During their latest episode of the VALUE: After Hours Podcast, Hasson, Taylor, and Carlisle discussed Factors Influencing The Success And Longevity Of Public Companies. Here’s an excerpt from the episode:
Tobias: JT, do you want to do your veggies before we run out of time?
Jake: [laughs] So, this is from Michael Mauboussin’s most recent whitepaper, which is called Birth, Death, and Wealth Creation. And effectively, this is an actuarial treatment of public companies. So, there’s some interesting numbers that fall out of this, and I will share with you, so you don’t have to read it if you don’t want to. So, of the firms in the US with 20 or more employees, only 1% of them are public. But they’re the biggest and most important. The combined sales of the top 100 public companies are seven times those of the top 100 private companies in 2021. So, while it is a minority of companies, it is the most important tend to be in the public sphere.
Now, what’s weird is that there’s nearly 3,100 more listed companies in the US at the peak in 1996 compared to today. So, there’s way less public companies than there used to be. So, there have been different periods of time where there have been booms and bust in company births. When we say birth, it doesn’t mean the founding of a company. It means like a company going public. So, you have different periods of IPOs when they were popular. For instance, 1969 alone, 780 IPOs, which is, that’s actually 18% of the total of public companies today. So, it’s a huge. There are only 39 IPOs last year.
In 2005 to 2007, there were 124 SPACs, which is another way that companies can be “born.” 861 in 2020 and 2021, which was actually two-thirds of the total ever issued occurred in those two years. But already 209 of the 613 SPACs from 2021 have already been liquidated. So, that gives you a little sense. So, there’s actually a lot less IPOs that are happening, and a lot of it has to do with the cost of regulation, like, regulatory requirements of Sarbanes–Oxley, loss of confidentiality, potentially media scrutiny, IR hassles, there’s a lot of reasons to not be a public company, actually. But on the plus side, you get liquidity for your stock-based compensation, potentially. Maybe cheaper access to capital. That might be one of the reasons why there’s less public companies today is that there’s more private financing available, just in general for all companies. So, it’s made going public less necessary than it used to be.
Also, what’s happening is that smaller businesses are finding it probably increasingly attractive to sell themselves to bigger businesses as opposed to IPOing and going through all of that hassle. So, in general, you just end up with less companies that are out there. Companies are also waiting a lot longer to go public. So, 1976 to 2000, the median age was 7.9 years. Since 2000 to today, it’s nine and a half years. So, companies are older. They’re also bigger. So, you compare Amazon’s IPO was $750 million at launch when it went public in 1997, and it’s $1.4 trillion recently. It was only three years old when it went IPO. So, essentially, all of the wealth creation that occurred for Amazon has happened as a public company. Compare that to Meta, whose market cap was $133 billion when it went public in 2012-
Jake: -eight years after its founding. And now it’s at, I don’t know, let’s call it like $770 billion. So, basically, an entire 20% of the company’s wealth had occurred as it was a private company before it went public. There’s other examples that are even more extreme of most of the wealth being created as a private company, and then going public, and then there’s just not as much meat left on the bone. How about longevity? Public companies have a half-life of about 10 years. So, for every having of population, it’s about 10 years’ worth. So, the average company in the S&P 500, the average age was 12 years in 1996. Today, it’s 20 years. And the average market cap in 1996 was $21 billion. And today, it’s $78 billion. So, they’re older and they’re bigger today.
Tobias: What index was that? Sorry?
Jake: S&P 500. And so, how does a company get out of the population? This is like “death.” So, you have mergers and acquisitions, which actually explains more than half of how the companies are disappearing out of public domain. You have also the private takeouts. This is just happening a lot more than it used to. I think everyone knows, maybe at this point, you want to be the one who’s typically you want to be the one who was acquired, not the acquiree. The median premium is 29% for the person who’s acquired, and the average is closer to 45%. And then of course, you can also have a delisting for cause, which is bankruptcy or failing to meet exchange requirements. That’s about 39% of the “deaths.”
Tobias: I’m surprised that it’s as many as that. That’s a lot.
Jake: Yeah, it is. I think there’s a lot of microcaps and stuff that happens to a little bit more regularly. I don’t know guys ever seen this before, but the New York Stock Exchange requires a stock to sustain a price of at least one dollar, have 400 or more shareholders, and maintain a market capitalization of no less than $15 million. So, I’ve never seen those numbers before, but that’s little trivia for you. And then there’s 2% of the companies that just delist voluntarily, because they decide it’s too expensive to stay public or whatever. And microcaps have been the source of most of this extinction. So, in 1996, microcaps were 56% of the total companies that were public. Today, it’s down to 33%.
Next thing to talk about is like hot versus cold markets. So, in hot markets, there tends to be a high volume of deals. There’s big gains on the first day of trading. So, you think like, in 1999, 476 IPOs. The average return on the first day was 57%.
Kyler: Oh. [laughs]
Jake: I know. It’s crazy, huh? And then another 380 in 2000 with a return of 45% on the first day.
Jake: Compare that to cold, which was no surprise, 2001, the next year, 80 IPOs, average gain of 8%. And then only 66 IPOs in 2002, average return of 5%. So, also, this probably shouldn’t be a big surprise, but the delisting rate is much higher for companies that come public in a hot market than during a cold market. So, one study found that 41% of the companies that listed in a hot market had delisted within five years. [chuckles] So, maybe you’re winning early in this hot market, but it might come back to bite you, which is what we would expect right?
Tobias: [crosstalk] Trading in sardines.
Jake: A little bit, right? So, let’s see. Of course, we should talk about this Hendrik Bessembinder study, where he studied 28,000 public companies since 1996, and he defined wealth creation as anything that was over one month T bill results. 60% of the sample of his 28,000 destroyed $9.1 trillion in value. And then the other 40% created $64 trillion in value. So, you end up of the net $55 trillion that was created, $50 trillion was attributed just to 2% of that sample. So, we have a very power law distributed outcomes here. And the top three, which were Apple, Microsoft, and ExxonMobil, added $6 trillion all by themselves, which was 12% of that total. So, just three companies did 12% of the work.
So, what about outside of the US? Similar results were found in other studies. But of course, it’s not an easy ride for these huge wealth creation vehicles. Apple had three drawdowns over 70% over the course of that time period. Amazon was down 91% in the dotcom bust. So, good luck being able to ride in the entirety of one of these things if you can find it. Now, interestingly enough, there’s a little bit of recency bias, probably for a lot of us. It’s not just big tech companies that are in this. In fact, they’re actually underrepresented in the top wealth creation population and overrepresented were healthcare and energy, which might surprise people.
Of course, there’s financial metrics that they found that correlated with this wealth outcome creation. It’d be what you’d expect, right? Increases in net income, internally generated assets and sales growth, rising return on assets above average R&D spend, which is actually maybe a little surprising, and then cash accumulation. So, you have a business that’s working, you’re reinvesting in it, growing the base.
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