On May 17, 2016, Fortune Magazine published an article by Geoff Colvin, “Take This Market and Shove It,” examining the growing trend of companies staying private rather than opting for an IPO. The article notes that while the total number of U.S. companies continues to grow, the number that are traded on stock exchanges has plunged 45% since peaking 20 years ago, and that IPOs, once an indicator of U.S. business dynamism, dried up after the dot.com bust in 2000 and have never fully recovered, even though today’s economy is far larger. The article provides various explanations for why some public companies are returning to private ownership and many other companies are simply staying private, while public companies are increasingly becoming fewer and bigger. Although going or staying private allows companies to invest for the long-term and focus on their businesses rather than Wall Street expectations, the article notes that another important driving force has been the increasing fear of activist investors. Other significant factors noted by the article include the following:
- A decreasing reliance of companies on physical assets (e.g., factories and machinery), resulting in a decreasing reliance on IPOs for broad-based financing.
- All-time low interest rates, resulting from a savings glut and easy monetary policies across the globe, and the tax deductibility of interest payments.
- The high costs associated with going public. Underwriting and registration costs average 14% of the funds raised and offerings are usually underpriced by on average 15% in order to produce a first-day “pop.” Public companies also face additional rules, notably those imposed by the Sarbanes-Oxley of 2012 and the Dodd-Frank Act. In addition, public company disclosures are replete with information for competitors to study.
- The ability of PE firms to provide broad managerial advice to private companies. In addition, public companies suffer from the so-called agency problem (the misalignment of owners and managers), which does not arise in private companies because the majority owners are usually either the managers themselves or members of a powerful board of directors.
- Private ownership is also attractive to managers because executive compensation is not publicly reported.
The article also refers to an informal online survey indicating that 77% of CEOs think it would be easier to manage their company if they were private rather than public and that only 8% of CEOs thought that they did not have all of the cash they needed to fund investments.
A copy of the article is available at: http://fortune.com/going-private/