No one disputes that the IPO market is pretty much dead, notwithstanding yesterday’s IPO by Grand Canyon, a deal that broke a 15 week streak without an IPO. With the stock market as crazy as it’s been, IPOs aren’t likely to stage a miraculous comeback soon.
But the IPO market’s troubles go beyond the current turmoil. They can be linked, among other causes, to changes in technology and regulation following the tech bubble earlier this decade, according to a white paper released on Thursday by consulting firm Grant Thornton.
The paper lists among the culprits of the IPO market’s anemia for the greater part of the decade:
- the emergence starting in 1996 of online discount brokerages such as Charles Schwab and E*Trade, which brought “unprecedented investment into stocks” and helped to cause the dot.com bubble, which in the process “destroyed the very best stock marketing engine” ever;
- decimalization of stock prices in 2001, which brought on automated trade execution, leading market makers to no longer exchange information, with traders “hijacking the markets for speculation.”
- a number of factors, including regulation, led to institutions no longer paying a premium for research, causing a “dumbing down” of stock research and leaving many companies without analyst coverage.
The end result of all this is a far lower average number of deals since the dot.com boom than before, in particular the disappearance of the $25 million IPO, which co-author David Weild says has “gone the way of the dodo bird.”
The authors argue that certain private placement markets such Nasdaq’s Portal, which is open only to qualified institutional buyers, or QIBs, and London’s AIM Market, both designed to help small companies float shares, have only partly satisfied the liquidity needs of smaller companies.
And so the authors imagine a new kind of market called “Second Market” that would have among its features: being open to all investors, have stocks with quote increments of 10 cents or 20 cents, and be intermediated by brokers.
Ultimately the authors argue, the languishing market for IPOs by smaller firms threatens U.S. competitiveness and innovation. Grant Thornton says there were an average of 520 IPOs per year before the dot.com bubble, versus 134 IPOs per year.
And with only 29 deals so far in 2008, and not a single one on the calendar, that average is likely to fall further.
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UNIFIEDMARKETS provides, for the first time ever, an efficient worldwide distribution network for IOI (Indications of Interest) to buy and sell financial instruments, business and business assets. It will provide greater efficiencies, anonymity and price discovery to the vast, but historically opaque and inefficient, unregistered securities markets.
- Posted by Robert BrownThe Sarbanes-Oxley Act of 2002 (Pub.L. 107-204, 116 Stat. 745, enacted July 30, 2002), also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly called SOX or Sarbox, is a United States federal law enacted on July 30, 2002. Named after sponsors Senator Paul Sarbanes (D-MD) and Representative Michael G. Oxley (R-OH), the Act was approved by the House by a vote of 334-90 and by the Senate 99-0. President George W. Bush signed it into law, stating it included “the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt.”[1]
The legislation establishes new or enhanced standards for all U.S. public company boards, management, and public accounting firms.
- Posted by H. Elwood Gilliland III