Many new - and needed - stock offerings wither on the vine after market plunge
SDA Systems Inc. was days away from selling stock in an initial public offering when the stock market plunged 508 points Oct. 19. The first sign that the 3.4 million-share IPO might not occur came with the Dow Jones industrial average's 100-point fall the Friday before, says Joseph Costello, president and chief operating officer of the San Jose, Calif., software company.
``Then on Monday, when I was driving in to work, a newscaster announced the market was down 200 points. I thought he was joking,'' Mr. Costello recalls. ``When it got so terrible, it was clear the offering wasn't going to happen.''
It still hasn't. SDA Systems' offering is on hold; the company has not filed its final document with the Securities and Exchange Commission, and the prospectus describing the offering is valid through Dec. 12.
Since ``Black Monday,'' IPOs have been postponed, and stocks of companies that went public before have declined in value. ``There's an absence of any activity except for closed-end offerings,'' says Robert Natale, an investment officer at Standard & Poor's Corporation, New York. Closed-end companies issue a set amount of outstanding shares, while open-end companies can offer new shares. ``A lot of damage was done during the crash week; it will take a while until IPOs can be done,'' he adds.
Some of this year's biggest IPOs raised from $400 million to $1.4 billion. In March, Consolidated Rail sold 52 million shares at $28 a share, raising $1.45 billion. In September ARCO Chemical raised $432 million by selling 13.5 million shares at $32 each.
In contrast, on Oct. 28, Western Acceptance sold 62.5 million shares at 4 cents apiece.
From Oct. 19 through Nov. 18, only four companies went public, according to Paul Simmonds, director of research at the Institute for Econometric Research, Fort Lauderdale, Fla. ``There is no way you can sell in this market, unless you practically give the company away,'' he says. ``A company wouldn't go public unless it really needs to make money; most IPOs have gone down one-third in value.''
Eight companies filed with the SEC to bring new offerings to the public three or four weeks ago, Mr. Simmonds says, but they have not printed their prospectuses. ``This gives an indication that they don't plan to bring the companies public soon,'' he explains.
If too much time passes from the printing to when the public can start buying, a company may have to refile, update its prospectus, or hit the road again to drum up support for the offering.
Costello estimates that SDA Systems spent between $400,000 and $500,000 to start the filing, find an investment banker, and take the show on the road. ``This becomes a cost of financing if the IPO goes through,'' he says. ``Otherwise it's just hanging over our profit-and-loss statement. Clearly we would rather have done it.''
A corporation's management might decide to take a company public by raising money through an IPO, the first offering of the company's stock to the public. Investors who already own shares in a company, and venture capitalists, can realize tremendous profits when the shares receive a market value by going public. When stocks are riding a bull market, popular new offerings can hit high premium levels on the first trading days.
When stocks are riding out a down market, however, IPOs are not popular. More tested stocks are having a hard enough time. For the week ended Friday, the Dow closed down 21.38 points, to 1,913,63.
``There is now little demand for equities and small-capitalization stocks, which tend to underperform anyway in the bear market,'' points out Mr. Natale at Standard & Poor's. ``Most new issues are small-cap stocks, or over-the-counter stocks, which historically tend to underperform in December anyway.''
For companies that sold stocks and investors who bought stocks before the market dropped, the news has not been good. Even though the companies raised their money from the sales, stock prices have fallen.
``Companies that had offerings in the 60 days or so before the market's 508-point fall have fared terribly, says Susan Gallant, editor of Going Public, which tracks new issues.
In the first nine months of 1987, there were 404 new issues, Ms. Gallant says. From Sept. 30 to Oct. 21, 388 of these fell in price, and 60 percent of the deals fell by more than 20 percent, she adds.
In another measure, the IPO 100, which is a portfolio of one share of each of the 100 most recent stocks to go public, has fallen 27 percent as of Nov. 11, Gallant says. ``This year is by far the lowest,'' she notes. Going Public has been keeping records of stock offerings since late 1985. ``This compares to the IPO 100 gaining 26.1 percent on offering prices in April 1986,'' she adds.
Corporate managers are waiting for the market to shake off the doldrums before continuing their offerings. Contel Corporation announced before the market's plummet an offering of 7.5 million shares, or 15 percent of the total shares outstanding, in Contel Cellular, which would be a wholly owned subsidiary of Contel.
``We've pulled it back, although Contel has gone ahead with the SEC filings,'' explains Kenneth Bomar, director of corporate communications for the telecommunications company in Atlanta. ``We're not yet at the point where we have to decide.''
The company expects a decision from the SEC in early December. ``We're watching other cellular stocks and seeing how volatile the market is before we decide on proceeding,'' Mr. Bomar adds.
The first group that will return to the IPO scene are the institutions, according to Simmonds, in Fort Lauderdale. ``If there is no institutional interest, there's no offering, because they almost set the price with the underwriters. Then retail investors will step back in.''
But there needs to be a glimmer of hope that the market is stabilizing. ``Confidence in the market needs to return,'' he says. ``Now the market is rising and falling based on the forthcoming news event of that day, as opposed to a general trend of news. We're moving in a narrow range.''