Why Firms Don’t Want to List on NYSE?

The number of companies going public in the U.S. has plummeted. U.S. Securities and Exchange Commission (SEC) indicates that for the decade ending in 2000, an average of 408 firms a year were listed but decade to 2012, this has dropped to 152 a year. In 2015, it fell below 100 firms. If sustained, the number of listed companies will dwindle to less than 500 by 2050. The S&P 500 would no longer exist.

In addition, there are companies listed that are being taken private. Elon Musk and Tesla is a case at hand. The other is mergers and acquisitions. About 5,000 firms were merged between 1997 and 2012. In 2015 and 2016 alone, there were 3,600 transactions. Fewer companies are also choosing not to list although the number of firms in the U.S.  increased from 4.7 million in 1996 to 5.9 million in 2015.

Why this development? Some blame it on regulation, i.e. disclosure requirements. Decline in listings they say, have coincided with significantly expanded disclosure rules. Others like researchers Davis and Stulz don’t agree. Listings standards and new rules were imposed much later, eight years later.

Rather than regulation it is the significant changes in the way business is done. Digital technology is driving down cost of transactions. This is encouraging firms to outsource, e.g. Nike. This firm (Nike) has focussed on design and marketing while production and other areas are contracted out. A lean business model means capital requirements are low. Combined with readily available funds, there is little pressure to list.

The other is activist investors. These people strive to exert greater control over public companies – strategies are questioned and the force companies to pay higher dividends. Examples include Apple and Dupont. So companies now go for dual class shares to restrict influence of activist investors.

Tapan Verma of Deloitte Australia believes it (decline in U.S. listings) is also due to increasing size and depth of other markets like Hong Kong, Shanghai and Shenzhen or Singapore. They draw business away from the U.S. It is easier to list in these newer markets.

Small investors are also shying away from listings because they perceive IPOs to be loaded in favour of insiders and institutional investors. So the demand side is rather limited.

Although data shows that listings decline is a U.S. phenomenon, the spread of this malaise is a possibility unless they seek to remain competitive and viable. So it is up to Bursa to initiate new steps beyond the LEAP market. One easy reform is to permit all Corporate Finance Advisors (licensed by Securities Commission) to act and submit any public offering subject to quality of submission being maintained.

Reference

1. The Other 1%: Fewer and Fewer Public Companies Are Getting More and More of the Pie – Mark Fahey

2. The Disappearing Public Company: Why Firms Don’t Want to List – Adrian Rollins (www.interblack.com)