We’re facing a biodiversity crisis. It’s a slow-moving ecological disaster that could have serious ramifications in the long run.
I’m not talking about what’s happening in the Earth’s jungles and forests, where we may be losing up to 1,000 species per year. This crisis is happening on Wall Street. Recent years have seen a significant diminishment in the number of publicly traded stocks. That’s a troubling trend that shows no sign of abating. Fewer stocks mean fewer choices for investors and more concentration of economic power in gigantic public or privately held companies.
The number of publicly traded companies in the U.S. fell from about 8,800 in 1997 to just 5,300 at the end of 2015. The famed Wilshire 5000 index, started in 1974 to measure the breadth of the market — small, mid and large cap stocks — now includes just 3,600 equities (down from an original 5,000). One example of how we continue to lose companies can be seen in the AT&T-Time Warner merger that was proposed in late October of last year. The merger of these two prominent companies, which it’s believed will take place by the end of 2017, would remove one more stock from the investment ecosystem.
Experts see many reasons for this ongoing extinction event. Heightened regulation, which surged in 2002 after the go-go years of the tech bubble, has made it difficult, expensive and overall less appealing to be a publicly traded company. As a result, initial public offerings are off dramatically. Just 114 companies went public in 2016, a 38 percent decrease from 2015. There has been an average 111 IPOs per year since 2001, just one-third the average number in the 1980s and 1990s.
Growing businesses are instead seeking other ways to get the funding they need to expand, including private equity investments. Thanks to the low interest rates in recent years, private equity firms can snap up promising young companies and keep them private until the PE firm decides to sell the company and take its profit. No surprise then that since 1990, 90 percent of the companies that have been exited by private equity firms have been sold to other companies rather than going public.
Luckily for those PE firms, we’re in a boom market for buyouts. Large companies are aggressively courting smaller firms with innovative technology or strong customer bases that offer an instant new revenue stream. In 2016, about $2.3 trillion in acquisitions took place, making this the third year in a row in which buyout activity topped $1 trillion.
These are troubling long-term trends for our country. While consolidation within an industry is a natural and often healthy thing, a drift toward monopoly or excessive concentration of market power should be avoided at all costs. A monopoly company offers some pluses for investors in the monopoly, but it's bad for consumers and the economy. That's what troubles me about the AT&T-Time Warner deal, which would see a major creator of entertainment content join with a major distributor of such material.
The poor customer service and exorbitant long-distance rates charged by the old monopoly AT&T is a classic example of how consumers are hurt by excessive market power. (Remember these moments: “You kids hurry up, get in here and talk to grandma on the phone! It’s long-distance! This call is costing a fortune!”) Similarly, in communities where one cable company competes only against DirecTV, we also see high prices and lackadaisical customer care.
Investors in an overly market-dominant company might benefit from the firm’s rock solid revenues, but there can be downsides to owning such stocks. Near-monopolies get complacent and lazy and are thus unlikely to show the sort of growth that comes from innovation, diversification and competition.
These monopolistic firms can also hurt the economy by stunting innovation they deem a threat to their business model. They do this by flexing their muscle with regulators or by simply acquiring the threatening competitor.
Wall Street watchdog groups also warn that as more companies go private, the American public is losing transparency with entities that may have great impact on their wallets — and lives.
How does the shrinking pool of stocks affect investors right now? It certainly reduces the asset purchase options for both financial planning professionals and personal investors. As an American, I hate anything that limits my choices or options. Yes, there are still plenty of stocks to choose from when building a well-diversified portfolio. But if the current trends continue over the next decade, investors could face real constraints.
I’m always skeptical of government regulation, which often overreaches and causes unintended negative consequences. (As noted above, well-intended regulation helped spur the current shrinkage of the market.) However, we need to stop our drift toward excessive consolidation of market power before it does real damage to our economy, investors and our country. Carefully considering all the economic consequences of the AT&T-Time Warner deal would be a great place to start protecting the market’s biodiversity.
Wes Moss has been the host of “Money Matters” on News 95.5 and AM 750 WSB in Atlanta for more than seven years now, and he does a live show from 9-11 a.m. Sundays. He is the chief investment strategist for Atlanta-based Capital Investment Advisors. For more information, go to wesmoss.com.
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