`TIS THE SEASON FOR IPO FEVER
Interest rates are rising. Stocks are in a funk. But one slice of the market is red-hot: initial public offerings. Deals postponed from a slow summer have been reworked and reissued, a large crop of technology offerings has taken gff like wildfire, and the IPO pipeline is packed with $5.3 billion worth of deals. A strong fourth quarter will produce the second-best year ever for new issues, with investors pouring in close to $40 billion.
Of course, the rise in U.S. interest rates and a deteriorating stock market could put a damper on the IPO market. Nevertheless, there are powerful forces driving the current upswing. While 1995 is not expected to be another record year, the current IPO revival is likely to provide a good jump start. And if the coming year brings investors a reduction in the capital-gains tax, the market may get an unexpected added boost.
FOREIGN FRENZY. Much of the IPO market's newfound vigor comes from the allure that technology stocks hold for investors. Take Shiva Corp., a small telecommunications outfit in Burlington, Mass., that went public on Nov. 18 at 15 a share. That was 50% more than its initial target price of 10. And the stock rose 110%, to 311/2, by the end of the first day. Another strong performer has been Network Peripherals Inc., a networking company that has seen its stock skyrocket 340% since it went public back on June 27. By the end of the year, a total of some 24 technology IPOs, which may amount to as much as $1.1 billion, could hit the market. Analysts think that investors' interest will be strong: "Everybody's still looking for the next Microsoft," says William M. Osborne III, president of IPO investment specialist McKinley Capital Partners Ltd.
The momentum in the IPO market doesn't come just from technology. The privatization frenzy that is sweeping world economies is bringing many new foreign issues into the market. "The international market is booming" and is likely to be a strong underpinning of the IPO market in 1995, says Kathleen S. Smith of Renaissance Capital in Greenwich, Conn., an IPO consultant that works with institutions.
The combination of high-technology and international angles is the reason experts think that Rupert Murdoch's IPO, the satellite-television outfit British Sky Broadcasting, is likely to get a warm reception from investors. Murdoch is looking to raise as much as $1.3 billion from the offering. Another eagerly awaited issue is the launching of SGS-Thomson, Europe's largest semiconductor company. It hopes to raise $462 million.
GOOD OMENS. The market is also being buoyed by more realistic estimates by underwriters of what new companies are really worth. Argentine energy company Bridas, for example, has lowered its expected offering price to the $10-$12 range, down from $16-$18, and will try to go public in the next few weeks.
Retailers are another group profiting from the IPO game. On Nov. 18, Sports Authority, a spin-off from Kmart, jumped 26% from its offering price of 19. Baby Superstores, a chain with 38 outlets, was another hot performer, shooting up 136% from its Sept. 27 offering price of $18. Such high-profile success stories bode well for other issuers waiting in the wings, says Richard L. Kauffman, head of U.S. equity capital markets at Morgan Stanley & Co.
Some analysts worry that high interest rates will quash the resurgent IPO market by drying up the supply of capital. "As the bond market goes, so goes the equity market," notes Tom Davis, head of equity capital markets at Merrill Lynch & Co. Some underwriters fear that a slumping stock market will cause institutional investors to lose interest in IPOs earlier than usual and focus on selecting existing stocks to keep in their portfolio for next year.
The slowdown in the flow of new money into equity mutual funds could also hurt new issues. Mutual funds
are often big buyers of IPOs. In some cases, large fund companies such as Fidelity Investments have bought 10% of an IPO.
Despite all those worries, the yearend boomlet in IPOs may have staying power. And if the Republicans keep beating the drum for a cut in the capital-gains tax, it could stick around longer than almost anyone expects....AND THERE'S MORE TO COME
BRITISH SKY BROADCASTING $1,300
RJR Nabisco food unit
SOUTHERN PERU COPPER 370
Peruvian copper company
Argentine oil & gas company
DATA: BUSINESS WEEK
Geoffrey Smith in Boston