The disappearing public company: why firms don't want to list

Since the 1990s, the number of companies going public in the United States has plummeted. Illustration: Ben Sanders

For many businesses, the lure of the initial public offering has lost its gloss. In the US, especially, the number of publicly listed companies has plunged. What’s behind this big change?

When tech company Snap, maker of the popular Snapchat app, had its initial public offering (IPO) earlier this year, some of the excitement was likely down to the fact that it was listing at all.

Since the 1990s, the number of companies taking the plunge and going public in the United States has plummeted. Figures from the US Securities and Exchange Commission (SEC) show that in the decade ending in 2000, an average 408 firms a year listed on US markets; but in the decade to 2012, that dropped to just 152 a year. 

The number of listings rose slightly in 2013 and 2014 as the broader share market surged, reaching a peak of 200, but has fallen back since then and dropped well below 100 in 2016, according to analysis by Professor Jay Ritter of the University of Florida. 

This rate of dieback, if sustained, would see the number of listed companies dwindle to less than 500 by the middle of the century. The famed S&P 500 would be no more. 

University of Michigan professor Jerry Davis, author of The Vanishing American Corporation, says fewer companies see any advantage in going public.

“The range of activities for which the most economical format is to organise as a corporation and sell shares to the public is rapidly diminishing,” he says, adding that public corporations “will no longer be the default way of doing business.”

The disappearing market of listed companies

It’s not that there has been a decline in the number of US companies per se; it’s just that fewer are choosing to list. US Census Bureau data shows the number of firms in the US has actually increased, rising from nearly 4.7 million in 1996 to 5.9 million in 2015.

While the number of listed corporations has always been a tiny fraction of all firms, it is now smaller than ever. Research by Craig Doidge, Andrew Karolyi and Rene Stulz at the National Bureau of Economic Research in the US shows between 1996 and 2012 the number of listings per million people more than halved, from 30 to 13.

In 2016, it dipped to 11.4 listings per million people. Doidge and his colleagues calculate the US has 5000 fewer publicly listed companies than would be expected, given its institutions and stage of economic development.

While much of this listings gap is due to a sharp slowdown in the number of companies that want to undertake an IPO, even more significant has been a surge in company mergers and acquisitions (M&A) in the past 20 years. About 5000 listed firms were gobbled up between 1997 and 2012, and M&A activity has grown even stronger since then, with more than 3600 transactions in 2015 and 2016 alone.

While few doubt that the shift away from companies listing publicly is entrenched, there is little agreement on what is driving it.

Who – or what – is to blame for the drop in IPOs?

Wall Street lawyer Jay Clayton, appointed by US president Donald Trump to the SEC, the US finance industry regulator, is among those who believe government regulations are to blame for the decline in IPOs.

In his inaugural public speech as chair of the SEC in July 2017, Clayton, who built his career on representing investment firms such as Goldman Sachs in disputes with government regulators, put the spotlight on disclosure requirements.

He said the fact this steep decline in company listings coincided with “significantly expanded” disclosure rules raised questions.

“When you have fewer small-end IPOs coming on, that’s an indication that your economy is not well …” Adam Steen, Charles Sturt University

“While there are many factors that drive the decision of whether to be a public company, increased disclosure and other burdens may render alternatives for raising capital, such as private markets, increasingly attractive to companies that only a decade ago would have been all but certain candidates for the public markets,” he told the Economic Club of New York.

In addition to tighter governance standards imposed by the 2002 Sarbanes-Oxley Act brought in after the Enron scandal, critics point to laws such as those aimed at curbing bribery of foreign officials, and the so-called blood diamonds section of the 2010 Dodd-Frank Act, which demands companies to disclose if their products contain conflict minerals from the Congo, as examples of US government overreach. 

Researchers such as Davis and Stulz don’t buy it. Stulz points out that the number of IPOs began to decline in 1996 – eight years before Sarbanes-Oxley came into full effect. There were no changes to regulations or listing standards during this period either. 

Should companies go public at all?

Rather than any changes in regulation, it is the profound changes in the way business is done that is turning companies away from public listing, according to Davis.

The most far-reaching of these is the effect of digital technology in driving down the cost of transactions. This is encouraging firms to outsource an array of functions and concentrate instead on their core business.

He cites sportswear company Nike as a prime example. Although it had annual sales of US$30.5 billion in 2016, it employs just 70,700 people (both full- and part-time), most of them retail workers in its more than 1000 stores worldwide. 

“Virtually none of them are involved in the actual production of its ubiquitous sneakers. Instead, for decades, Nike has focused on design and marketing, while contracting out the rest,” Davis writes in The Vanishing American Corporation.

Such a lean business model means capital requirements are low. Combine this with the ready availability of funds, either through low interest loans or from private equity firms, and there is little pressure to raise money through a public float.

“Back in the day, companies went public because they were somewhat profitable but needed to raise funds to invest in long-lived assets like factories or stores or railroads,” Davis explains. 

“But look at some of the companies going public today, like Snap. They have almost no tangible assets and almost no employees.” 

The activist investor issue

Davis says companies contemplating listing may also be wary of activist investors, who seek to exert greater control over public companies, including challenging corporate strategies, forcing changes to senior management and demanding pay-offs like bigger dividends.

“More important than regulation in keeping companies off the market is that activist investors are off the chain,” suggests Davis. 

“They used to target companies that were underperforming, but now they are targeting companies that are doing really well. They target Apple for having a giant cash hoard offshore [and] Dupont after they have done a big turnaround.”

Some companies that go public are resorting to dual-class shares in an effort to curb the influence of activist investors, Davis adds.

Decline in listed companies: Made in America?

So far, the decline in listed companies seems to be largely a US problem. In most other parts of the world, public listings are stable or growing strongly. 

While the number of public companies in the US halved between 1996 and 2012, they increased by almost 30 per cent elsewhere in the same period, including, by one count, a near-50 per cent jump in other developed countries and a 12 per cent rise in emerging economies.

Leading the way have been Hong Kong, China, Singapore and Russia. There was a stunning 300 per cent surge in listings worth a combined US$18 billion on the Shanghai and Shenzhen stock exchanges in the first half of 2017, making them the second and third most valuable IPO markets in the world (behind the New York Stock Exchange) over the six-month period, reported the South China Morning Post.

Tapan Verma, director of transaction services at Deloitte Australia, believes part of the reason for the US decline is the increasing size and sophistication of other markets, which are drawing business away from the US.

“Exchanges and economies across the world have caught up with the level of sophistication of the US markets,” he says.

“In fact, it is far easier, from a regulatory perspective, to list in other jurisdictions [than in the US].”

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While Hong Kong lost out to New York in its bid to host the float of Chinese e-commerce giant Alibaba in 2014, it beat its US rival to handle the second and third largest floats of the past decade, including the Agricultural Bank of China’s US$22.1 billion listing in 2010 and the Industrial and Commercial Bank of China’s US$21.96 billion offering in 2006. In 2016, it hosted the US$7.4 billion float of the Postal Savings Bank of China, the biggest such issue in two years.

Although company listings in China and on its periphery are growing strongly, in Australia they are relatively stable, numbering about 2000 stocks.

In the 20 years to 2017, Australia grabbed a modest 3.2 per cent share of the global IPO market by value, listing 1367 stocks. Verma and his Deloitte colleagues think Australia will continue to attract a share of IPOs, given demand for growth stocks from cashed-up superannuation funds and institutional investors.

However he warns that for all the attention they attract, IPOs account for only a small fraction of market activity. In 2014, considered a bumper year for Australian IPOs, they still accounted for only 1.6 per cent of the total market capitalisation of listed companies, and that dropped to 0.5 per cent in 2016.

“We are talking relatively small numbers here,” Verma says, but adds that he does not expect to see “any marked decline in this in the near future”.

Public company trends in Australia

In the long term, however, Verma thinks Australia and other markets will follow the US trajectory. 

“I’d say yes [there will be a decline in listed companies] over time, but having watched this space … I am yet to see any evidence of this happening in the near term,” he says.

Others are less confident. Adam Steen, a finance professor at Charles Sturt University, says change is already underway.

“I think the same thing is happening here [as in the US]. If you look at the numbers, the same dynamics are going on,” he says, pointing to a drop in the number of IPOs in Australia over time, from 169 in 2005 to 94 last year.

Steen says markets in Australia and elsewhere are being hollowed out as high compliance costs, a dearth of retail investors and the availability of capital on private markets deters small and medium-sized enterprises (SMEs) from going to an IPO.

While big floats raising large sums make IPO markets appear buoyant, “at the SME end … issues have been declining for quite some time,” Steen says, and warns the consequences will be significant.

"More important than regulation in keeping companies off the market is that activist investors are off the chain." Jerry Davis, University of Michigan

“The IPO market is the engine of growth; it is where SME companies have been able to raise capital. When you have fewer small-end IPOs coming on, that’s an indication that your economy is not well, and it has clear implications for jobs. It is an economic barometer for growth and employment, and it is a worry.”

Davis, too, is concerned about what a shrinking number of publicly listed companies will mean.

This decline has coincided with an increase in mergers that has seen more industry concentrated in fewer hands. In the US in 1995, 89 listed companies accounted for half of all earnings, and 69 held half of all assets. Twenty years later (in 2015), just 30 listed companies accounted for half of all earnings, and 35 held half of all assets.

Davis says such massive consolidation is a sign of the failure of regulators to adequately enforce anti-trust laws, and the resulting diminution of competition is bad for consumers.

American workers are also losing out, he says because of the role US employers play in providing health insurance and retirement security for their staff.

“The US is uniquely reliant on corporations for providing a social safety net for their employees and their dependants,” he explains.

“Clearly, the disappearance of corporations is leaving major holes in the social safety net” – although he acknowledges that private corporations also face obligations around health insurance and pension provision.

While the public corporation is not dead, the growing ranks of companies that are held, and will perhaps forever remain, in private hands could fundamentally challenge assumptions about how wealth is shared. The days of the share-owning democracy may be numbered. 

Increasingly popular with public companies: shares without votes

Public companies have increasingly found themselves under pressure from shareholders demanding a say in how they operate.

While some activist investors want companies to adopt policies on social and environmental issues, such as using renewable energy, others try to use their stake to get a seat on the board or increase dividends.

Founders of recently floated companies such as Facebook and Alphabet (Google’s parent company) have sought to muffle the voice of activist investors by issuing stock with limited voting rights and retaining for themselves shares carrying multiple votes.

With the Snap IPO, in March 2017, of the 200 million shares issued in the float, none had voting rights. Snap co-founders Evan Spiegel and Bobby Murphy hold all class C shares, which each carry 10 votes, while company insiders and early investors hold class B stocks, which carry one vote per share. In effect, Snap was telling retail investors they wanted their money, not their opinion.

These dual-class listings have become an increasingly popular device for company principals to retain control. 

Jack Ma cited the ability to issue dual-class shares as one of the reasons he listed his e-commerce giant Alibaba with the New York Stock Exchange rather than the Hong Kong exchange.

Deeply disturbed by this, the Hong Kong Exchanges and Clearing market, which has banned dual-class listings until now, is controversially considering setting up a board to allow the trade of such shares.

Yet the success of dual-class stocks as a tactic to circumvent activity investors could be short-lived. While Hong Kong is pondering allowing the practice, other markets are acting to stamp it out. 

The S&P 500 index has banned dual-class stocks, and FTSE Russell, a unit of the London Stock Exchange, has said it will only include stocks in which at least 5 per cent of voting rights are in the hands of public shareholders.

However the upshot of these policy changes could be to deter even more companies from considering a public listing. 

The shrinking IPO pond

When it comes to raising capital, Australia’s IPO market is small beer. In the past two decades, the ASX has raised US$110 billion in public floats; the New York Stock Exchange raised US$675 billion in the same period. After a bumper year in 2014, when 73 IPOs raised A$17 billion, the Australian market has been much more modest, raising A$8.6 billion from 97 floats in 2015 and A$7.9 billion from 94 offerings in 2016.

However, there are signs more firms are looking to private deals with equity funds and institutional investors to raise the money they need. 

It’s a trend that worries Adam Steen from Charles Sturt University. He says Australia’s IPO market is becoming shallower because retail investors are shunning floats they perceive to be loaded in favour of insiders and institutional investors.

“People are complaining about retail investor lack of access to IPOs because the distribution is locked up between investment banks, brokers and institutions, and retail investors just aren’t getting a look-in. They’re saying, ‘We are getting done over if we participate in the market. We are not getting a good allocation of anything decent’,” Steen asserts.

He warns that the ASX is “sowing the seeds of its own destruction” if it does nothing to address these concerns, or to reduce the cost of listing.

Read next: Bigcommerce: Preparing a company for public listing

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