The proposed AT&T – Time Warner merger has me thinking about bees.
In recent years there’s been much concern over the plight of the honeybee. The bee population has dropped precipitously of late to the detriment of the agriculture industry and Mother Nature, both of which count on the honeybee to help pollinate plants. Fewer bees means less diversity and, potentially, less wealth.
Recent years have also seen a significant diminishment in the number of publicly traded stocks. That’s a troubling trend that shows no sign of abating. Fewer stocks means fewer choices for investors and more concentration of economic power in large companies.
In 1997 there were about 8,800 publicly traded companies in the US.
By the end of 2015, that number had tumbled to just 5,300. The famous Wilshire 5000 index, which was created 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 5000). The AT&T- TW deal would, of course, remove one more stock from the marketplace.
There are several reasons for this shrinkage. Increased regulation, which saw a particular uptick in 2002, has made it difficult, expensive and generally less attractive to be a publicly traded company. As a result, initial public offerings are off dramatically. Just 71 companies have gone public this year, a 47% decrease from the same point in 2015. There has been an average 111 IPOs per year since 2001, just one-third the average number in the 1980s and 1990’s.
Businesses are instead finding other ways to get the funding they need to grow, including private equity investments. Low-interest rates have made it possible for private equity firms to snap up promising young companies and keep them private until the PE firm decides to cash out. It’s no wonder that since 1990, 90% of the companies that have been exited by private equity firms have been sold to other companies rather than going public.
And it’s a hot market for buyouts. Large companies are on the hunt for smaller firms with innovative technology or strong customer bases that offer an instant new revenue stream. So far in 2016, about $1.1 trillion in acquisitions have been proposed, 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, we don’t want to drift towards monopoly or excessive concentration of market power. While a monopoly offers some pluses for investors in the monopoly company, 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 service and sky-high rates charged by the old monopoly AT&T is a classic example of how consumers are hurt by excessive market power. Similarly, in areas where one cable company competes only against DirecTV, we also see high prices and lackadaisical customer care. (I’m looking at you, Comcast).
While investors in an excessively dominant company might benefit from the firm’s almost guaranteed revenues, there are downsides. Near-monopolies get content and lazy and are thus unlikely to show the sort of growth that comes from innovation and diversification.
Overly large firms can also hurt the economy by stifling innovation they deem a threat to their markets. They do this by flexing their muscle with regulators or by simply acquiring the threatening competitor.
So, how does all of this affect investors right now? The shrinking stock pool certainly limits the investment options for both professional and personal investors. Being an American, I hate anything that limits my choices or options to diversify. There are currently still plenty of stocks to choose from when building a well-diversified portfolio. But if the current trends continue for the next many years, investors could face serious constraints.
I’m always wary of government regulation, which has a tendency to go too far and cause unintended negative consequences. But we need to stop our drift towards excessive consolidation of market power before it does tremendous damage to the economy, consumers and our country. Taking a long, hard look at the AT&T – Time Warner deal would be a great place to start.