New Stock Issues Make Comeback
More offerings wait in wings as companies plan to take advantage of higher share prices
WALL Street is suddenly smiling upon new stock offerings. New stock issues - both initial public offerings (IPOs) and secondary offerings, which are expanded issues of stocks already on the market - were a major casualty of the market downturn of late 1990. As uncertainties about recession and the Gulf crisis intensified, nervous investors fled the equities market for safer instruments such as money-market funds and bank certificates of deposit.
Now, with equities posting strong gains, new issues are making a comeback. The new-issue market follows rising volume on the stock market as well as rising share prices, says Perrin Long Jr., an analyst with Lipper Analytical Securities Corporation. The last time there was a sudden spurt in new issues, he says, occurred in the period from August 1982 to July 1983, which mirrored the bull market that began in August of 1982. Whether the current situation also represents the beginning of a new bull market remains to be seen, says Mr. Long, since ``pop-ups'' of new offerings can come in the midst of existing markets, as happened in the first quarters of 1985, '86, and '87.
``For all practical purposes, there was no IPO market in the fourth quarter of 1990,'' says Mark Basham, who follows IPOs for Standard & Poor's Corporation. IPOs had fallen from 41 issues in the first quarter of the year to a mere 8 in the last quarter. But now ``the market seems to be assuming an end to the recession,'' Mr. Basham says. IPOs ``are lagging economic indicators that turn up after the stock market has already turned up.''
For the first two weeks of 1991, there were no new IPOs of $5 million or more - the minimum amount of IPOs monitored by S&P. Then a number of new issues hit the market right after the Allied bombing of Iraqi military positions began on Jan. 16, Basham says. All were considered relatively successful sales, he says.
The biggest offering was the sale of the credit card division of MNC Financial Inc., a bank holding company, for $700 million. The new company is called MBNA Inc. Other IPOs were for Alta Health Strategies, Preferred Income Fund, Cygnus Therapeutic Systems, and Health Management Associates. Three are related to the health sector, one of the better-performing market sectors in a recessionary economic climate. The fourth is a mutual fund.
The initiation of United States military action in the Gulf is clearly linked to the spurt of new offerings, ending some uncertainty about whether or not the US would respond to Iraq, says Mark Basch, who monitors new offerings for Securities Data Company, a financial services firm in Newark, N.J.
``New offerings had been going pretty well during the first half of 1990, but died right after July,'' Mr. Basch says. ``There was a sense of panic in the market after the Kuwaiti invasion. But when the US bombing began, investors suddenly had a sense of what the course of international events was going to look like.'' And that, Basch says, opened up the wallets of investors.
For the first two weeks of 1991, Securities Data Company lists just three new issues, all relatively small. But after Jan. 16, there have been at least 15 new issues, including both IPOs and secondary offerings. The dollar amount: about $1.8 billion, which is ``fairly substantial,'' Basch says.
New issues are sold to the public by underwriters - such as Goldman Sachs & Co. - who first buy the stock from the issuing company. The underwriter then sells the stock at a slightly higher price, making a profit. Underwriting is often a major source of profitability for investment houses, since the ``spread'' can run to 7 percent of the offering price. Most new offerings are oversubscribed, since there is ``usually a minimum amount of money in the market looking for new issues,'' Basch says.
Analysts believe that as many as 60 or more offerings are now ready to go to market - with a value of over $1.5 billion.