laddie chairmen: The Changing Universe of Public Companies ? Portfolio Investing ...

Thursday, October 18, 2012

The Changing Universe of Public Companies ? Portfolio Investing ...

A new article in Knowledge@Wharton highlights a body of research that suggests that the universe of public companies is very different than in the past.? There are, for example, 44% fewer publicly-listed companies on U.S. exchanges than there were only fifteen years ago.? The Wharton article is a review of a range of work, including both experts who believe that we are seeing a decline in the role and significance of public firms and those who conclude that we are seeing a natural part of the business cycle.? In the late 90?s, it seemed as though every small company, with or without a proven product of earnings, was rushing to cash in on IPO fever.? Many of these companies subsequently failed.? Today, after a decade of weak market performance and with individual investors increasingly skeptical of the stock market, it is not surprising that fewer firms are going public.? The Wharton article also cites increased oversight and regulation of public companies as encouraging firms to remain private.

One of the primary sources in the Wharton article is a 2011 paper written by Gerald Davis, a professor in the business school at the University of Michigan.? This paper documents the major changes in the U.S. economy as a whole, the governance of public firms, and the emergence of 401(k) plans.? Consider the following excerpt:

During the first decade of the twenty-first century, manufacturing employment in the United States declined by one-third, and by March 2009, more Americans were unemployed than were employed in manufacturing. This shift is reflected in the character of the largest employers. In 1960, the five largest private employers in the United States consisted of AT&T and four vertically integrated manufacturers?GM, Ford, GE, and U.S. Steel. In 1980, U.S. Steel had been replaced in the top five by Sears. By 2010, however, nine of the twelve largest employers were retailers, and none were manufacturers. Indeed, Walmart alone employed as many Americans as the twenty largest manufacturers combined.? Whereas large manufacturers characteristically have relatively low turnover, long employee tenures (eight years on average in auto manufacturing), and high wages (over $27 per hour for auto workers), retailers have high turnover (an estimated 40% annually at Walmart), low tenure (three years on average), and low wages ($9.33 per hour in ?general merchandise retailing?).

Davis explores a number of other specific examples of how the operations of publicly-listed firms have changed, including the degree to which U.S.-listed companies with substantial stock market capitalizations often have relatively few employees in the United States.

Collectively, Apple (with 34,300 employees), Google (19,835), Intel (79,800), Amazon.com (24,300), Cisco (65,550), and Microsoft (93,000) employed only 316,785 workers, of which 215,485 were employed in the United States in 2010. For comparison purposes, grocery chain Kroger had 334,000 workers in the United States. Somewhat more pointedly, the United States lost 598,000 net jobs in January 2009 alone?the equivalent of 17.43 Apples.

To me, these types of changes seem far more important than the specific number of public firms.? Given shifts of these magnitudes in the characteristics of the largest U.S. firms, what are the implications?? Davis concludes that we are at some kind of tipping point with regard to the role of public corporations:

Half of [U.S.] public corporations have disappeared through multiple rounds of bubbles, scandals, and corporate failures. The first ten years of the twenty first century represented the single worst period of stock market performance in U.S. history. The S&P 500 closed the first trading day of 2000 at $1,455.22. On January 1, 2010, it stood at $1,115.10, having declined by almost one-quarter over the decade. A generation that had hoped to retire on increased home values and an ever-rising stock market would require other plans. Not only is an economy organized around public corporations an increasingly risky place for workers, it is not a safe bet even for shareholders.

The Wharton review article tends to frame the changing landscape of public companies in the U.S. less ominously, but the issues raised by Davis are certainly significant.? U.S. listed firms have historically provided substantial numbers of well-paying jobs and their employees have increasingly been shifted into retirement plans in which they invested heavily in mutual funds that hold U.S. stocks.? As these companies reduce their employee headcounts, there must inevitably be fewer well-paid 401(k) plan participants.

On one hand, a shrinking population of well-paid middle-class U.S. workers seems likely to put downward pressure on stock prices as a whole.? If people cannot afford to save for retirement, they will not be investing in stocks.? On the other hand, increasing profits will accrue to shareholders of U.S.-based companies that seek out the cheapest global labor supplies.? Both the universe of companies and the population of Americans who invest are changing.? The ultimate role of US corporations in our economic future is unclear.