In a stock market dominated by giant companies, life can be tough for the small fry.
That’s essentially the pitch that an investment firm is making to one of the St. Louis area’s smaller public companies, Huttig Building Products of Town and Country.
Mill Road Capital, based in Greenwich, Connecticut, wants to buy Huttig for $73.9 million. Instead of the usual paeans to synergies and value creation, Mill Road argues that Huttig simply shouldn’t want to be public anymore.
Analysts pay little attention to “micro-cap” companies like Huttig, Mill Road argues. Institutional investors don’t like them because it’s too hard to buy a substantial position. The shareholders who do buy in are often short-term speculators hoping to make a quick buck.
Huttig says it is reviewing the offer, but the price — 65% above where its shares were trading before the offer — has to look attractive. If directors accept, they’ll join a long-term exodus of smaller companies from the stock market.
The number of publicly traded micro-cap companies, those valued at $200 million or less, is down 47% since 1997. The number of small-caps, the next-biggest size category, has dropped 59%.
Public companies are disappearing as regulatory costs have risen, and as the growth of private-equity funds has made it easier to raise capital without going public.
The 2002 Sarbanes-Oxley Act, in particular, often gets blamed for driving companies away from the public markets. Passed in the wake of the Enron and Worldcom scandals, it toughened reporting requirements and required senior executives to certify their firms’ financial statements.
“Increased regulations could be a particular problem for small companies,” said Todd Gormley, associate professor of finance at Washington University. “Per unit of revenue, it’s going to be a bigger cost for them.”
Gormley doesn’t buy all of Mill Road’s arguments, however. He’s not convinced that short-term speculators dominate micro-cap trading any more than they do for larger companies.
Michael Dell made the same argument when he took Dell Computer private in 2013, and Panera Bread’s former chief executive railed against short-termism after his company was acquired in 2017.
“I don’t buy it,” Gormley said. “It kind of assumes a certain degree of market inefficiency. If the investments Michael Dell wanted to make were long-term value creating, he should have been able to communicate that to shareholders.”
Should we care about the disappearance of small public companies? If the firms are able to raise capital from private investors, there’s no obvious loss of economic efficiency.
Private-equity investments, though, generally are not available in the typical investor’s 401(k) plan. If the most dynamic companies are reserved for the wealthy and well-connected, investing may seem both less promising and less fair.
For Joe Terril, who runs investment firm Terril & Co., the 3,000 remaining small- and micro-cap stocks provide plenty of room for diversification. “It’s not a problem yet, but the trend isn’t good,” Terril said. “In many cases they are the companies driving technology and productivity.”
It’s too early to declare an end to the exodus, but a recent uptick in initial public offerings has brought new small fries to the market. The number of micro-caps has risen 4% in the past year, even as the number of larger public companies continues to decline.
In St. Louis, appliance seller Goedeker’s made its IPO two weeks ago with a market value of just $53 million. In an era when some investors think small companies get no respect, it’s encouraging to see one that still has faith in the market.
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