Larger companies buying up smaller, potential competitors

Ryan Smith spent years planning to sell shares of his software company, Qualtrics, on the stock market, meeting with bankers, carefully auditing financials and shaping a Wall Street-friendly narrative about the company’s prospects. Two weeks ago, the finish line was close, with a listing on the Nasdaq just a few days away.

But shortly before a staff meeting to update Qualtrics’ employees about the public listing, Smith received a phone call from Bill McDermott, chief executive of SAP. "It’s on," McDermott told Smith.

Smith then stunned Qualtrics’ workers with a totally different message: SAP had agreed to buy the company for $8 billion in cash, nearly double the valuation bankers had set for the company’s public listing. It was a decision, Smith said, that he did not second-guess one bit.

"I’ve never felt more peace in my life," he said.

That kind of last-minute deal, an increasingly common occurrence in the tech industry, is contributing to a major reshaping of the U.S. financial landscape that has been underway for years.

Small and midsize companies are fading from stock markets, leaving far fewer publicly traded companies. Many of the smaller companies are bought by larger organizations or are enticed to stay private by the sharp rise in venture capital money, both of which allow them to avoid the volatility and scrutiny that come with going public. The number of listed companies peaked in the late-1990s, before the dot-com bust, plummeting 52 percent by 2016.

The shift leaves big companies with an outsize influence. That effect was on display last week, as tech giants like Apple, Microsoft, Amazon and Alphabet, whose sky-high profits had powered leading indexes on their long march up, led a retreat of major stock indexes. Those companies spurred a rally on Monday, with the S&P 500stock index rising by more than 1.5 percent.

Some economists say the buyouts of early-stage companies by large dominant players help explain why, by many measures, the U.S. economy has been less dynamic in recent years. Less competition can contribute to sluggish rates of entrepreneurship, business creation, wage growth and productivity, they say.

Technology companies are still going public. But Qualtrics’ last-minute deal mirrored similar moves by other software companies.

Even some companies that do go public can find that their time there is shortlived. In March, Salesforce acquired Mulesoft, a software integration company, just a year after its public offering.

"Companies like Qualtrics are saying, 'Huh, why bother with the fighting in the public markets if I can do just as well by presenting myself for acquisition in sort of a premarket sale?'" said Andrew Karolyi, a Cornell University finance professor who has studied the decline of publicly traded companies.

The traditionally vibrant U.S. small business sector was long viewed as a strength for the economy. Small businesses are more likely to develop innovative new technologies, forcing large companies to reinvest significant amounts of profits to keep pace. The economy benefits from that competition, improving productivity and generating new and higher-quality products and services for consumers.

But there is evidence that the competitive climate has changed. Across industries — from retailing to manufacturing to construction — startup businesses are playing a smaller role as new companies are slower to form and employ a smaller share of America’s workers.

At the same time, the market share of the largest companies in many industries has risen. Merger and acquisition activity is higher than it used to be. And companies are spending less on investment than they used to.

The ability of large, cash-rich companies to buy smaller businesses before they have the chance to emerge as formidable competitors has altered the corporate landscape, said Thomas Philippon, a professor of economics at New York University, who has studied the increased dominance of large companies in many U.S. industries.

"What would have happened to Instagram if Facebook hadn’t had bought them?" Philippon said. "They would have competed with Facebook for sure."