Is Going Public Going Out of Style?

The number of publicly traded companies continues to decline.

No matter how you slice it, the number of publicly traded companies in the United States continues to fall. On the major exchanges, there were 5,091 companies, including foreign-based ones, listed at the end of February, a 2% drop from 2009 and a 42% decline from the peak of 8,823 in 1997, according to new data from Grant Thornton. Looking across all U.S. exchanges, including the over-the-counter (OTC) market, the number of U.S.-based companies has fallen more than 30% since 2000, according to Audit Analytics.

Exactly why the number of publicly traded companies is declining is a matter of debate. Are the markets shunning companies, or are companies veering toward alternatives that don’t require onerous reporting and disclosure requirements?

Companies have been disappearing from U.S. exchanges in various ways. About 140 companies left the public markets in 2010 through going-private transactions, according to FactSet MergerStat research. Those transactions, which hit a peak of about 200 per year in 2006 and 2007, included private-equity buyouts, management buyouts, and acquisitions of public companies by private companies. However, since many of those companies will subsequently go public again, experts say they don’t account for much of the decline.

Other companies — approximately 375, according to CapitalIQ — were swallowed up by public companies through mergers and acquisitions. And about 100 companies were delisted from Nasdaq and the New York Stock Exchange in 2010 for being out of compliance with exchange standards, such as minimum trading prices.

At the same time, the number of IPOs has not been sufficient to replace the outflow. The swell of offerings in 2010 — 153 in total, up from 61 in 2009 — certainly helped stem some erosion. But Grant Thornton calculates that it would take more than 500 IPOs per year to grow the number of companies, and 360 just to replace delistings, volumes that are unlikely ever to occur, say Edward Kim and David Weild, senior advisers to Grant Thornton.

Fewer small companies are tapping the public markets.

The cost of being a public company — namely, the price of complying with Sarbanes-Oxley — is often tagged as the most significant deterrent to companies considering the public markets. Besides the organizational processes that must be put in place to comply, the cost of an audit can shoot up drastically once a company goes public. In part because public companies tend to be larger and more complex, the average public-company audit cost $4.8 million and consumed 21,458 hours, compared with $291,200 and 2,606 hours for a private company, according to a survey of 2009 fees by Financial Executives International.

However, there is little clear evidence that Sarbox is the true culprit. On one hand, about 11% of the companies that filed to go public between January 2009 and March 2011 withdrew from the process, with many citing the cost of going and being public as the main deterrent, according to a Securities and Exchange Commission analysis.

On the other hand, companies backed by venture-capital and private-equity firms, which make up the majority of IPOs, typically run their accounting and compliance processes as if they were already public. “You don’t build it to sell it, you build it to be a standalone entity and operate on a quarterly cadence from day one,” said Tim Healy, CEO of EnerNoc, at a recent conference. EnerNoc, initially venture-backed, raised close to $100 million when it went public in 2007.


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