But it can also be because of opportunities to grow the business. Or because the buyers thinks it’s undervalued. The UK stock market has been trading at an ever-wider valuation discount to global peers. This is true for the vast majority of industries. So it cannot just be blamed on the UK having a larger exposure to energy and materials companies, and lower to technology, than the high-flying US.
What looks to be more behind it is a lack of appetite from global investors to invest in the UK market full-stop. Not helped by Brexit-uncertainty, the asset class has seen 31% cumulative outflows since June 2016, according to Refinitiv Lipper data.
Potential buyers are assessing that the valuation of some companies is being adversely affected by them being listed in London. And that their true, unimpaired, value may be higher.
A threat to a thriving equity market
A thriving UK stock market is important, not just for investors and companies, but also for the UK economy and society.
From the companies it finances, to the people working in the markets directly, to the companies and services which support them, to the taxes the industry contributes, which pay for vital public services. While this covers much more than the stock market alone, it is an important piece of the jigsaw.
And when the number of companies on the UK main market has fallen in 23 of the last 25 years, and stands at only 42% of its level from 25 years ago, then this has the potential to be a worrying development.
Companies being bought isn’t a bad thing as such. It can be a sign of a healthy and dynamic market and economy. But too few companies have sought to join the UK stock market, to replace the ones departing.
These takeovers may be cutting off potential future corporate success stories at the knees. When people ask, why there are not more world-beating companies being built in the UK and listed in London (don’t get me wrong they do exist, just fewer than we might want), one answer may be that they sell out too soon.
And an inability to nurture companies to sufficient scale, whatever the reason, means that when buyers do come shopping, overseas companies have more clout to do the deals. This may explain why we are unable to replicate the US outcome, where it is other US companies that have been the biggest buyers of their public companies.
There are still more than 1,100 companies in total on the UK main market (a wider universe than those analysed above) . And 2021 was one of the two years in the past 25 when that number did increase. So the UK is not in a danger zone…yet at least.
But markets operate on confidence. Success is self-fulfilling. If a country is known as a place where companies can raise money, more are drawn to it. The reverse is also true. If the UK comes to be viewed as a market in decline, whatever the reason, then a self-reinforcing decline could set in.
To ensure the UK thrives as a listings venue, it is important to look at both why too few companies have been listing and also why so many have been delisting. Emphasis so far has been on the former, such as the encouraging measures set out in the Hill review. The latter should not be forgotten.
