A Few Tips On What To Think About - And To Do Now…
Recently, we were startled to realize that our last update on Transfer Agent market share was way back in the first quarter of 2009. We were even more surprised – and even more startled – by the current numbers, which are shown in a chart below.
The biggest surprise was how much the total market for registered shareholder services has shrunk since our last update. Why is this so important? To us, as avid observers of - and as one-time active players in this universe – it tells us that the industry will, almost certainly, continue to contract…and to consolidate further - and that we may well be seeing the “end game” that most of the players have been expecting all along.
At least four factors account for the huge drop in the number of registered shareholder accounts that are being reported:
First, and easiest to explain, is that the average company is seeing about 5% of the registered shareholder base rolling off each year due to what we call “secular attrition” – a combination of the Grim Reaper doing his work, coupled with a clear preference among the heirs and assigns for street-name rather than registered ownership. This factor alone translates into a 20% decline in registered owner records – and that’s without compounding – for a loss of at least 13 million shareholder accounts since the beginning of 2009.
Second, as we’ve noted here before, the number of NYSE and NASDAQ listed companies has dropped very dramatically over the past five to seven years - from 8500 or so to just about 5000 today – due to M&A and going-private activities, bankruptcies, de-listings, etc. And this, coupled with a dearth of IPOs and spin-offs that are large enough to make a difference, accounts for most of the remaining drop in registered owners.
Two other factors play a role in the number of holders TAs have been reporting; (1) the closing out of closed accounts, which many TAs kept on their books – and billed for to some extent, with some justification – but which tend to disappear when the business moves to another TA and (2) the fact that TAs have a much harder time “hyping their numbers” without being called out than they had when the universe was so much larger and more dynamic.
And actually, without naming names, we ourselves are still suspicious about some of the gross numbers being reported…or at least about taking them seriously as an indicator of an agent’s true size and strength: The only ”accounts” worth counting – at least in our book - are those that are being billed for…And we do believe that a fair number of (pre-paid) un-exchanged shareholder accounts - and accounts in basically bankrupt or otherwise “no account companies” in the roughly 11,000 “issuer clients” that the agents reported have created a fair amount of “windage” in the already shrunken numbers that are reported below.
But wait…as we’ve been fond of saying of late…There’s more! We believe that 20% - and sometimes way more of the reported numbers of holders – hold truly meaningless “positions” as registered holders…which isn’t good for TAs either, long-term: We have seen many companies where 85-90% of the registered holders hold less than 4% - and sometimes less than 2% of the shares outstanding. We ourselves, following our efforts to exit most of our Dividend Reinvestment Plan positions – in order to consolidate our holdings - and to reduce all that paperwork – now have at least ten “registered positions” with way less than a full share – since most TAs do not automatically sell the tiny fractional share that typically remains when one transfers one’s DRP “position” to a brokerage account.
There’s another, very important observation to make about the market share numbers reported below - namely that the most meaningful measure of market share is in dollars of revenue rather than numbers of “clients” – whether one is counting issuers or shareholders as the clients. In this business, the “richest” sources of revenue tend to be provided by large-company clients, with a rich array of products and services - like regular dividends, DRPs and DSPPs etc.Usually – but not always, we’d note, given today’s cut-throat competition – such clients tend to produce much bigger gross revenue. We have our own educated guesses as to the annual revenues at each of the top-six providers, and, while both the gross numbers – and the relative profitability vary widely among them – we do think the relative rankings show in the chart are pretty much on track, dollar-wise, with the number of shareholders and number of issuer rankings.
One other thing jumps off the chart of course, and that’s the fact that the former number-one player is gone from the business…along with the former number-seven…while Broadridge – which wasn’t IN the business in 2009 – has grown since its initial purchase of roughly 250,000 shareholder accounts to a whopping 1.6 million in just three short years.
And lastly…yes…there’s more: See that 1.8 million number in the “all others” section…that used to be 5.3 million in 2001? The total shareholder number is mainly made up by an ever-shrinking number of issuers that still serve as their own transfer agent…And, if one can believe the rumor mill - and we do in this case - that number will soon decline by about 1.3 million more, which will shake up the relative rankings - and the competitive scene in a pretty big way…
Bottom line, as we’ve said on these pages again and again, “The dealin’s here are far from over” so stay tuned for more….
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