Wall Street, the Home of the Vanishing IPO
One of the golden oldies of the stock market tables — GM — is back. But where did all those other stock symbols go?
For all the hoopla over General Motors, which is returning to the New York Stock Exchange in one of the largest initial public offering of all time, the nation’s stock market seems to be getting smaller, not bigger.
Hundreds of stocks that once captivated investors — Pets.com, anyone? — vanished long ago. Scores of big-name public companies have passed into private hands. Others have been gobbled up by rivals.
As a result the number of companies listed on the nation’s major exchanges has plummeted, to 4,048 today from a peak of 7,459 in 1997.
It is a remarkable turnabout for the nation’s markets and, to some, deeply unsettling. This is Wall Street, after all — home to the largest and deepest capital markets on the planet.
An I.P.O. used to be a rite of passage for a company, a sign that it had arrived. But even before the financial collapse of 2008, some entrepreneurs and financiers worried that America’s markets were somehow losing their edge. That would be bad news not only for Wall Street but ultimately the entire economy.
Entrepreneurs like Kirk H. Knight complain they’ve been pushed off the I.P.O. track.
His start-up, SurgOptix, makes medical devices to light up cancer cells during image-guided surgery.
But Mr. Knight says he can’t find big investors willing to gamble on SurgOptix, largely because people are no longer sure they can exit investments through an I.P.O.
“I have been in Silicon Valley for 35 years, and I have never seen investors quite so afraid,” Mr. Knight said. “That whole pipeline to the stock market is closed down.”
For G.M., going public again is a step into a new, postbailout period. But in the world of initial public offerings, G.M. is an anomaly. Most I.P.O.’s involve young companies, not century-old giants like G.M.
Some economists warn the economy will suffer if innovative private companies cannot or will not turn to the public markets.
“We should be very concerned about this trend,” said Andrew W. Lo, the director of the MIT Laboratory for Financial Engineering. “Capital markets are central to business formation and economic growth, and if listings are falling, that is a sign there is not the same level of capital formation as there was in the past.”
Everyone wants to be the next Google . But the fact is, I.P.O.’s are a high-risk game: many start-ups fail. Yet small, nimble companies tend to be the ones that develop new products and create jobs. And far fewer of them are going public than before.
The annual rate of I.P.O.’s peaked in 1996, when around 756 American-based companies went public, according to Dealogic. That figure fell to a low of 36 during the financial crisis in 2008. It picked up to about 50 in 2009 and, so far this year, it is running at about 100, excluding G.M.
Several companies are set to go public Thursday, in the shadow of G.M, including Anacor Pharmaceuticals and the broker-dealer company LPL Investment Holdings.
But while I.P.O.’s have come out of their deep freeze, they are still running below the level required to hold constant the number of public companies. And that, analysts say, has unsettling implications for American job growth.
“I would worry about the number of start-ups declining as they are the engines of the future,” said Eric Olsen, a senior partner the Boston Consulting Group in Chicago. “Smaller companies tend to drive innovation more than big companies. I worry about the lack of new companies.”
Granted, many businesses are thriving privately, away from public exchanges. They are financed by private equity or bank lending.
Others say it makes no sense to compare today’s I.P.O. market with the frothy days of the dot-com frenzy. Many of the companies that abandoned exchanges like Nasdaq once the bubble burst never made any money.
Some critics say the incredible shrinking stock market is one of the unexpected results of regulations like the Sarbanes-Oxley Act of 2002, which have increased companies’ legal bills.
Others say the evolution of the capital markets has favored large companies over smaller ones.
New technology like online brokerages and regulatory changes meant to increase competition in the nation’s stock market pushed trading costs to a fraction of what they were. This has generated benefits for ordinary investors who can buy and trade shares cheaply and much more quickly than in the past.
But David Weild, former vice chairman of Nasdaq and capital markets adviser at Grant Thornton, said that had cut profitability for big brokerage firms that now preferred to focus on large company stocks and did not promote share offerings by smaller, less-known companies.
“The whole ecosystem to support small-cap companies has shrunk,” Mr. Weild said. “This infrastructure is every bit as important as bridges, roads and tunnels. Without it, you undermine growth.”
The trend is startling when compared to emerging markets like China or India where new listings are growing at a fast rate.
While these still lag behind the United States, the number of companies listed on Chinese stock exchanges has grown by about a third over the last 10 years and stood at 3,019 by the end of last year, according to the World Federation of Exchanges.
This year alone, Chinese companies introduced 391 global I.P.O.’s, worth $89.5 billion, the data firm Dealogic reported. The 99 I.P.O.’s by American companies listing in the United States were worth $15.69 billion.
“I.P.O.’s raise innovation rates,” said David H. Hsu, associate professor of management at the Wharton School at the University of Pennsylvania, who has studied I.P.O.’s in the biotech industry. He worries that the dwindling number of I.P.O.’s could ultimately hurt the competitiveness of the nation’s economy.