Indeed, for these companies, many of the traditional advantages of going public are no longer valid, and the mounting costs all the more obvious. When one reviews the historical rationales for companies being public in the first place, however, one finds that the evolution of the capital markets, compensation policy, and other factors render most mute:
- A shortage of risk capital motivated the formation of publicly owned corporations. As manufacturing companies requiring substantially more initial capital than banks or individuals could or would provide began to emerge, the need for a new means of raising funds and spreading the associated risks arose. Capital is no longer scarce—witness the rush of VC money into dot-coms. Nor is it as risk averse. Professional investors have access to unprecedented amounts of information relevant to weighing the risks of any given investment, ranging from a huge, real-time business press to information services on specific global markets. And, despite recent, glaring shortcomings of auditors in specific situations, the extent and timeliness of financial information within companies are unprecedented. Legitimate investment hypotheses do not go begging for capital in today’s environment. Do most companies truly require access to the public markets to fund themselves? No.
Public ownership provided liquidity in several senses. First, it serves as a means for an entrepreneur (such as Bill Gates) to gain liquidity and diversify his or her holdings. Floating stocks will always offer that important benefit. Second, stock exchanges provide easy mechanisms for individuals and institutions to adjust their portfolios. In an era with fewer, larger, and more widely held stocks, all companies benefited from such a system.
Today, however, a two-tier system of public companies has emerged. Large companies with significant floats and, especially, certain “star” companies, such as GE, continue to benefit from the liquidity afforded them by the market and the associated coverage from analysts. The second tier consists of a large percentage of mid-market companies, left struggling for market-making attention. Analyst coverage of that second tier—particularly those companies with no prospect of generating meaningful investment banking fees or requiring brokers to sell anything other than the hottest current investment hypotheses—has simply disappeared in recent years. The vast majority of mid-cap companies find themselves dropped from the coverage of major banks, leaving second- and third-tier banks with modest resources to provide coverage. They often provide little more than limited commentary attached to cursory forecasts and earnings bulletins. That, in effect, leaves a large, absolute number of companies in public “purgatory,” unable to generate enough interest to reap the presumed benefits of the liquidity and with too small a float to attract the investment of institutional investors who fear that they will set a higher price for a stock from which they will be unable to escape.
The growing inability of many public companies to attain any relevance in the public markets raises the real costs and real risks of being public for those companies. Are most companies enjoying the type of liquidity for their shareholders they assumed came with public status? Probably not.