IPO drought in US is real

Dhaka,  Wed,  28 June 2017
Published : 13 May 2017, 19:36:52
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Stock market

IPO drought in US is real

The Securities and Exchange Commission’s (SEC’s) power to bring positive change seems quite limited. The small companies that want to see go public are not coming back, according to a global media report Saturday.

Certainly, the drought is real: there were only 74 IPOs in the US last year compared with 206 in 2014 and more than 600 20 years ago, according to data of the University of Florida. 

The dwindling numbers of public companies -- down from more than 9,000 20 years ago to fewer than 6,000 today -- is caused more by an increase in mergers. 

This trend towards gigantism makes life harder for fledgling rivals, especially in the technology sector, which traditionally accounts for 40 per cent of IPOs and which can now boast -- or lament -- Apple, Alphabet, Microsoft, Amazon and Facebook as the top five biggest companies in the S&P 500. 

It is easier to be acquired by one of the giants than battle against them as a public company.

Even those rich unicorns with a chance of joining the super league are not going to market until they have proved it. Those who mourn the state of the IPO market often cite Cisco going public in 1990 with less than $100m of revenues. That was indeed wonderful for those who bought at the IPO and saw it become the first company to reach $500bn of market capitalisation. 

It was, in retrospect, less wonderful for the early backers who could have done even better had they held out until Cisco was more mature and able to command a premium valuation. 

Today, with the help of a vast influx of sovereign wealth money and mutual funds not wanting to overpay at IPO, companies can delay until they are big enough to command the sort of valuation that Snap achieved this year: $20bn.

 
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