Robert Reich and IPOs

Robert Reich had an interesting piece on NPR Marketplace today. You can read the transcript or listen to it on the NPR site. I think Reich is a scary smart guy. But I can probably count on one hand the number of times I’ve agreed with his conclusions.

The net-net of his piece was that the stock market run-up over the past few years is because of PE and buy-backs. Specifically, at an ultra-macro level, the PE folks and corporations via buy-backs are taking public companies out of play, and thus reducing the amount of stock instruments available to be purchased.

Last year, corporate buybacks and leveraged buyouts totaled about $600 billion. That was roughly 3.5 percent of the whole value of the American stock market. At the rate buybacks and buyouts are going this year, the total is going to be close to about $900 billion. That’s another 4 .5 percent of U.S. market capitalization taken out of circulation.

Too much money pursuing too few stocks means higher stock prices. On the face of it, the argument seems to not be illogical.

But what occurred to me after I thought about this for a minute was that if the problem is simply supply and demand for fungible instruments, why hasn’t the IPO market gone berzerk? Here’s a quick stat from Hoovers:


Obviously, these numbers are relatively flat. Also note that these are pricings, not issuances. Furthermore, if the US stock markets represents $20T in value (Reich’s 4.5% number being $900B) then the IPOs represent nothing more than a rounding error – maybe, at the outside, one quarter of one percent of the value of the US stock markets.

He’s smarter than me, but I’m not buying his argument on this one. Anyone care to tell me why I’m wrong?


  1. nabeel hyatt

    the IPO market is depressed because of the new coast and obligations (onerous I would contend) with going public. This is also one element (although lesser so) at play in the dynamic for buybacks.

    It should be not be surprising that as we make being public more difficult, less firms will IPO and less will hold their stock there. That this creates higher demand for the remaining shares and firms that can withstand it is an interesting byproduct.

  2. Shawn

    No argument on the individual company angle: buy-backs increase share price. But he’s claiming the index run-ups are being fueled at a macro level across the entire market (or at least the index components). Are they all doing buy-backs? Are they all being taken private by PE firms?

  3. Ray

    For the large insurance company I work at, I have seen very tight tracking between stock buy backs and stock price. Early on, you could tell from the stock price when buy backs were on hold and when they weren’t (for example, in preparing for a major acquisition).

    When a $60B market cap company is buying back $3-4B in shares is no trivial. As earnings grow, the buy back amount continues to grow as well (you can draw your own curves for when the company goes private)

    Interesting dynamic is the more buy backs occur, the more attractive these companies become to PE firms (essentially, earnings have already been used to take the companies closer to private)

    YHOO is clearly being propped up with buybacks, as is eBay. More generally, it seems like earnings driven from non-US activity is driving the privitization of major US firms.

    I think secretary munchkin is right.

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