Opinion

Felix Salmon

Is the era of the public company coming to an end?

By Felix Salmon
January 25, 2011
dld | IPOs

One of the problems with Davos, and with ambitious conferences in general, is that all too often the subject of conversation becomes large and amorphous to the point of meaninglessness (“how to leverage leadership in a global economy”, or something like that). So well done to Henry Blodget, at the DLD conference in Munich, for taking his broadly-defined session (“Where is the Money?”) and focusing it with clarity and insight on the question of the disappointing market in IPOs, and the growing grey market in non-public securities.

Barry Silbert, of SecondMarket, made the strongest case possible that “the IPO market has been dying a slow death over the past ten years”, and that nowadays it’s pretty much impossible for a company worth less than $500 million to go public. So it makes sense that private exchanges like his are stepping in and allowing owners to start selling stakes without going through the hassle and expense of an IPO.

The attraction is clear: for one thing, as Silbert says, “the company gets to decide who the buyers and sellers are, and what information they want to disclose to investors.” And by being picky about possible buyers, it avoids the fate of many public companies whose stock is held largely by traders with a time horizon of weeks, days, or even seconds.

What was interesting was the very low degree of pushback that Silbert got. David Liu of Jefferies spent as much time on the downside of IPOs as he did on the upside. “The IPO windows are much tighter now than they’ve ever been, there are so many exogenous shifts in the global marketplace,” he said. “When we counsel companies on the IPO route, we spend a lot of time on the volatility, the quarterly earnings, everything.” He was much more bullish on the M&A market, generally, than the IPO market.

I asked the panel whether they agreed with the conventional wisdom in the media that Facebook is going to go public in 2012 when it starts releasing financial information to the SEC. No one did: they all thought there was a good chance that Facebook could stay private indefinitely.

That said, it’s also pretty clear that Facebook is exceptional in that respect: it’s important not to extrapolate from one hypothetical datapoint. Liu said that Facebook’s private valuation, at a p/e ratio somewhere north of 100, is higher than it would likely be trading at in the public markets. And if that’s the case, then the chances of an IPO seem pretty slim indeed: Facebook’s executives aren’t going to sell a large chunk of shares to the public at a significantly lower price than they could fetch privately.

Near the end of the panel, Silbert said that nine out of ten CEOs who had run both public and private companies would say that given the choice, they will never go public again. Somewhere in the audience, I’m sure, Arthur Sulzberger was quietly nodding.

My feeling is that there’s so much money flowing into the private markets these days, in the form of VC funds and super-angels, that tech companies have almost no need to tap the IPO markets any more. They make sense for things like banks and car makers, but in general the total number of listed companies, which has been falling steadily for a decade, will continue to fall for the foreseeable future. I tried to get that data once, and failed — does anybody have a graph of the total number of companies listed on the NYSE and the Nasdaq over time? The era of the public company has not yet come to an end, but it certainly feels as though it’s well past its peak.

Comments
11 comments so far | RSS Comments RSS

Public!? Public companies are now largely managed for the benefit of the executives, fund managers, bankers and such. It is said that to own a minority position of a closely held company is to own nothing; this has certainly been extended to public companies.

As an investor I know that management will manipulate the business and the books to maximize their personal return. And they will work with the fund managers, the accountants, the lawyers, and the rest of the insiders to keep published earnings at a figure that allows the stock to stay at a level at which they can all maximize their personal incomes.

Much of this money should belong to shareholders. If management would manage to pay dividends and increase tangible book value, investors would return. Maybe there could even be a second stock market for real public companies. Of course then the executives would only be rich and not super rich. Sounds like class warfare.

Posted by RichardR1 | Report as abusive
 

At an internal P/E of 100, I truly hope that the rich continue to buy up such companies before they reach the public market. Better, Goldman should buy ALL of Facebook and hold it. They can distribute the stock in lieu of cash for bonuses.

Posted by ARJTurgot2 | Report as abusive
 

Publicly traded companies offer advantages that private exchanges will never match.

By far the largest advantage is they provide the richest valuation to the seller. Facebook is a statistical outlier in this reguard for the reasons Felix has previouly mentioned. Private equity valuation metrics depend on the industry but deals most commonly get done in the ballpark of 5-7x normalized earnings.

Public markets usually trade around 10-15x normalized earnings. When the seller is a wealthy family more concerned with control and privacy than making their 2nd billion then they might favor private placements. Everyone else is going to push for public trading and the increased liquidity and valuation that IPO’s bring.

Posted by y2kurtus | Report as abusive
 

But isn’t it those VCs and angels who push for IPOs?

Posted by walt9316 | Report as abusive
 

“If management would manage to pay dividends and increase tangible book value, investors would return.”

They can’t do that while dividends are exposed to double taxation. That’s why most take the alternative of stock buyback nowadays, so that investors can defer capital gains.

Posted by SGKingsley | Report as abusive
 

I think it’s a bit more complicated than Felix is letting on. For prestige companies with deep bases of investor interest and executives disinclined to be asked by scads of investors why their stock traded up or down on a given day, or whether earnings will be up or down a penny vs guidance, staying out of the public markets makes a lot of sense. Zuckerberg et al probably spend a quarter of the time on IR that a public comp does, and they don’t have to convince investors on a daily basis not to sell down their stock. If you’ve ever been on the comp side of this, it is positively Sisyphean. However, if you are a development stage biotech or a company in some sort of tech infrastructure business (Rackspace and the like), there are no DSTs willing to put up $100M at a pop. Biotech (like CLRT, prior to its recent announcement) will instead try and muddle along, doing convertible PIPES and the like to fund ops and putting up with public company rigmarole, because there’s no other game in town.

Posted by Derrida | Report as abusive
 

How much of this is due to Sarbox? To what extent would IPOs have come back after the 2000 recession in a way that they didn’t this time?

Posted by dWj | Report as abusive
 

how will this private market be better. they can decide what they tell their ‘investors’. how is this really better? after all the company doesn’t to tell you that they are broke. or that the companies is failing badly. though there are some rules that require disclosure once a company has more than 500 investors, even if they aren’t on a public market. but the company can manage to keep the number of investors (suckers maybe?) under 500.

Posted by willid3 | Report as abusive
 

DwJ – Sarbox had exactly zero effect. Remember, there were public stock markets back when CEOs could be sued for being liars and looters, such as in the ancient 1980s. All Sarbox did was moderately increase the documentation costs – it didn’t slow down the looting or expose management to the rule of law..

Posted by Dollared | Report as abusive
 

This is the end of the ownership society. I’ve been asking since 2005 – what is the difference between a private equity fund with $300B in assets, and the US Steel Trust c.1890?

Nothing – it’s just a repeat of the concentration of wealth that occurs in an unregulated capitalistic society.

Posted by Dollared | Report as abusive
 

I assume, Dollared, that you don’t believe you’ve actually provided much evidence for the position that it had “exactly zero effect”. I obviously would expect Sarbox neither to destroy American capitalism nor to trigger an explosion in growth and investment, but it does seem reasonable to me that it would dampen the alacrity with which management of private companies would seek to be publicly listed.

Posted by dWj | Report as abusive
 

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