A day before their April 4 meeting with President Donald Trump and members of Congress, executives from the New York Stock Exchange stopped by Austin to meet with political and business leaders in Texas.
During their visit, NYSE President Tom Farley and John Tuttle, the exchange’s global head of listings, spoke with the American-Statesman. They discussed a range of issues, including the NYSE’s role as liaison between business and government, the move by Dell Technologies to go (mostly) private and the current state of IPO activity.
The conversation below has been edited for clarity and length:
American-Statesman: We’re on the front edge of the new Trump administration, but there’s the expectation we’ll see some tax and regulatory relief for businesses. How might that affect IPO and market activity?
TUTTLE: There’s a renewed sense of optimism, it seems like. … During the campaign, everybody focused on the negative things that each candidate was saying. But once you had some clarity about who won the general election and what the political landscape – or at least the regulatory and economic landscape – might look like for the next four years, you started to see people focus in on the economic messages and the positive things, like corporate tax reform, like regulatory review.
FARLEY: The single issue that our CEOs care most about and agree the most on is taxes. That’s been the case for three or four years, as long as I’ve been in the seat. There’s a view that we have the highest tax rates of (developed) countries … and that we need to lower the rate. So that will be my message, paraphrased: Let’s not get hung up in the details and let’s not see another failed effort at reform. Let’s just, at a minimum, lower our corporate income tax rates so we can be more competitive with the rest of the world.
TUTTLE: And I think it’s that renewed sense of optimism about the potential for corporate tax reform, coupled with indexes and asset prices flirting with record highs, interest rates remaining fairly low and stable…and low volatility that has allowed the IPO window to re-open. Last year at this time, if we were having this conversation, we would’ve had zero IPOs in the first quarter. This year we’re off to a strong start and have had … 18 for north of $9 billion.
Snap was a big headline grabber this year. Do the big ones like that leave less oxygen for smaller IPOs?
FARLEY: Yes. By and large, with Alibaba and Snap, you won’t see other IPOs that week. But that’s all. People don’t like to be on the road with Snap. You’re going in with your oil-and-gas production company, and you’re saying, ‘Hey, we bought it at $20,000 an acre. We think it’s worth $20,500, and we’re going to manage it well.’ Snap’s coming in and going, ‘I’ve gone from zero to 158 million users in five years! My revenue is going like this!’ So people don’t like to be in that comparison.
Austin has a strong tech scene but one that’s different from Silicon Valley. It leans more toward acquisitions than public offerings. How critical are IPOs for startup activity?
TUTTLE: The statistic’s a few years old, maybe five or six years old by the (National Venture Capital Association) … but something like 90 percent of job growth in venture-backed companies comes post-IPO. That’s companies staffing up, creating jobs, and those people go on to create their own companies and really create an ecosystem in a given area.
FARLEY: That’s a new form of financing, and it’s relatively easier to access capital once you’re a public company. And when you’re accessing more capital you can create more jobs. The issue that Austin has – it’s the same issue New York has, quite frankly – is when somebody really sharp has an idea to start a company or even has started a company and is having some success but they need access to smart capital in the tech world, the first thing the investors do, inevitably, is say, ‘You need to move to Silicon Valley.’ … There is some crack in the facade, and I think there’s opportunity for Austin to continue to flourish.
I don’t think I’d even want to be in the Valley. The competition for technical talent is so intense.
We see the result of that here, where we have a lot of outposts from the big Silicon Valley firms but fewer big, home-grown names.
FARLEY: Dell ain’t a bad one to have. (Laughs)
Speaking of which, how do you view these go-private moves, especially one the size of Dell? What’s your take on companies pulling back off public markets?
FARLEY: We’ve been around 225 years, so we never urge somebody to go public this year or that. I don’t even offer my advice unless really strongly asked for it, because people assume we’re biased. Meanwhile, if Uber goes public this year or next year, it’s irrelevant. It’s a drop in the bucket. In fact, we make very little money, as a business matter, on new listings. We make it off the existing 2,500 companies we have. So when a company like Dell goes private, it’s really and truly not a concern and we assume that it’s for all the right reasons. That said, someday they may re-approach the public markets, so we spend a lot of time with companies like Dell. Michael (Dell) is a friend of mine; I admire the heck out of him… And our fervent hope is that if he ever chooses to go public again, he’d choose to do it on the New York Stock Exchange.
You have a range of company sizes on the NYSE, of course. I imagine there’s benefit in that diversity, but from your perspective are larger IPOs more useful?
FARLEY: We have an issue in this country – not necessarily calling it a concerning issue or a bad issue, but it’s an issue. The number of public companies is down by half over 20 years. However, the total market cap is up by 3x. Therefore, the average market cap is up by 6x. … So the public markets are clearly working for the Dells of the world … and that’s why at some point it may make sense for them to go public. The fixed costs have creeped up in this country, for better or for worse… So for the smaller companies, it’s just more difficult to be a public company. It’s one of the things the administration has talked quite a bit about — capital formation, particularly for small- to mid-sized companies. That’s another thing we’re eager to talk to them about… and we have some specific ideas and recommendations about how to kind of lower the bar, the fixed costs part, particularly for those small to midsize companies.
The JOBS Act and crowdfunding – there hasn’t been a huge rush on that since the federal rules passed, but is that anything you have to think much about?
TUTTLE: From an IPO standpoint, we don’t necessarily see it as a direct threat to us because it’s a couple people looking to start a business. I also think it’s interesting—look, there was a gap and somebody was innovative and came up with a way to fill that gap. So that’s interesting to us, but how you regulate that and whether, once you put regulations around it, if the juice is worth the squeeze when it comes to the crowdfunding remains to be seen.
FARLEY: We have this other issue where we’re the New York Stock Exchange, and that brand stands for a lot. And one of the things it stands for is a nationally regulated securities exchange. If companies are listed on the NYSE, they’re well-run, they’re well-governed. We hold ourselves out, whether you’re the grandmother in Peoria or the sophisticated investor on Wall Street, you’re going to get a certain sort of quality of listed companies. Therefore, we have spent relatively less time on venture funding initiatives — not because we think they are not a good thing, it’s just not what we’ve done historically. So we’ve spent relatively less time on it.
Let me reframe that a bit. If we see an aggregate level of activity there, could crowdfunding become a half step toward an IPO with a larger, established market like the NYSE?
FARLEY: It really hasn’t yet been proven out that it’s a natural on-ramp to being a public company. It can be, but when you look at just the traditional private markets for funding – in other words, venture capitalists for technology, for example – funding is not the issue, really. So a venture exchange and crowdfunding, while interesting and maybe helpful in certain circumstances, doesn’t feel like, in and of itself, a maturation of that will create a kind of boomlet of new IPOs and public companies.
TUTTLE: It fills a gap. It’s great. It’s helping create jobs and grow businesses. But at the end of the day these are tiny companies. Same thing with incubators. People say, ‘Does the New York Stock Exchange do an incubator?’ They’re great. We’re not opposed to them. We support people doing them. But really .001 percent of all companies in an incubator will end up becoming a publicly traded company. Not to say that an incubator is a bad thing, it’s just that there’s not a natural path to the stock market.
We often identify an IPO with high-tech, but obviously you have a spectrum of industries on the exchange. What sectors are you seeing interesting activity in these days?
FARLEY: Apropos of a meeting here in Texas, oil and gas. Who would’ve thought a year ago that would be our answer – both oil-and-gas exploration and production, as well as oil-and-gas and oilfield services? Very hot. We have literally dozens of companies that have told us they are going to IPO on the New York Stock Exchange and are kind of awaiting the right moment. And then we’ve had a number of successful IPOs already this year …That’s our hottest sector.
TUTTLE: Think of all the traditional reasons why a company looks to go public. While there is this pool of longer-term capital, I guess you could say, with some of these funds like Fidelity or a T. Rowe, there are a lot of technology companies … where you have young people in there that, when they joined the company, they were 23-, 24-years old. They could take the shares. They could take the options, take the equity in the company. They didn’t need the cash. Now, it’s 10 years later, they’re starting families. They want to move out of their one-bedroom apartment into their first home. So they need that liquidity event, and to keep great talent you may need to accelerate your IPO plans.
That’s what we tend to see in Austin – the push toward a liquidity event, but not necessarily to go public and build a lasting, growing public company. It’s often liquidity for its own sake.
FARLEY: Yeah, I don’t know what the numbers are, and you would know the anecdotal feel for Austin. But that is what’s going on all throughout the country and the world. Interest rates are so low it’s easy to lever up and do an M&A transaction. If you’re a private equity firm, you say… ‘I’m going to take (XYZ) public. I’m either going to sell out over five years, because you can’t sell out all at once or you’d drive the stock to zero, or I could just sell the while thing. I could sell 100 percent of it.’ … But as rates go up, you will see IPOs come back.
There’s always that sort of equilibrium with rates and where people put their money, but it’s interesting how rates going up would benefit IPO activity…
FARLEY: It would, for sure. I can’t tell you how many companies we had get ready for their IPO and in some cases the night before the IPO announce, ‘We’re selling the whole thing.’ Inevitably, they sell to somebody who went and raised a bunch of low-interest debt and put it together.
STATESMAN SUNDAY INTERVIEW
This is one in an occasional series of in-depth interviews with people who impact the Central Texas business community. To suggest someone for the Statesman Sunday Interview, email business editor Barry Harrell at email@example.com.