Thursday, June 13, 2013

The Twilight of the Public Corporation?

Seattle has been the birthplace of some of the most iconic American companies over the past few decades.

Microsoft, Starbucks, and were all started in the Seattle area. 

All were classic success stories:the founders started with a dream,worked incredibly hard and grew exponentially, then finally took their companies public and become fabulously wealthy.

However, in recent years, this story appears to have been played out less frequently, as a recent column in the Seattle Times discussed.

The number of companies listed on the U.S. stock exchanges has declined by 44% since 1997, according to the article.  The problem is not so much that companies have disappeared, but rather the appeal of going public has been lost on many new companies today.

Here's an excerpt for the piece:

Back in the 1990s, 400 companies a year might go public.

A Kauffman Foundation report explains that this averaged out to 298 IPOs a year in the United States from 1980 to 2000. From 2001 through 2011, however, the number of new listings dropped to an average of 90 per year.

So far this year, 64 public offerings on American exchanges raised $16.8 billion, according to Dealogic and The Wall Street Journal. And this would be the most number of IPOs since the financial crisis.

What has changed since the boom years? For one thing, the long bull market came to an end in 2001. Rising stock prices are an essential environment for a successful public offering. That’s why the relative optimism about IPOs now must be tempered by how the stock market performs this summer. Recently, it’s been jittery.

The capital markets changed in myriad ways. Venture capitalists became pickier and less patient. Investors could get better returns in exotic investments such as derivatives. Better returns and promising startups were often found in overseas markets. And companies could raise funding through hedge funds and private equity.

I wrote a piece last month about Marc Andreessen, the internet pioneer now venture capitalist.  Here's what I wrote, which echoes the Seattle Times column:

I thought {Andreessen's} comments were very interesting.  He notes that in "old days" private companies were started with the goal of eventually going public.  However, the collective impact of burdensome regulation (e.g., Sarbanes-Oxley; Reg FD) has made being a public company more trouble than its worth.
Andreessen notes that in 1997 there were close to 9,000 public companies, but today is just over 4,000.  This in his opinion is not healthy for our economy:

What's with this war on public markets? Basically we seem to have collectively decided as a society we want to strip risk out of the public markets.  We had the dot com crash, financial crisis.  We decided we don't like risk.  There have been a series of regulatory reforms, corporate governance movements.  The result has been a huge disincentive for public companies to go public. The problem is if new companies don't go public you get what we're seeing, the number of public companies falling.  The result from that is we're stripping growth out of the public market.
This strong aversion to risk, Andreessen believes, is that reason that the stock market has struggled over the past decade or so to make any real gains:

The result from that is we're stripping growth out of the public market... I believe that the S&P 500 stock performance is flat, adjusted for inflation, right?  Since 1997 to 2012.
Interesting stuff.

Another difference between today and prior periods is attitude of the underwriters towards pricing an IPO.

In the "old days", IPO's were priced at a level where they could offer value to investors.

When Apple went public in 1980, for example, the stock immediately jumped from $22 a share to $29, and continued to rise for months thereafter. The idea of the Apple IPO was not only to make its founders wealthy, but also to have its stock rise in value for the benefit of investors.

Contrast Apple's IPO to the Facebook IPO last May.  Originally Facebook was supposed to be priced at $28 a share, but after the roadshow and subsequent hype become evident the price was moved to $38.

Problem was, Facebook knew the stock was overvalued at $38, and apparently quietly told a few influential institutional investors to stay away.  When the stock went public, it briefly moved higher, but then plummeted to as low as $20 in the months ahead.  Lawsuits were filed and settlements paid, but the public was left with a sour taste for IPOs.