Why are more and more publicly-held businesses going private? As the Journal explains, “Imagine: No Reg FD, no 10Ks, no Sarbox, no . . . “:
Sarbanes-Oxley has been the last straw for some, with its auditing and reporting requirements imposing major new costs, especially on smaller companies. This has already played a part in the remarkable slowdown in U.S. initial public offerings. Today’s largest IPOs are taking place mainly on foreign markets, away from the reach of U.S. regulators. New York Stock Exchange CEO John Thain understands this as well as anyone, which is one reason for his $20 billion EuroNext purchase.
The Securities and Exchange Commission is promising Sarbox reform, though its recent noises suggest it won’t exempt smaller companies from the rules. It might want to consider International Strategy & Investment Group data showing that 191 public companies–worth $146 billion in deal value–have gone private since June 30, 2002, shortly before Sarbox went into effect. Daniel Clifton, executive director of the American Shareholders Association, notes that the big spike came right after Sarbox’s implementation, yet the dollar amount of the deals didn’t rise equivalently–suggesting it was mainly smaller firms doing the exiting.
Mr. Clifton has also been studying the surging costs of regulation for public companies and has found that while in 1999 regulatory costs were about 4.8% of market capitalization, by 2002 the ratio was 9.9%. It has fallen some since. But these costs are a double whammy for smaller companies, which have fewer resources to devote to compliance costs. “It is also money that they can’t use for the investments that they need to make to grow,” says Mr. Clifton.
The relentless pressure of quarterly earnings is also a tyranny that some managers would prefer to avoid. Such targets have their uses in holding managers accountable. But even capable executives who fail to meet Wall Street expectations, or suffer an unexpected bump in the road, have to worry that they’ll get hit with shareholder suits for even a temporary stock-price dip. It may not be a coincidence that, according to a recent survey from Booz Allen Hamilton, 15.3% of CEOs at the world’s 2,500 largest public companies left office in 2005, many of them fleeing to private companies that can afford the luxury of a longer-run view.
Why should anyone care? All things being equal, it shouldn’t matter whether corporations are choosing private or public equity; the more choice, the better. But it’s troubling that the current trend is being driven as much by regulatory excess as market opportunity. U.S. capital markets have long been a national strength and a source of wealth creation. To the extent that broad shareholder ownership has also spread the wealth, it has been good for social mobility and boosted public support for free markets.
Whatever its other virtues, the private-equity boom is a signal that the regulatory pendulum has swung too far post-Enron. Congress might consider whether it really wants to turn U.S. public markets–long the envy of the world–into a second- or third-rate destination.