Many Firms are opting Not to be Listed on the Stock Exchange — Here's Why.
- dummies stock
- Oct 14, 2021
- 4 min read
Updated: Nov 9, 2021
Even after allowing for the recent downturn, stock markets hit all-time highs in 2021, providing enormous value to the firms riding the wave. We are also in the middle of a record-breaking year for flotations, with several boards capitalizing on investor excitement for shares. However, firms have been delisting from the stock market in greater numbers, and this trend has been ongoing for some time.
According to the World Bank, the number of listed businesses globally peaked at 45,743 in 2014, but had fallen to 43,248 by 2019. The figures in key markets such as the United States, the United Kingdom, France, and Germany have all been declining.
In 2020, there were 47 deals to take companies private worth a total of US$40 billion (£29 billion), a significant decrease from the 62 deals worth US$88 billion in 2019, though the numbers in Asia were significantly higher. On the other side, 2021 has been a massive year: going private has already eclipsed its previous peak from 2007, with a record number of transactions exceeding US$800 billion.
Total number of listed businesses worldwide
Some of these decisions to go private are being influenced by aggressive acquisitions by private equity firms such as Blackstone, KKR, and Apollo. These investment companies did US$113.5 billion in transactions in the first half of 2021 alone, believing that there are business bargains in the aftermath of the pandemic and Brexit. This is more than twice the previous six months and the best half-year performance since the first half of 2007.
However, the allure of private equity is not the main reason why firms are abandoning the public market. So, what's going on, and are they acting appropriately?
The major deterrent
For starters, there is enough money available elsewhere that firms do not need to acquire capital through a float. Since the financial crisis of 2007-09, the world's central banks have been expanding the money supply by lowering interest rates and "printing money" through quantitative easing (QE), but the newest wave of QE in reaction to the epidemic has pushed this to a whole new level. The current rate of money-supply increase is outpacing economic growth. With interest rates so low, all of this money is rushing after assets. When you can borrow money for a fraction of the cost of a stock market listing, it becomes tiresome.
The second advantage of being private is that it is more regulated. Following corporate-governance catastrophes such as WorldCom, Enron, Galleon Group, and, most recently, Wirecard, listed firms have become heavily regulated. Because of these restrictions, many businesses have chosen to avoid public scrutiny by going private.
Another issue with public markets is that they have become irrational. Company values are at the mercy of amateur traders' whims now that they can readily purchase and sell shares through sites like eToro and Robinhood. Witness GameStop and other stocks skyrocketing earlier this year as a result of the Reddit group WallStreetBets.
On a site like eToro, novice traders may also opt to automatically imitate the moves of experts or celebrity traders. The market actions of a celebrity trader might cause numerous individuals to execute the same transaction, raising volatility across previously unrelated assets.
Tweets and memes can also cause values to rise or fall. Elon Musk, for example, drove up the price of dogecoin by posting encouraging comments about the cryptocurrency on Twitter, even referring to himself as the #Dogefather. It's no surprise that many corporate boards would want to avoid such a turbulent atmosphere.
Is it worthwhile?
When corporate executives have previously agreed to go private, they have sometimes reversed their decision. Michael Dell, for example, took his computer firm private in 2013, only to relist it five years later. He had gotten the company into a better position that he believed the markets would recognize. Musk has shown interest in taking Tesla private, believing that the business was being undervalued by the markets in the past, but that is no longer the case as the share price has risen in recent years.
Similarly, an increase in a company's market sentiment is not the primary reason to stay listed. Greater openness may be a selling feature for investors, and selling stock to them isn't the only way to capitalize on it. Companies can always choose loans or bonds as alternatives, limiting their exposure to social media influencers and inexperienced traders.
Instead of fearing negative opinion, businesses may view it as a challenge and consider how to respond more effectively. This might include stepping up their public relations, advertising, and lobbying efforts in order to better explain the firm to the outside world.
Company leaders can still be harmed by large changes in their share price because it is one of the performance metrics that determines how much they are paid. But, once again, delisting isn't the only solution to this problem. Instead, businesses should reconsider their performance metrics, possibly putting greater focus on environmental performance, for example, in anticipation of increased restrictions in this area.
Another possible medium-term benefit of being listed is regulation. The more firms that go private, the more probable it is that authorities will implement stricter regulations to safeguard investors and prevent fraud. They may even be inclined to raise taxes on private firms to compensate for the absence of regulatory oversight. In this regard, the temptation of going private might prove to be fool's gold.
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