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The Weekly Economic & Market Recap
September 20, 2019
Datadog, the developer of an IT analytics platform, came public this week selling 24 million shares at $27 that valued the firm at $7.83 billion. With fewer companies today electing to come public due to burdensome listing requirements, increased regulatory scrutiny, and to avoid investor’s short-term mentality, it was encouraging to see the company opt for a public listing. It was especially encouraging since immediately before its IPO, Datadog had a $7 billion acquisition offer from Cisco. Large, deep-pocket-ed companies, especially in the IT space, have been acquiring non-public companies in attractive growth niches to augment their growth prospects or to defend their products from rival offerings. A lower number of corporate IPOs and acquisitions are just a couple of factors contributing to the broader concern of the shrinking U.S. equity market. Today, there are 3,600 publicly-listed companies in the U.S. compared to 8,000 in 1996. Another primary reason for the decline in the number of public companies is the availability of capital from private equity sources. Every single year since 2011, U.S. companies have bought more shares than they have issued. The aggregate share count in 2018 shrunk by roughly 3% due to the significant shift in the relative cost of debt versus equity. Even before the recent compression of rates over the last three months, Citigroup calculated that the cost of debt in the U.S. is 4.1% while the cost of equity is 6.7%. The shrinking of the U.S. public equity market has several disturbing consequences. First, companies today are much larger, and profits are increasingly becoming more concentrated. A study by the University of Arizona highlights this issue. In 2015, the top 200 companies by earnings accounted for all the profits in the stock market and the remaining 3,281 publicly-traded companies, in aggregate, lost money. The second issue is that as the equity opportunities shift toward private equity, where the average investor does not have access, retail and smaller investors are losing the ability to participate in early-stage growth companies. Regulators will eventually need to address this structural issue.
Click below to listen to this week's Peapack Private Wealth Management Market Report as heard on WCBS NewsRadio 880.