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September 30, 2003

Small-Cap Companies Turn Back on Market

By Peter Chapman

More small-cap companies are ditching the stock market.

The number of publicly-traded U.S. companies opting to go private has jumped significantly this year, according to the Securities Industry Association.

The SIA says 95 companies, mostly with capitalizations of less than $100 million, chose to remove themselves from the market in the 12-month period ending in July. That's up from 75 in 2002, 66 in both 2000 and 2001, and 51 in 1999.

Frank Fernandez, the SIA's chief economist, identifies several factors. Low valuations, limited trading volume, and declining research coverage top the list.

The SIA, citing research from brokerage Robert W. Baird & Co., notes that companies "despite attractive profitability" trade at "significant discounts to the broader market and even to their historical valuations."

Volume is scant because fewer brokerages are making markets in small-cap names. That's a result of industry consolidation and market structure changes. Also, institutions largely stay away from companies with thin floats. They cost too much to trade.

Analyst coverage is shrinking because of industry consolidation as well as layoffs and additional regulatory burdens. Indeed, consolidation has eliminated regional brokerages that used to provide investment banking, research and market making.

In August 2001, 4,763 stocks had analyst coverage. Two years later, that number had declined 14 percent to 4,103, according to the SIA. The percentage of companies with capitalizations of between $75 million and $100 million with research coverage has declined to 51 percent from 61 percent two years ago.