The number of companies with shares listed on U.S. stock exchanges increased last year compared to 2012, which is the first annual increase in the number of publicly traded companies in the U.S. since 1997, according to information from the World Federation of Exchanges. As reflected in a February 5, 2014 Wall Street Journal article entitled “U.S. Public Companies Rise Again” (here), the number of companies with shares listed in the U.S. has been declining since “the go-go days of the Internet boom,” so the 2013 increase represents something of an exception to a longer term trend. The question is whether it represents a one-time anomaly or a directional change.
According to the data from the WFE, there were 5,008 companies listed on the U.S. exchanges as of year-end 2013, representing an increase of 92 companies from the 2012 year-end tally of 4,916. The 2012 figure represented the smallest number of public companies since 1991. The number of public companies peaked at 8,884 in 1997. In other words, the number of companies with U.S. listings declined 3,968 (44%) between 1997 and 2012.
Though the increase in the number of companies in 2013 was slight (representing an increase of about 1.87%), it is nevertheless significant. The increase occurred because the number of new listing exceeded the number of delistings for the first time in many years. The number of new listings reflects a vibrant market for IPOs. According to the Journal article, there were 230 IPOs in 2013, which was the highest number of IPOs since 2007. The increased number of IPOs during 2013 was due to soaring stock indices; the IPO on-ramp provisions of the JOBS Act; and a generally healthier economy.
The reduced number of delistings is also in part a reflection of a healthier economy, meaning that fewer companies are going bankrupt. However, the reduced number of delistings in 2013 was also a reflection of reduced M&A activity compared to recent years. In the recent analysis of 2013 securities class action litigation filings (here, see Figure 11), Cornerstone Research showed that between 1998 and 2012, the number of M&A deals “greatly exceeded” the number of IPOs each year, which goes a long way toward explaining the sharp drop in the number of U.S. listed companies during that period. Obviously, the dot-com crash and the credit crisis took out quite a number of U.S. listed companies as well.
The Journal article identifies another factor that may have contributed to the decline in the number of publicly traded companies between 1998 and 2012, or at least acted as a restraint on possible growth. That is, “emerging markets such as China lured more companies to their exchanges.” Between 2000 and 2012, the U.S. averaged just 177 listings annually, while the number of listings in China nearly tripled to more than 4,000. The Journal suggests optimistically that the U.S. markets have “at least temporarily stanched the bleeding from listings lost to foreign exchanges.” The article notes that at least during 2013 non-U.S. companies showed a renewed interest in listing in the U.S., citing several examples of non-U.S. companies that listed their shares on U.S. companies during 2013.
The more interesting question is whether the growth in the number of publicly traded companies during 2013 represents a directional shift or whether it was just a blip in the larger trend toward fewer U.S.-listed companies. The market volatility in the early weeks of 2014 could mean that prospective IPOs could be facing a less predictable environment. Whether or not this will reduce the number of completed IPOs of course remains to be seen, but it sure doesn’t help. Another factor that will affect the number of U.S. IPOs is the question whether the U.S. exchanges will continue to be able to attract non-U.S. companies to list their shares here.
Another dynamic that could significantly affect whether or not the growth in the number of publicly traded companies will continue in 2014 is the level of M&A activity. 2013 was the first year in many years where the number of IPOs exceeded the number of M&A transactions. However, M&A activity could pick up in 2014. According to the Journal, U.S. companies are “sitting on vast piles of cash, giving them ammunition for takeovers that could swallow up public companies. “ Private equity firms are also reloading with multimillion dollar funds that “could also remove more companies from the ranks of listed names.”
Because of all the considerations, there are a number of possible outcomes. For example, the trend toward shrinking numbers of publicly traded companies could resume. Alternatively, the number of public companies could stabilize at or about current levels. Or the number of companies listed in the U.S. could increase again; however, it seems likely that even if there were to be an increase in the number of U.S. public companies, the increase would be relatively modest. As the Journal article puts it, “a return to the peak years of the 1990s isn’t expected.”
A number of important consequences flow from the reduced numbers of public companies over recent years. The first is that fewer companies in general means that the likelihood that any particular company will be sued is greater than is it was a couple of decades ago. As NERA Economic Consultants put it in their 2013 analysis of securities class action lawsuit filings (here), the decline in the number of publicly traded companies since 1998 means that “an average company listed in the U.S. was 83% more likely to be the target of a securities class action in 2013 than in the first five years after the passage of the PSLRA.”
The decline in the number of U.S. listed publicly traded companies also has important implications for the U.S public company D&O insurance marketplace. It is not just that there the universe of buyers is 44% smaller than it was in the late 90s. During that same time period, the number of D&O carriers has been increasing, as has their available underwriting capacity. In other words, an increased numbers of players are chasing premiums from a much smaller pool of insurance buyers. Some of the effects of this dynamic have been offset because many insurance buyers now buy a lot more insurance than they used to. But the inevitable result of these circumstances is that D&O insurance pricing has been under pressure, as will happen when supply exceeds demand.
While the primary D&O insurers have been able to resist these forces over the last 24 months or so (in part because of their claimed losses based on the surge in M&A litigation), overall and taking excess pricing into account, the increased numbers of D&O carriers and the reduced numbers of public companies has translated into downward pressure on pricing over time.
The slight increase in the number of publicly traded companies in 2013 is a positive note, although the upswing in IPOs has also meant an increase in the number of securities suits involving IPO companies as well. And as positive as the increase in the number of listed companies during 2013 may be, the increase is not yet large enough to represent a sufficiently larger pool of insurance buyers to shift the demand/supply ratio.
In any event, it is important to keep the changing numbers of public companies in mind. The fact that the number of public companies is more than 40% smaller than it was in 1998 is a very important consideration that is too often overlooked. All too often, discussions of litigation rates and other key trends continue as if the number of companies were constant. The public company D&O insurance community needs to keep the reduced numbers of U.S. public companies in mind when they think about their marketplace.
Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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