Where have all the public companies gone?
It’s no big news that there weren’t a lot of IPOs in 2009, and hardly any in 2008. In general, IPOs were few and far between in the years after the dot-com bust. Most pundits make the passage of Sarbanes-Oxley in 2002 responsible for this dearth of new offerings.
A recent Grant Thornton study digs a little deeper and identifies 1997 as the peak year for the total number of public companies in the US. Since then and through 2008 the number of listings has declined by almost 40%. This is especially remarkable as listings on other global stock exchanges have increased: the number of listed companies in Hong Kong has almost doubled.
Grant Thornton traces this development back to the advent of online brokerages in 1996 and introduction of new order handling rules in 1997. The decline in listings was already in full swing when the dot-com bubble peaked. The rate of decline has slowed somewhat since Sarbanes-Oxley (between 2004 and 2007: coinciding with the economic recovery), but accelerated again towards 2008.
Grant Thornton argues that the root cause of this depression in listings is not Sarbanes-Oxley, but an array of regulatory changes that were meant to advance low-cost trading (such as decimalizing spreads), but have had the unintended consequence of stripping economic support for the value components (quality sell-side research, capital commitment, and sales) that are needed to support markets, especially for smaller capitalization companies.
There likely is more to it:
The pace of smaller IPOs after the dot.com crash may have been much higher without Sarbanes-Oxley, or with a reasonable exception for small-cap companies. This has combined with decreased investor appetite for “public venture capital” in the US vis-à-vis emerging markets.
Is any of this likely to change?
Grant Thornton makes several recommendations to bridge to more traditional IPOs, such as the establishment of an alternative public market segment that supports a higher fee structure for market makers, as well as private markets with limited access, such as solely to qualified investors. IPOs might pick up in a recovery, but they are unlikely to reach the 360 new issues per year that are calculated as the equilibrium number to avert further erosion of total listings.
Given investor interest in overseas markets compounded by an increase in domestic M&A activity and bankruptcies, a further decline in listings in the US is much more likely until a new equilibrium is found.
Gunther Hofmann is a Vice President of The Brenner Group and has done extensive work in valuations, M&A, venture capital, and corporate finance with significant international experience in small firms as well as global corporations. Gunther earned a Masters Degree in Electrical Engineering and Business Administration from Darmstadt University of Technology in Germany, and was a Visiting Scholar at UC Berkeley. He is a holder of the Chartered Financial Analyst designation, and a member of the National Association of Certified Valuation Analysts. Gunther is Chairman of the Software/IT Industry Group of the German American Business Association (GABA).
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