Weekly Update

A Surge in Companies Going Public Reverses Years of Decline

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Published July 30, 2021


One of the interesting features of the stock market over the past year has been the tremendous rise in companies going public. This is coming after a long period where companies seemed very much to prefer staying in private hands. That sentiment has changed dramatically and pretty quickly, giving investors a plethora of new companies to consider. Here is an article from the Wall Street Journal’s Amrith Ramkumar on the trend.

“The number of publicly traded companies is rising after a two-decade slump, a shift that highlights how businesses are clamoring to capitalize on the buoyant investor sentiment that has carried everything from stocks to bitcoin to record highs.

Last year’s increase in the number of companies listed on U.S. exchanges was the largest since the late-1990s dot-com bubble. The total is expected to surge even more this year as hundreds of companies tap everyday investors, according to data compiled by University of Florida finance professor Jay Ritter.

That marks a key change because the number of listed companies fell steadily for 20 years, declining from roughly 8,500 in 1997 to 4,500 in 2017, as the internet bubble burst, startups raised huge sums through venture-capital and private-equity firms, and mergers and acquisitions shrunk the pool of public companies. After edging higher in 2018 and 2019, the number of listed companies surged by nearly 200 last year during a record stretch in the market for initial public offerings.

Companies listed on major U.S. exchanges

Shares in companies such as dating-app operator Bumble Inc., online real-estate rental business Airbnb Inc. and digital food-delivery provider DoorDash Inc. soared recently after traditional IPOs. A torrid stretch in the market for special-purpose acquisition companies, or SPACs, is adding to the frenzy. Also called blank-check firms, SPACs are shell companies that list on an exchange with the sole purpose of acquiring a private company to take it public. The private company, typically a startup, then gets the SPAC’s place in the stock market.

Some companies, such as workplace-communications business Slack Technologies Inc., have even garnered lofty valuations by going public through direct listings. Those let companies sell shares directly to the public without going through banks; but prevent them from raising new money.

Regardless of how they go public, many companies are finding that the process accelerates their growth in a way that it hasn’t in decades. That now offsets the stricter regulatory and transparency requirements that come with being a listed company, executives say.

“It’s been a change for the brand,” said Dave Glazer, chief financial officer of data-mining company Palantir Technologies Inc. “We underestimated the value in going public.”

Companies market values since they have gone public

Palantir’s market value has swelled from $15 billion to $42 billion in the five months since the company’s direct listing, as the once-private business became a darling for traders on social-media platforms such as Reddit.

Two-hundred thirty companies have gone public so far this year and raised $78 billion through Wednesday, putting the IPO market on track to shatter last year’s record high of $168 billion, according to Dealogic.

And 120 companies valued at $1 billion or more have gone public through IPOs or SPACs since the end of June, nearly matching the total from the previous nine quarters, according to Mr. Ritter’s data. Many of those that have gone public in the past few years were so-called unicorn companies privately valued at $1 billion or more, such as ride-sharing company Uber and video-conferencing company Zoom.

Public companies valued at or above $1 billion

“The public markets have really become much more receptive,” said Scott Galit, chief executive of digital payments company Payoneer Inc., which recently reached a $3.3 billion deal to go public later this year by merging with a SPAC.

Before the agreement, Payoneer had considered going public for multiple years but preferred staying private. The ability to raise a large sum and make forward-looking projections about its business—something that isn’t allowed in a traditional IPO—made this the right time to go public, Mr. Galit said.

To some market watchers, the booming IPO market is part of a bubble in hot assets that will eventually burst. Companies that recently went public like Airbnb and Palantir were among the hardest hit during Thursday’s market swoon.

Still, startups are raising hefty sums through venture capital and private equity, and the froth in the stock market and popularity of SPACs are making public-market valuations attractive in a range of industries. That represents a tipping point that investors said for years would be key to increasing the number of companies available to amateur investors.

“We’re seeing that moment right now,” said Chinh Chu, a SPAC creator and former co-head of private equity at Blackstone Group adding that the variety of ways for companies to go public now makes doing so more compelling.

One of his SPACs took snack maker Utz Brands Inc. public last year, ending almost a century of family control. Shares have surged recently, giving the company a market value near $3.5 billion.

Investors and corporate executives have long debated whether it is better to be private or public. Tesla CEO Elon Musk ignited controversy about the topic in 2018, when he tweeted that the company had secured funding to be taken private, then reached a settlement with regulators to step down as chairman of Tesla’s board.

Long-term investors that previously might have avoided splashy startups and blank-check companies are now putting money in, adding to the momentum in public markets. Berkshire Hathaway Inc.’s Warren Buffett invested in data-warehousing company Snowflake Inc. last year when it went public, and institutions such as Canadian pension funds now buy SPACs.

Annual amount raised in initial public offerings

Nearly 70% of this year’s IPO activity is in blank-check firms, up from about 20% in 2019, as big gains in companies that recently merged with SPACs—such as sports-betting company DraftKings Inc. and space-tourism company Virgin Galactic Holdings Inc. —inspire others to follow suit.

Competition among SPACs is another force inflating startup valuations in public markets, bankers say. There are now about 340 blank-check companies seeking private firms to take public in the next two years, according to data provider SPAC Research, and many of them are pursuing similar deals in buzzy sectors such as electric vehicles.

That is fueling a spree of SPAC mergers that turbocharges the increase in the number of publicly traded companies. Mr. Ritter’s analysis doesn’t include SPACs until they complete a merger to take a private company public.

Stephan Scholl, CEO of employee benefits-provider Alight Solutions, said reaching a $7.3 billion deal in January to go public by combining with a SPAC will speed up the company’s business plan by several months, adding that many companies now need to raise large sums to adjust to the disruptions caused by the coronavirus pandemic.

“There’s just a huge pace of innovation and transformation coming forward,” Mr. Scholl said.”

Market Update

This was the big earnings week for investors with most of the market heavyweights reporting. Stocks began the week biding time until those announcements, though with a positive bias, to leave the S&P 500 higher by +0.2% and touching a closing record high. Stocks gave that all back Tuesday with a -0.5% dip. A rout in Chinese shares and a poor market reaction to earnings from UPS provided negative sentiment in Monday’s session. China has been cracking down on high-flying sectors of their stock market, seeking to gain more control over these companies. A flat session Wednesday for the broad market; but a losing one for the tech-heavy Nasdaq. Strength in Boeing, Pfizer, and Alphabet (Google) was offset by weakness in Apple and Microsoft as those company’s earnings failed to enthuse buyers. A +0.4% lift Thursday as surging consumer spending drove a jump in GDP. It was a broad-based rally with 9 of the market’s 11 sectors rising. However, large-cap tech shares continued to underperform, with Facebook falling on its earnings report. Friday brought a solid month of July to a close though investors pulled back -0.5% on the day. Earnings from Amazon and Caterpillar closed out the week’s big earnings announcements. Both stocks were sold on their earnings news.

The heavy week of corporate earnings resulted in muted selling for the market overall as some cyclical sectors made notable gains while the market’s largest stocks slid back on their reports. The S&P 500 (SPY) dipped a slight -0.32%. The Nasdaq 100 (QQQ) fell back -0.99%. Investors seemed to feel that the earnings of the index’s leading companies failed to warrant higher prices. Smallcap stocks (IWM) managed a +0.71% weekly gain on the strength of the push higher in cyclical shares. Interest rates and the Dollar both continued their downtrends.

Warm wishes and until next week.