A number of reports over the past several years have discussed the declining number of public companies, particularly in the U.S. However, perhaps the outlook for public companies isn’t as bleak as some might think, according to an analysis by several professors at the University of Pennsylvania’s Wharton School.
The concern about the environment for public companies goes back at least a few years. In 2009, for instance, accounting firm Grant Thornton issued, “A wake-up call for America,” which focused on the “systemic failure in the U.S. stock markets.” The report notes that the number of companies listed on either NASDAQ, the NYSE or AMEX dropped by about 22 percent, from 6,943 to 5,401, between 1991 and 2008. When adjusted for GDP, the decline was even more significant: down by nearly 53 percent.
Moreover, the report stated that the U.S. was falling behind other parts of the world, such as Asia, where the growth in listed companies actually was outpacing GDP growth. The relatively paltry number of new listings also threatened job growth; with up to 22 million jobs that may have been lost because of the “broken” IPO market, the report said.
Earlier this year, the Economist wrote about “the endangered public company.” The article noted that public companies had been key to a robust economy since the middle of the 19th century, providing limited liability, professional management and “corporate personhood” – that is, the ability for the business to outlive its founders.
Despite these attributes, public companies are “in danger of becoming like a fading London club,” the Economist stated. Indeed, a 2012 Grant Thornton report, “The trouble with small tick sizes,” revealed that the number of IPOs coming to market each year now averages 128. That’s down from an average of 520 per year between 1991 and 1995, and 539 per year between 1996 and 2000.
The reports point to a number of reasons for the decline: increasing regulation, which boosts the cost of going and staying public, and a heightened focus on short-term results, which can make it difficult for management to make decisions that look much beyond the next quarter.
At the same time, other forms of corporate structures, such as partnerships, are growing, the Economist reported. For instance, one-third of tax-reporting businesses in the U.S. now are partnerships, it noted.
However, while the number of public companies is lower than it was a decade or so ago, and the companies that are listed differ in several significant ways from their earlier counterparts, the news isn’t necessarily cause for alarm, according to several researchers at Wharton. For starters, the drop in the number of listed companies hadn’t resulted in a drop in the value (share price multiplied by number of shares outstanding) of the companies that remain public. In fact, the market capitalization of all NYSE companies rose from $.9.1 trillion in 1996 to $25 trillion in 2006, the NYSE reports.
And, some of the reasons for the drop in IPOs may be due to one-off events, such as the current low interest rates, which has made borrowing money, rather than raising it in the stock market, more attractive for many companies, the Wharton paper points out. In addition, many of the companies deciding not to go public today are on the margin, or small enough that absorbing the costs of being a public company would be difficult. In some cases, the higher costs are prompting companies to wait longer before going public. That’s not always a bad thing.
What’s more, the private equity industry isn’t a likely replacement for the public markets, Wharton professor Richard Herring notes, pointing out that PE firms often sell their portfolio companies via public offerings. And, the dispersion of ownership inherent in public companies can make life easier for the management team, possibly offsetting some of the regulatory burdens public companies face.
Time will tell if the current decline in public companies is a relatively temporary blip, or a longer-lasting shift, the Wharton paper concludes.
What do you think? How do you see the public company markets faring five or ten years down the road?
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