As I look at Wall Street headlines – namely, those having to do with Apple Inc.'s (AAPL) weak share performance and Netflix Inc.'s (NFLX) resurgence – I better understand why so many owners and stakeholders of privately held companies aren't jumping into the IPO line and some publicly traded firms are jumping out. Private owners, already dealing with a lot of uncertainty as they manage businesses in this economy, have a lot to lose in the market's volatile pricing, and many are finding insufficient motivation to overhaul their current setup in favor of an IPO. Out of the 27 million businesses in America, nearly all are already privately held, and they drive the lion's share of economic growth and jobs. There are excellent reasons for this.
The performance of these two high profile companies makes a case for staying private. Looking at the price of these two companies, it's hard to fathom that there is efficient pricing in the public markets, most certainly in the short run, which is sometimes quite important to owners and founders. Let's call this the Applix effect.
Before diving into the specifics, let me address a few theoretical issues. Advocates of the public markets assert that, while markets may not always act rationally in the short run, they tend to act rationally over the long run. I will concede this upfront, even though the definitions of "long run" have very important implications. Another argument for public markets is that, while a specific company may or may not be priced well, companies tend to be well priced as a group or in buckets. For example, let's say that Company A is overpriced but Company B is underpriced. If we make a bucket containing both companies A and B, that grouping might be pretty fairly priced. Despite the limited theoretical underpinnings to this line of thinking, I'll also accept this as well for the sake of argument.