Going public was considered the ultimate sign of success for any company in a capitalist market. It meant the company had succeeded and the founders and original investors could reap some of the benefits. Public stock also allows companies to raise money, use stocks as a means to acquire and much more.
Would it surprise you to learn that the number of publicly listed American (USA) companies has declined dramatically?
We are currently sitting at about half the number of public companies, compared to the 80s and 90s. More are taken off the market through mergers and acquisitions. In 1996, 9080 companies were listed in the USA. In 2017, that number fell to 4336 (an almost 50% drop).
We are seeing more and more companies stay private longer. Why is this? Many, like the US Chamber of Commerce, believe overly burdensome regulations like Sarbanes Oxley are encouraging companies to stay private. Going public means spending millions on compliance and executives running the risk of jail time.
The numbers show that the decline started around 1997-1998, Sarbanes Oxley was enacted iJuly 30 2002. So SOX could be partly to blame for an acceleration in the rate of decline but it cannot be the sole culprit. The other half of the decline could be attributed to the end of an era of irrational exuberance (where hundreds of unprofitable companies couldn’t find continued funding and folded).
While the number of publicly listed companies fell sharply, the value of those that remained listed grew dramatically.
In 1996, the market capitalization of listed US domestic companies totaled 8.48 trillion dollars. In 2017, it hit 32.121 trillion dollars (all the while the number of companies listed dropped ~50%).
Many market purists now complain that this illustrates an unhealthy concentration of market power in the hands of fewer and fewer companies. Perhaps there is some truth to these concerns but on the other hand, many of the winning companies did so through technological innovation and global expansion.
Does this concentration mean newcomers are starving for funding? The answer is a resounding no. Look at the company everyone loves to hate, Uber. According to Crunchbase, Uber has raised 24.2B$ through 21 rounds of funding. The same can be said for dozens of other companies.
“Innovative startups are still able to secure critical funding to build, grow and expand.”
Aren’t public companies more transparent? The belief is that private companies are more opaque because there are less disclosure requirements and in most cases the company is managed by a small number of investors. Although government regulations like SOX impose a higher burden on public companies to be transparent, the truth is that a select group of large investors hold the majority of the shares for most companies (think hedge funds, pension funds, etc). So if we agree that public and private companies can be controlled by a select group of large investors, then the only difference is forced transparency through government regulation.
In addition to being VP Information Security for a large tech company, I am also responsible for many of the company’s compliance activities. Would I love the compliance burden to lighten? Of course, but the truth is that these compliance requirements instill a certain level of trust in the market. It is this forced transparency that makes the Western Markets so attractive to investors. Additionally we saw that the US attempt to lighten the regulatory burden on early-stage companies, through the 2012 jobs act. The JOBS act was designed to encourage smaller companies to go public. The argument was that these organizations were delaying going public because of overly-burdensome government regulations. The JOBS act dramatically reduced this burden hoping to spur a mad dash to IPO-heaven for companies under 1B$ in annual revenue. 12 months after go live, the number of companies that IPOed were just 63 which was down 20% from the previous year. It didn’t really help companies improve their performance and it didn’t spur a mad dash to the public markets as anticipated.
“None of the available data shows that a reduction in government regulation or control would lead to a statistically significant increase in the number of IPOs”
Conclusion
The moral of the story is that the USA is still a world leader in free markets and has the most valuable public companies of any country. Part of this success is due to the perceived transparency USA government regulation creates and hurting this in any way could undermine US public market leadership.
US pubic companies are raising more money than ever before, US public companies are larger than ever before. Foreign companies looking for cross-border listings are overwhelmingly choosing US markets.
“The US remains the most attractive public equity market in the world.”
Although there are fewer IPO companies today (compared to 20 years ago), modern companies are more stable, are raising more money and are considerably more sustainable.
