Rumors of the Death of US Public Companies Are Greatly Exaggerated
As of 2017, 172 of America’s 200 largest companies, ranked by revenue, were publicly traded. Public company dominance of the corporate economy of the United States has existed for decades. There has been much speculation recently that this era may be ending, reinforced by a marked decline in the number of public companies since 2000. My article, ‘Rumours of the Death of the American Public Company are Greatly Exaggerated,’ argues that this pessimistic take on the public company misses the mark in important respects.
Why might the American public company be in peril? Exit and entry to the stock market dictate how many public companies there will be at any one time. On both counts, there is reason for pessimism.
Exits from the stock market can occur due to listed firms being acquired by another corporation, falling afoul of eligibility requirements for listing (typically due to financial distress) and opting to give up public status because it is no longer worthwhile to remain listed. Perhaps the most dramatic form of exit, however, is a buyout of an otherwise viable public company by a fund operated by a private equity firm. Governance advantages relating to monitoring and incentivizing management imply public-to-private buyouts constitute a potent threat to the public company. Whereas shareholder passivity has long been a hallmark of the American public company, with private equity buyout funds owning a majority of the shares of companies acquired, the private equity firms in charge should be suitably motivated and sufficiently powerful to orchestrate change at any hint of things going awry. Moreover, at companies private equity funds control, the executives are typically bestowed with a substantial ownership interest that provides a direct financial incentive to focus closely on the bottom line absent at most public companies.
As for entry to the public company universe, the initial public offering (IPO) is the key mechanism. There is widespread concern, however, that American companies have become counterproductively reluctant to take this step. This has been prompted by the number of companies going public failing to rally substantially after an abrupt decline since the end of a ‘dot.com’ IPO frenzy in the early 2000s. The fact that there are now dozens of ‘unicorns’—start-ups valued at more than $1 billion that have not joined the stock market—when there were none before the 2008 financial crisis underscores fears that IPO activity is currently sub-optimal.
Lukewarm investor interest has helped to suppress IPOs. Reluctant sellers, however, have likely dampened IPO activity more than discerning buyers. Many blame excessive regulation for the reticence. However, the fact that the number of initial public offerings has remained well below pre-2001 levels after facets of the IPO process were deregulated by the Jumpstart Our Business Startups (JOBS) Act of 2012 suggests that regulation has not played a major role in dissuading firms from going public.
The reticence regarding IPOs has in fact been due primarily to market factors. A desire to provide liquidity for current shareholders can motivate a move to the stock market, as can the need to raise capital. Finding buyers, however, for shares of successful, privately held companies has become considerably easier recently. For instance, private equity funds, sovereign wealth funds, and even some publicly traded firms have been stepping forward with some regularity to buy up sizeable stakes of prosperous private companies that have come up for sale.
As for raising capital, technological change has meant promising ventures can now scale up much more cheaply than was the case when large, labor-intensive factories were the norm. Growing companies can also raise funds more readily without a public offering of shares. The venture capital industry in the United States has expanded markedly over the past dozen years, thereby improving an entrepreneur’s chances of obtaining financial backing from this source. Mid-1990s deregulation has also fostered later stage capital-raising by making it easier for companies prepared to focus exclusively on investors with credentials as ‘qualified purchasers’ to issue securities and remain private.
If major American public companies were being taken private with a high degree of regularity and prosperous start-ups were avoiding the stock market completely, the future of the American public company would indeed be bleak. Public-to-private buyouts do not pose, however, any sort of existential threat to the dominance of the public company. They have been occurring with some regularity during the 2010s. This, however, has been happening largely under the radar, with deals worth more than $10 billion having been virtually unknown. Private equity in turn is now an afterthought amongst America’s largest corporations. As of 2017, among America’s 200 largest companies, only one, grocery retailer Albertsons, was under private equity control.
Despite reduced IPO activity since 2000, prosperous start-ups usually do end up linked to the stock market. For owners of such firms, trade sales, likely to a large established company have grown considerably in popularity as an ‘exit’ mechanism. With most large American companies being publicly traded, the assets usually end up in the public company realm, albeit by a different route than an IPO.
If a trade sale is not forthcoming, a prosperous start-up experiencing sustained success likely will go public. Once large-scale acquisitions are on the agenda for this type of company, publicly traded equity will usually be needed, either to raise cash to pay the shareholders of targeted companies or to execute share-for-share exchanges with those shareholders. Reticence amongst proprietors of successful start-ups regarding a move to the stock market means that firms carrying out initial public offerings are bigger and older than they used to be. Nevertheless, successful business enterprises rarely remain out of the public domain forever. The fact that erstwhile unicorn Lyft Inc. went public in March of this year bears this out. Lyft’s ride-haling rival Uber Technologies will likely carry out an IPO later this year, accompanied by fellow unicorns Pinterest Inc., Slack Technologies Inc. and Postmates Inc.
One might infer from the foregoing that the decline of the American public company is less precipitous than is widely perceived but is occurring nevertheless. Even this sort of revised assessment undersells the public company’s dominant status. The ratio of the aggregate market capitalization of publicly traded stocks to gross domestic product is currently higher than it ever has been. Public companies therefore have never been more important relative to the US economy. This has occurred despite the decline in the number of public companies, with the explanation being that companies that are publicly traded are now considerably bigger than they used to be. The average market capitalization of listed US companies is currently more than 10 times what it was 40 years ago, even allowing for inflation.
Forecasts of the extinction of the American public company have been occurring since at least the 1970s. Such predictions have proved to be erroneous, and current speculation about the public company’s gloomy future will also likely miss the mark. While public-to-private buyouts remain relevant, they do not currently imperil seriously the stock market status of larger public companies. Though business enterprises are not going public as frequently as they used to, the point has not been reached where successful sizeable American firms consistently stay private permanently. Hence, absent an unforeseen economic or regulatory equivalent of the asteroid that left behind the Chicxulub crater off Mexico and fostered the Cretaceous period extinction of the dinosaurs, the publicly traded corporation will continue to be a pivotal feature of the American economy for some time to come.
Brian R Cheffins is S.J. Berwin Professor of Corporate Law at the University of Cambridge. Professor Cheffins also canvasses the topics discussed in this post in The Public Company Transformed (OUP 2018).
This is a revised version of a post which first appeared on The Columbia Law School Blue Sky blog here.
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