Speaker Illuminates the IPO Landscape

The environment for initial public offerings has changed radically in the last two decades, Alec Ellison told students. In the years before the tech bubble of the late 1990s, there was an average of 115 technology IPOs a year; since the bubble, the average has been 51. "What happened to cause this collapse?" he asked.

Ellison, a 1984 graduate of Yale College, is vice chairman of the independent investment bank Jefferies & Company and chairman of technology investment banking there. He spoke on March 27 at Yale SOM.

Ellison led an interactive discussion on the shift in the markets, with students suggesting factors that may have affected the number of IPOs. The Sarbanes-Oxley law, he said, "makes a lot of CEOs not want to be a part of public markets." Another important change is the growth in acquisitions by large technology companies. Decimalization—the shift from pricing stocks in fractions to pricing them in dollars and cents—cut into trading profits. The 2000 Regulation Fair Disclosure—"Reg FD"—changed the role of analysts and the 2003 settlement with the investment banks over conflicts of interests altered for the worse the economics of bringing a company public.

"You throw it all together and your entire ecosystem has changed, probably irrevocably," Ellison said. "Think of the implication of this if I'm an investor or an entrepreneur. The payoff is further off in the future. You've increased the cost of capital."

The flip side of this change is the increase in mergers and acquisitions. "I would call it a near-perfect storm on M&As," Ellison said, again eliciting explanations from the audience of students: low interest rates, cash on corporate balance sheets, slow growth (which makes it difficult for companies to grow without acquisitions), companies acquiring human capital through acquisitions, cash held by private equity companies. Taxes are an issue as well, he added: if Congress doesn't act, taxes on capital gains will more than double at the end of the year, making it a good time to sell.

A large-scale shift underlying all of these changes is an increase in capital efficiency: with improved infrastructure available to new companies, from cloud computing to office space, it simply takes less money to start a venture. "That's good news for the economy," Ellison said, "but not so much for those with money to invest."

Alec Ellison spoke as a guest of the Career Development Office and the Development and Alumni Relations Office at Yale SOM.