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Sarbanes-Oxley's Unintended Consequences for IPO Market

February 22, 2005

In the WSJ: "So far in 2005, 33% of the 18 withdrawn stock offerings -- including IPOs, secondary offerings and convertible-stock deals -- were put on ice because the issuers began discussions to be acquired instead, according to data from deal tracker Dealogic. That rate is up from 2004, when 18% of the 97 withdrawn deals were due to acquisition discussions, and 2003, when 16% of 67 deals were pulled for that reason, says Dealogic."

One explanation for the increase in acquisitions is to avoid the burden of complying with Sarbanes-Oxley Act regulations. The added time, expense and managerial hassle to small companies of the misbegotten law may be tipping the decision away from a public offering. This trend demonstrates how the Sarbox law is so onerous that it may even be altering the operation of capital markets. By creating an artificial incentive to merge, is the law impeding market competition? If Sarbox had existed in the 1980s, would a young Microsoft have been forced to merge with a more established rival such as IBM?

One can imagine that somewhere down the road, lawmakers and regulators will attempt to reform the reform by increasing other regulations, such as anti-trust.

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