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Why is the number of publicly traded companies in the U.S. declining?
Alix Stuart, CFO.com | US
March 22, 2011
Another sign of the difficulty small firms are having in accessing capital: the number of publicly traded companies in the United States continues to fall, according to new data supplied by Grant Thornton. At the end of February, there were 5,091 companies listed on major U.S. exchanges, a 2% drop from 5,179 companies at the end of 2009 and a 42% decline from the peak of 8,823 in 1997. (The numbers include foreign firms listing in the United States.) "U.S. listings have decreased every single year since 1997 with no rebound at all," says Edward Kim, capital markets senior adviser to Grant Thornton.
The decline means it is harder for companies to grow today, Kim says, and it weakens the U.S.'s capital-raising reputation against its global peers. Stock exchanges in virtually every other country continue to grow, the research points out, particularly in China. A recent report from the Committee on Capital Markets shows that U.S. exchanges won only 14.2% of all initial public offerings last year, down from 16.9% in 2009 and an average of 28.7% between 1996 and 2006.
Companies disappeared from U.S. exchanges in various ways. About 140 companies left the public markets in 2010 through going-private transactions, according to FactSet MergerStat research. Those transactions included private-equity buyouts, management buyouts, and acquisitions of public companies by private companies. Other firms were swallowed up by public companies through mergers and acquisitions. And about 100 companies were delisted from Nasdaq and the New York Stock Exchange for being out of compliance with exchange standards, such as minimum trading prices.
As companies have disappeared, the number of IPOs has not been sufficient to replace them. The swell of offerings in 2010 — 153 in total, up from 61 in 2009 — certainly helped stem some erosion. But Grant Thornton calculates it would take more than 500 IPOs per year to grow the number of companies, and 360 just to replace delistings — volumes that are unlikely ever to occur, say Kim and his colleague David Weild, also a senior adviser to Grant Thornton. Weild testified on the topic before a subcommittee of the U.S. House of Representatives Financial Services Committee last week.
The real problem, Kim and Weild contend, is that the markets have become inhospitable to smaller private companies looking to raise less than $50 million. The main cause, as they see it, is lower trading fees, stemming first from online brokerages and new order-handling rules in the late 1990s, and then from decimalization, Sarbanes-Oxley, and the global research analyst settlement separating research from banking. Given the lower fees, it no longer makes economic sense for investment banks to support small-company IPOs with capital and research. Kim says that small companies "are not a product anymore; they're just food for Goldman Sachs's real clients" — hedge funds looking for quick gains through IPOs. With such a large universe of companies shut out, he expects the pool of publicly traded firms to continue shrinking.
The issue has attracted no shortage of attention in Washington, D.C. Treasury Secretary Timothy Geithner held a conference on Tuesday to examine the difficulty of funding for smaller businesses. Among other fixes, Geithner said the Treasury Department has approved more than $50 million in disbursements to three states — Connecticut, Missouri, and Vermont — to stimulate lending through partnerships with private lenders.
Another effort to make things easier for small companies looking to approach the public markets is the Small Company Capital Formation Act of 2011, sponsored by Rep. David Schweikert (R-Ariz.). That bill would increase the amount of money companies can raise in the public markets through Regulation A transactions from $5 million to $50 million. (Reg A allows companies to trade securities on the over-the-counter (OTC) market without having to register with the Securities and Exchange Commission, file regular reports, or be audited.)
Whether or not a change in Reg A will lead to more companies listing on the major markets is debatable, however. Not many companies currently use the Reg A exemption, says William Rodgers, an attorney with law firm Tarlow, Breed, Hart & Rodgers in Boston. In part that's because they must still comply with state securities laws. If those laws were waived and the Reg A cap raised, "I think you'd see more companies using it," says Rodgers.
The idea is that the additional capital could help companies grow without the costs of being public, allowing them to get big enough for major exchanges faster. Last year Nasdaq saw 54 companies upgrade from the OTC market to its exchanges, according to the market's 10-K, along with 47 in 2009 and 45 in 2008.
Raising the limit "would be a positive step that would reduce some red tape, and one that I think Congress will pass, but it's just one step of many that would be needed," says Kim. "I truly believe that without a completely different market model, we won't fix the problems."
Correction: The original version of this story quoted Edward Kim as saying that smaller companies were seen merely as potential acquisitions ("food") for larger companies. In fact he was referring to hedge funds, not larger companies. The story has been corrected.