The number of listed companies is increasing after a slump of two decades. This shows just how much companies are striving to capitalize on the buoyant investor sentiment that has carried everything from stocks to bitcoin to record highs.
The increase in the number of companies listed on US stock exchanges last year was the largest since the dot-com bubble in the late 1990s. According to data from University of Florida finance professor Jay Ritter, the total is expected to climb even higher this year as hundreds of companies target everyday investors.
This is an important change as the number of publicly traded companies has steadily declined for 20 years, going from around 8,500 in 1997 to 4,500 in 2017. When the internet bubble burst, startups raised huge sums of money through venture capital and private equity firms, and mergers and acquisitions shrank the pool of public companies. After rising in 2018 and 2019, the number of publicly traded companies rose by nearly 200 during a record stretch in the IPO market last year.
Shares in companies such as dating app operator Bumble Inc.,
Online real estate rental Airbnb Inc.
and digital grocery supplier DoorDash Inc.
recently rose after traditional IPOs. A rapid expansion of the special purpose vehicle (SPAC) market is adding to the frenzy. SPACs, also known as blank check companies, are shell companies that are listed on a stock exchange for the sole purpose of acquiring a private company in order to get it public. The private company, usually a startup, then receives the SPAC’s place on the stock exchange.
Some companies, such as Slack Technologies for workplace communications Inc.,
even got high ratings by going public through direct listings. These allow companies to sell stocks directly to the public without going through banks, but prevent them from raising new money.
Regardless of how they go public, many companies find that the process is accelerating their growth in ways that it hasn’t done in decades. This now offsets the stricter regulatory and transparency requirements that a publicly traded company brings with it, executives say.
“It was a change for the brand,” said Dave Glazer, chief financial officer of data mining company Palantir Technologies Inc.
“We underestimated the value of the IPO.”
Palantir’s market value has risen from $ 15 billion to $ 42 billion in the five months since the company was directly listed as the formerly private company became a favorite of traders on social media platforms like Reddit.
Two hundred and thirty companies have gone public so far this year, raising $ 78 billion as of Wednesday. According to Dealogic, the IPO market reached a record value of 168 billion US dollars last year.
And 120 companies worth $ 1 billion or more have gone public through IPOs or SPACs since the end of June, which, according to Mr. Ritter, is almost the sum of the last nine quarters. Many of those who have gone public in recent years have been so-called unicorn companies with a private value of $ 1 billion or more, like ride-sharing company Uber Technologies Inc.
and zoom video communication Inc.
“The public markets have really become much more receptive,” said Scott Galit, managing director of digital payments company Payoneer Inc., which recently closed a $ 3.3 billion deal through its merger with a SPAC that later became the latter Year to go public.
Prior to the deal, Payoneer had considered going public for several years but preferred to remain private. The ability to raise a large sum and make forward-looking projections about the business – something that is not allowed in a traditional IPO – made it the right time to go public, Galit said.
For some market watchers, the booming IPO market is part of a hot asset bubble that will eventually burst. Recently listed companies like Airbnb and Palantir were hardest hit during Thursday’s market weakness.
Private companies are flocking to special purpose vehicles (SPACs) to bypass the traditional IPO process and get a public listing. WSJ explains why some critics say investing in these so-called blank check companies is not worth the risk. Image: Zoë Soriano / WSJ
Still, startups are raising hefty sums of money through venture capital and private equity, and the froth in the stock market and popularity of SPACs make public market valuations attractive in a number of industries. This is a tipping point that investors have said would be key for years to come to increasing the number of companies available to amateur investors.
“We are just seeing this moment,” said Chinh Chu, a SPAC inventor and former co-head of private equity at Blackstone Group Inc.,
The multitude of options for companies to go public now makes this more compelling.
One of its SPACs took the snack manufacturer Utz Brands Inc.
Public last year and ended nearly a century of family control. Its stocks have risen lately, bringing the company a market value of nearly $ 3.5 billion.
Investors and executives have long debated whether it is better to be private or public. Tesla CEO Elon Musk sparked controversy over the issue in 2018 when he tweeted that the company had secured funding for the privatization and then reached an agreement with regulators to step down as Tesla’s CEO.
Long-term investors who may previously have avoided splashy startups and blank check companies are now putting money in, adding momentum to public markets. Berkshire Hathaway Inc.’s
Warren Buffett invested in the data warehousing company Snowflake Inc.
Last year when it went public, institutions like Canadian pension funds are now buying SPACs.
The New York Stock Exchange in December. The number of companies listed on US stock exchanges rose by nearly 200 in the past year.
Courtney Crow / Nyse Handout / Shutterstock
Nearly 70% of this year’s IPO activity is in blank check companies, up from around 20% in 2019, as large increases in companies that recently merged with SPACs, such as sports betting firm DraftKings Inc.
and space tourism company Virgin Galactic Holdings Inc.
– inspire others to follow suit.
Competition between SPACs is another force that is driving startup valuations in public markets, bankers say. According to data provider SPAC Research, there are currently around 340 blank check companies looking to private companies to go public over the next two years, and many of them are pursuing similar businesses in busy sectors such as electric vehicles.
This creates a spate of SPAC mergers that are spurring the surge in the number of public companies. Mr. Ritter’s analysis does not include SPACs until they complete a merger to bring a private company public.
Stephan Scholl, CEO of employee benefits provider Alight Solutions, said closing a $ 7.3 billion deal in January when combined with a SPAC will accelerate the company’s business plan by several months. Many companies are now faced with large sums of money to adapt to the disruptions caused by the coronavirus pandemic.
“There is only one tremendous pace for innovation and transformation,” said Scholl.
Write to Amrith Ramkumar at firstname.lastname@example.org
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