Where have all the public companies gone?
According to the Center for Research in Security Prices, the number of companies that sell stock to the public on the exchanges has shrunk since 1996 by 50 percent — from 7,322 to 3,761. Fewer listed companies means less competition and prevents average investors from buying shares in fast-growing companies.
As existing public companies die, are delisted or merge normally, they are not being replaced. The number of companies going public with initial public offerings of shares has fallen some 65 percent over the past two decades and is now at about 100 per year.
Why are companies choosing to avoid the infusion of money that results from selling shares to the public? There are many reasons.
A good example of the changing attitude toward IPOs can be found in the tech sector. In the 1990s, many tech startups wanted to benefit from investors’ interest in internet-related companies, so they sold shares to the public. But when the public’s faith turned to fear and investors sold their shares, many of these companies vanished during the dot.com bust in 1999 and 2000.
Now, Instead of doing an IPO, companies such as Lyft, a ride-sharing firm, and Pinterest, a social-media platform, prefer to raise money from venture capital firms or other private sources of capital.
Michael Mauboussin, who works for Credit Suisse and teaches at Columbia Business School, gave other explanations for the decline in public companies:
• Complying with the regulatory requirements involved in being a public company is time-consuming and expensive.
• Many founders of start-up companies believe that the private markets provide a better environment to implement their long-term strategies, without concern that a quarter of lower profits would send their shares tumbling.
• Tech companies’ require less capital for money for facilities and equipment than companies in other industries.
• In recent years, investors and private companies have used creative financing techniques that might run afoul of the regulators of public companies. These innovative strategies are only available to the private market.
• The proliferation of takeovers. In decades of lax antitrust enforcement, the annual number of mergers and acquisitions has dwarfed the number of IPOs.
The decline in public firms means less competition, which means higher prices and less pressure to innovate.
For decades, antitrust regulators have approved mergers if the remaining players in an industry meet the watchdogs’ standard for workable competition. Regulators want the surviving companies to be profitable enough to be innovative and spend enough on new plants and equipment to remain viable while competing with the newly combined, larger company. The problem with the workable-competition standard is that there is little evidence that regulators will split up companies if innovation stagnates or falls short of expectations, leaving a near monopoly that cannot compete globally.
In addition, many big, mainstream fund managers, such as Fidelity and T. Rowe Price, are investing in unicorns, the name given to private firms that are worth over $1 billion, despite the fact that, as privately held firms, they do not have to meet public-company standards on accounting and disclosures.
Because institutional investors have fiduciary obligations to their investors, they have to pay for the costs of performing due diligence to comply with their fiduciary obligations
Ordinary Americans have been blackballed — prevented from investing — in an extremely vital segment of companies. As an article in Inc. magazine entitled “Meet America’s Greatest (and Most Inspiring) Entrepreneurs This Year,” the fastest-growing private firms in America are great creators of value and jobs — 619,631 of them over the last three years.
Originally published in the Sarasota Herald-Tribune
