Opinion and Investing Column

Skarbeck: Decline in listed stocks not likely to continue

January 25, 2014

Ken SkarbeckWhere have all the stocks gone? Most investors will probably find the following statistic a bit surprising. According to Barron’s, in 1997, 8,823 companies had their stocks listed on U.S. stock exchanges. Since then, the number has dropped about 40 percent, to 4,916 publicly traded companies.

This stunning depletion in the ranks of publicly traded stocks in the United States is captured in the following trick question: How many stocks are in the Wilshire 5000 index? The answer is 3,609.

There are several explanations for why the number of traded stock issues is shrinking. To begin with, some companies that normally would have pursued an initial public offering, or IPO, are choosing to stay private. Managements are becoming more discouraged by the increased regulatory burdens and costs for public companies under the Sarbanes Oxley Act.

In addition, the credit crisis put a damper on the market for IPOs. In the five-year period beginning with 2008, IPOs averaged a weak 100 per year. The IPO market only recently has perked up, with 222 companies going public in 2013. That is in contrast to the 486 that went public in 1999 and the 403 that did so in 2000.

Another factor, especially in the technology industry, is that younger companies are being acquired by larger firms before they go public. These small, fast-growing firms that are likely candidates for IPOs are being scooped up by the likes of Google, Facebook, Microsoft, etc., which are eager to catch new trends, or more sinisterly, to keep a competitor from getting ahead in a promising, nascent technology.

Other companies are using private placements to access quick, cheap capital without the need to register securities with the Securities and Exchange Commission. Last year, privately negotiated deals to raise capital between institutions, so-called 144A private placements, raised $162 billion, while the more traditional public equity offerings raised only $154 billion.

Mergers involving one public company acquiring another also reduce the public stock supply, as does a bankruptcy.

All these factors have contributed to the shrinking number of stocks, but the biggest reason is acquisitions by large private equity funds. Private equity firms at year-end were managing a record $3 trillion in assets. As pension plans continue to allocate more money to giant funds managed by Blackstone, Carlyle, KKR and others, more public companies will be acquired and taken private. The list of companies going private in 2013 included deals to acquire Heinz for $28 billion, Dell $25 billion, and Smithfield Foods $4.7 billion.

The economics of supply and demand would suggest that a portion of the markets’ move to record highs is being driven by the demand for stocks’ exceeding the supply of publicly traded stocks. Perhaps, but it would be difficult to quantify the overall effect on the market.

It is doubtful that the supply of stocks will continue to dwindle away. The number of market constituents ebbs and flows, and perhaps we are reaching a trough in the supply of publicly traded stocks. As both the economy and stock market continue to recover, private equity firms will seek to list their holdings as IPOs and the number of publicly traded stocks may once again expand.•

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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.

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