Why companies are choosing not to be listed on the stock market
Is going private worth it?
The big turn-off
For one thing, there is enough money to be found elsewhere that companies don’t need to raise funds through a flotation. The world’s central banks have been increasing the money supply by slashing interest rates and “printing money” via quantitative easing (QE) since the financial crisis of 2007-09, but the latest round of QE in response to the pandemic has taken this to a whole new level. The current rate of money-supply expansion isfaster thanthe growthof economies. With lending rates so low, all this money is chasing investments. A stock-market listing begins to seem tedious when you can just borrow money very cheaply instead.
The second attraction with being private is regulation. Listed companies have becometightly regulatedon the back of corporate-governance disasters such asWorldCom,Enron,Galleon Group, and more recentlyWirecard. These constraintshave motivatedmany a company to skip public scrutiny by choosing to be private instead.
Another problem with public markets is how illogical they have become. Now that amateur traders can buy and sell shares easily through platforms like eToro and Robinhood, company valuations are at the mercy of their whims. Witness GameStop and other shares going through the roof earlier this year thanks to the Reddit groupWallStreetBets.
Amateur traders can also choose to automatically copy the trades of professionals or celebrity traders on a platform like eToro. One celebrity trader’s decisions in the market can mean that many people make the same trade, increasing volatility across hitherto unrelated assets.
Equally, tweets and memes can send valuations soaring or sinking. A good example wasElon Muskdriving up the price of dogecoin by making positive noises about the cryptocurrency on Twitter, including referring to himself as the #Dogefather. No wonder many company boards would rather keep away from such a volatile environment.
Is it worth it?
Sometimes when business leaders have decided to go private in the past, they have reversed this later.For example, Michael Delltook his computer company private in 2013 only to re-list it five years later. He had got the business into a stronger position that he felt would be recognized by the markets. Musk himselfhas musedabout taking Tesla private, having felt that the car company was being undervalued by the markets in the past, though now it’s a different story after the share price has surged in the past couple of years.
Neither is an improvement in a company’s market sentiment the only argument for staying listed. Greater transparency can be a selling point to investors, and selling shares to them is not the only way to take advantage of this. Companies can always opt for loans or bonds as alternatives – and hence limit their exposure to social media influencers and amateur traders.
And instead of living in fear of negative sentiment, companies might see it as a challenge and reflect on how to better respond. This might involve intensifying their public relations, advertising, and lobbying strategies to better explain the company to the outside world.
Company executives can still be hurt by big shifts in their share price because this is typically one of the performance indicators that determines what they get paid. But again, delisting isn’t the only way around this problem. Instead, companies can rethink their performance indicators – perhaps putting more emphasis on environmental performance, for example, in anticipation of the fact that regulations in this area are bound to increase.
One other potential medium-term advantage to being listed relates to regulation. The more companies that go private, the more likely that regulators will impose more rules on them to protect their investors and prevent fraud. They might even be tempted to increase taxes on private companies to make up for the lack of regulatory scrutiny. In this sense, the allure of going private might turn out to be fool’s gold.
Article byKarl Schmedders, Professor of Finance,International Institute for Management Development (IMD)andPatrick Reinmoeller, Professor of Strategy and Innovation,International Institute for Management Development (IMD)
This article is republished fromThe Conversationunder a Creative Commons license. Read theoriginal article.
Story byThe Conversation
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