Image Credit: Christophe Vorlet
By Jason Zweig | June 25, 2010 12:01 a.m. ET
Where have all the companies gone?
The number of U.S. firms with publicly traded stock has dropped by half in the past decade. Ten years ago, around 9,100 companies filed annual proxy statements with the Securities and Exchange Commission. Last year, roughly 6,450 did; so far in 2010, only about 4,100 have, estimates Wharton Research Data Services. The Dow Jones U.S. Total Stock Market Index tracks 4,136 stocks, down from 4,599 just a year-and-a-half ago and 5,000 at the end of 2005.
Companies take their shares off the market for many reasons: through mergers and takeovers, by going private, by going bankrupt. And the shrinking number of stocks isn’t necessarily bad. For some to succeed, many must fail, and falling supply may help lead to rising stock prices over time. But job creation and technological innovation depend heavily on the birth of new public companies.
In two-thirds of the years from 1960 through 1996, the number of initial public offerings exceeded the number of stocks that dropped out. Since then, however, there have been more deaths than births among stocks every year: 7,725 stocks have disappeared over that period, while just 4,299 new ones have arisen to replace them, according to Wharton.
“Small IPOs have gone the way of the dodo bird,” says David Weild, head of Capital Markets Advisory Partners and ex-vice chair of Nasdaq.
But the IPO market isn’t dead; it is in suspended animation. Two major deals, Tesla Motors and LPL Investment Holdings, are in the works. “We’ve got quite a few companies in registration that are saying, ‘Let’s wait till the dust settles,’ says veteran banker Thomas Weisel, whose firm is merging with Stifel Financial Corp. “It’s a function of all the uncertainty about the global economy.”
If IPOs are to resume fostering innovation and creating jobs, the IPO process itself needs to be innovated. These days, big investment banks are rarely willing to underwrite and research firms smaller than $250 million or so in total market value. William Hambrecht of W.R. Hambrecht & Co. estimates that there are 4,000 to 5,000 small but robust growth companies in Silicon Valley that would like to list their shares. “We’re looking at literally dozens of companies” that want to sell 20% stakes to the public, raising $10 million to $30 million apiece, he says. But most banks can’t be bothered with such piddly deals.
Cost is also a deterrent. The underwriting discount, or investment-banking fee, has averaged 6.8% this year, according to data from Dealogic. Underwriting fees are meant to compensate banks for the “risks” they incur buying shares from issuers and reselling to the public. But, as Mr. Hambrecht points out, “today they take no risk.” If the public doesn’t want the stock, the underwriters simply pull the deal from the market.
Still, the bankers’ take has stuck close to 7% for decades. In fact, it is higher than it often was back in 1913, when future Supreme Court justice Louis Brandeis advocated what he called “corporate self-help.” Under Brandeis’s plan, companies would sell their shares directly to the public, rendering investment banks “superfluous” in many stock offerings.
In that spirit, the “OpenIPO” model, which Mr. Hambrecht used to take public such companies as Google, Morningstar and Interactive Brokers Group, enables any investor large or small to put in a competitive bid on an IPO. The stock is then auctioned to anyone — not just favored clients — at the highest price that will enable all the shares to sell. Underwriting fees run roughly 2% to 3%, so it is easy to see why Mr. Hambrecht’s approach hasn’t caught on with his competitors.
A rule called Regulation A, dating to 1933, permits firms to sell up to $5 million in securities without filing a full registration statement with the SEC. If Congress and the SEC were to lift that ceiling to $30 million, says Mr. Hambrecht, more small companies could go public more easily. Of course, small stocks have always been a favorite sandbox for fraudsters, touts and pump-and-dump promoters, so investors always need to be on guard when investing in these companies.
Mr. Hambrecht and Mr. Weild have independently proposed a stock exchange dedicated to IPOs. Market-making firms would maintain fair and orderly prices. Such an exchange would also collect and distribute independent research on its listed stocks. To discourage fast trading, Mr. Weild suggests that the stocks be priced at minimum spreads, or differences between buying and selling price, of 10 cents — rather than the one-penny spread prevailing on other exchanges.
If great oaks are to grow from acorns, the seedlings could surely use a little help.
Source: The Wall Street Journal, https://www.wsj.com/articles/SB10001424052748704569204575328784069347058
For further reading:
Definitions of INDIVIDUAL INVESTOR and IPO in The Devil’s Financial Dictionary
Data on initial public offerings compiled by Jay Ritter of the University of Florida
Michael J. Mauboussin et al., “The Incredible Shrinking Universe of Stocks”