price. It probably makes more sense for the funds to sell their shares now for cash, as opposed to sitting on them for the dividends. I believe this is a good thing.

Since these funds are looking to provide a steady return to their own investors, their goals are different than an individual investor who may pour over the details of the company. Institutions don't have the time or the inclination to study an investment in depth. They want predictable performance, not wild roller-coaster rides of profit and loss. They could give a toss about quality of product. To them, GW is a system for generating money. Either in dividends paid out (preferred), or steadily rising stock prices (which can be sold or borrowed against to generate cash for the fund).

If a stock doesn't perform to these funds' expectations, they will sell it. Simple as that. They're constantly buying stocks that meet their performance criteria, and selling ones that don't. They have set metrics and rules that govern what they do.

So that's the vice that's squeezing GW. According to Cruddice, they can't just make cool stuff and sell it when they want to, because then their quarterly performance would go up and down like a roller coaster. So they have to keep their investment returns smooth and predicable. If they don't, their institutional owners will sell them off. If that happens too quickly, their stock price will crash, and a Mitt Romney will come along, snap them up, and then sell them off in pieces. Maybe Hasbro buys a few parts they like.

Which is a long-winded way of saying that GW is obsessed with matters that have little to do with giving us new rules and toy soldier models. Or even growing their customer base. Because as a public company they have to worry about their institutional investors first. It explains a lot about GW's seemingly bizarre behavior when it comes to releasing, or not releasing, products. Or why Fantasy and 40K (and soon LoTR again) have to coexist within the same crowded release schedule. Or why the prices have to go up every year. It's all about being smooth and predictable.

On the bright side, the percentage of the company that's owned by these investment firms is shrinking. So maybe in another 2-4 years they won't have the same anchor dragging down their release schedule. Maybe that's a very deliberate strategy on the part of GW's board, with the changeover in CEO from Kirby to Wells. Who knows?

But it is what it is.


  1. Nice explanation of the situation. I'm hoping they can eventually shift to a more consumer-centered model, but that requires investors who are either apathetic in the short term or investors who trust the designers. Can't say I've been displeased with the rules they've been writing recently, but we'll see if this trend continues.

    1. GW has more problems than who their investors are. But at least their release schedule would be free to speed up. Assuming their outdated development methods could keep pace.

  2. Excellent article. Well articulated, and gives me a better understanding of the situation GW has found themselves in. This is probably the highest caliber post I've seen on this blog.

  3. You make a good point that GW needs to make their shareholders happy and that investment funds prefer to have a steady return which prompts GW to avoid sales spikes that can't be consistently duplicated and therefore cause the stock price to flunctuate. I'm not sure why you seem to have Mitt Romney confused with Gordon Gecko. If a public company's share price plummets then the company will fold unless it gets an infusion of capital to keep it running. When a venture capital firm buys a company they do so to make a profit and nobody would profit from buying a company to watch it fold, that's why venture capitalists restructure companies so they stay in business so share prices go up and dividends get paid. I'd be ecstatic of a failling GW got "victimized" by a company like Bain so they could keep supplying me with plastic crack. Your explanation of why GW benefits from timing their Codex releases to keep sales and stock prices even is excellent but your decision to ascribe sinister malicious motivations to market forces is gratuitous. But it's your blog so write whatever makes you happy.

    1. Have a read of this:


      Also, as an aside and an open question, what does 'market forces' cover?

    2. Mittens is topical, as the US Elections are today (For the record, I hate both candidates.).

      Why would a company need an infusion of capital if the share price goes down? I think you're confused here. A company's finances aren't affected in any way by their share price. They get their money during the IPO or later share sales. The day-to-day trading of their already-sold shares between investors doesn't affect their bottom line one bit. Apple's stock could drop to $1.00 tomorrow and it wouldn't affect their profits or the cash they have in the bank.

      The threat is simply one of control. If the share price drops, then a competitor or a vulture firm could buy the company on the cheap through the market (hostile takeover) and kick out the existing management. Or, the company could buy back it's own shares and reduce the amount of stock in circulation. Thereby increasing the control of it's existing shareholders. Or the existing investors could get cranky and call for a management change. But it's not like anyone is going to show up with a bill because the stock drops.

      Whether being bought and broken up by a venture firm would be good for GW or not depends on the circumstances and the firm doing the buying. But it's the interests of the firm that would be served first. not ours or GW's. Remember that.

    3. As for 'market forces', you're talking about the sum total of all decisions made by real people. Some of which are nice, some of which are malicious. Many or most of which are simply amoral. Meaning that morality doesn't enter into their decisions in any significant way. Good? Bad? It's just business dude.

  4. Fantastic article. Really puts a lot of things into perspective. I would love to see more on the subject.

  5. THANK YOU! For explaining this so clearly and concisely. I'm sick of having to explain this on the Chaos of the Warp pod-cast ever other week. Now I'll just drop a link to this page into the conversation every time it comes up.

  6. Maybe if we bought GW stock instead of models they could pay us our dividends in toys! If more wargamers invested in GW stock then we would have more of a say in GWs operations.

    1. Maybe we should do a Kickstarter for a GW takeover. :)

    2. I wouldn't be impartial to starting up fan-base mutual funds designed to seize control of the companies we love back from people who couldn't give less of a gak about preserving our favorite pastimes. If we could get a serious share of the public stock, we could influence more money being put into cost-reducing R&D, for example.

      Unfortunately I don't think Kickstarter would cover this sort of crowdfunding cause :(

  7. Good Points Sandwyrm.

    So a I read it...everyone stop complaining because that is the way business works. IF any competitor gets this big they will do the same thing. As I am aware of the hobby I hear sale are up from FLGS locations.

    You should write more often.... :)

    1. It's not about size Spag, it's about corporate structure and incentives. A privately held company (one that never sold any shares publicly), could release whatever it wanted whenever it wanted. Because the only people they would have to satisfy are their own owners and management. Who not only see and talk to each other (and their customers) all the time, but are often willing to forgo short-term gain for long-term investments and strategies that they hope will pay off with bigger rewards later.

      Public companies, on the other hand, have a very hard time thinking even a year ahead. Have you seen the bad press Apple has gotten over selling 'only' 1.5 million of the new iPad mini last week? ANY of their competitors would be celebrating numbers like that, but the investment community now has inflated expectations of what Apple should be able to deliver. They did X last quarter, so anything less than X+(X/2) this quarter is seen as a failure, and the stock price drops. Which is exactly the problem that GW is trying to avoid. Because they don't have Apple's ability to shrug off investor jitters with the next big hit product.

  8. This was a very written article and well thought out... Thanks for sharing. I am wondering if Robin will come to regret what he said publically.

    1. Probably. But he's an adult and knows how his company works.

  9. Really interesting article, thanks for taking the time to write it!

    Hopefully the situation will change at some point, there are those of us who still remember what Games Workshop was once like :)

    1. It will never change. Companies go public to survive, to grow, to ensure long term investments from others. Regardless of how you or I or even Sandwyrm feel that is the way it is.

      And size does matter Sandwyrm. As you stated your self with FOW they started conducting business practices similar to what GW did. It is the evolution of business. As the a business grows it gets more 'top heavy' meaning it has to pay more people at the top more money to run the business. As it grows and expands, sales has to cover the increasing costs of running the business. You also say that it's not about long term. That is true and untrue. Yes a public company wants it's quarters to be positive because reporting numbers is so important to investors, but companies also plan years ahead of time.

      I was with a company that was public then went private. Did the reporting of of numbers, my budgets, my sales and profit goals change? Not a bit. The same pressure to perform was always there. Business is about making profit. Putting money in someone's pocket. More people will invest in you if you show consistent stead growth over long periods of time. I mean when you pick your 401k, do you pick options that are poor performers? Come on man!

      You mad bro?

      It's all business. You can remember the good ol' days but they ain't comin back! ;)


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