Public ownership has historically been the lifeblood of the American economy. Going public produced funding for growth, while providing investors with an opportunity to share in the company’s success.
In the peak year of 1996, more than 1,000 companies went public. This year, we may not have 100 initial public offerings (IPOs). To date, only 39 IPOs have been filed—a 52.4% decrease from last year. Only 20 IPOs have been priced, which is a 65.5% decrease from last year. Only $3.3 billion has been raised from IPOs, a decrease of 68.8% from last year, according to Renaissance Capital.
In January, not a single U.S. company went public. And there was no polar vortex to blame. Through the first quarter, there were only 11 IPOs, which is the worst start to a year since 2009.
So tell me again about the booming economy.
In the past, the number of newly public companies far outweighed the number of companies that converted from public to private ownership, failed, merged, were acquired or were delisted because they no longer met exchange requirements. In recent years, though, the number of companies no longer trading on U.S. exchanges has been increasing just as IPOs have been decreasing.
In fact, the U.S. now has half as many publicly listed companies trading on its exchanges as it did in 1996. As the chart shows, America had 7,322 in 1996 and, as of last year, that number had dropped to 3,700. That’s 1,000 lower than in 1975, a date well before the boom in IPOs.
While having more than 1,000 companies going public in a year can be interpreted as a sign of the coming bubble at the end of the century, America averaged more than 300 IPOs a year from the period 1980 through 2010. That’s still three times the number that’s likely for this year.
Startup Numbers Also Dropping
At the same time that the number of public companies has been dropping, not coincidentally, so has the number of startups.
For the first time ever, there are now more business failures than business startups in the U.S. In Gallup’s Business Journal, Chairman Jim Clifton wrote that, “American business deaths now outnumber business births.” Based on U.S. Census Bureau statistics, he wrote that 400,000 new businesses are started each year in the U.S., but 470,000 are failing.
He noted that “the U.S. now ranks not first, not second, not third, but 12th” among developed countries in business startup activity. … Until 2008, startups outpaced business failures by about 100,000 per year. But in the past six years, that number suddenly turned upside down.”
Clifton wrote that, because they are America’s job creators, “when small and medium-sized businesses are dying faster than they’re being born, so is free enterprise. And when free enterprise dies, America dies with it.”
Why Businesses Are Dying
No one factor is responsible for the drop in business startups and IPOs in the U.S. The responsibility, we believe, is due to overregulation, high taxes, low productivity, increasing lawsuits against businesses and the overall malaise that’s held back economic growth for the past eight years.
It’s logical to assume that slow growth is a factor, as the economy has been growing at about 2% a year during the Obama Administration, compared with a rate of 3.3% for the period from the end of World War II up to the financial crisis.
However, economies throughout the world have stagnated, yet the National Bureau of Economic Research found that America’s share of the market for IPOs has dropped from 27% in the 1990s to just 12% in the 2000s. Much of the shift was due to IPO growth in developing countries—especially China, whose IPO proceeds exceeded those of the United States in 2006 and 2007.
David Weild, the leading expert on the near-demise of the U.S. IPO market, has cited causes ranging from the introduction of decimalization to the growth of online brokers. And, as we’ve also noted, “The number of IPOs has fallen for many reasons, including the cost of compliance with the Sarbanes-Oxley Act; Eliot Spitzer’s global research settlement, which resulted in a lack of research for small company stocks; the dot-com bubble, and the financial crisis.”
Overall, the drop in business startups and IPOs can be blamed on increased regulation, high taxes and a growing disdain for free-market capitalism. As we’ve previously noted, America has the highest corporate tax rate in the world and it’s the only developed country that taxes revenue when it’s returned home.
We’ve added major new regulations, such as the Dodd-Frank Act and the Affordable Care Act, along with a powerful bureaucracy known as the Consumer Financial Protection Bureau. New regulations spawn increasing lawsuits that cost America’s small businesses more than $100 billion a year.
While the unemployment rate has fallen, fewer startups and fewer IPOs will ultimately mean fewer jobs and a stagnant stock market.