Just a few weeks ago, investors and market mavens were writing the epitaph for the bull market, kissing off everything from the rock-solid blue chips down to the most speculative initial public offerings. But in a remarkable turn, the Dow Jones industrial average has piled up some 370 points since last month's low, and even the tech-laden NASDAQ Composite Index has climbed 9.5% from its bottom. In the IPO market, however, you can still hear the chisels chipping away on the gravestones.
Pity the poor investor who got sucked into the euphoria of the once surging IPO market of 1996. The Standard & Poor's New Issues Index, which measures the first six months of IPOs' performances, jumped 41% from January to mid-May and has now dropped 20% from that peak. Sure, the average return for the 436 members of this year's IPO class is 10.5%, according to Securities Data Co. But that's based on the difference between the IPO price and the market price on Aug. 2. Most new offerings initially traded much higher, so most investors paid a lot more.
THAT'S HIGH-TECH. Indeed, behind the averages, the damage is worse (table). Look at Yahoo! Corp., the Internet search engine company. It was taken public by the prestigious Goldman, Sachs & Co. at 13, shot up that day to 43 and now sells at 18 1/8, down 57.9% from its peak. Heck, that's high-tech. Consider Garden Botanika Inc., a cosmetics retailer backed by Montgomery Securities. Issued at 20, the stock ran up to 35. Now, it's at 16. "IPOs are the leading edge of risk," says Robert Natale, editor of Standard & Poor's Emerging & Special Situations, which reports on IPOs.
The investment banks, which made a bundle taking companies public, are also feeling the pain. Compared with the supercharged activity last spring, the new-issues market is as flat as yesterday's soda pop. The pace of new offerings has been cut in half. The prices at which they're done have been slashed. On Aug. 6, jeans maker Guess Inc. cut its asking price for its IPO by 13% and reduced the number of shares by 24%. Aftermarket performance is flagging, too. "Before, a hot deal could double the first day," says George S. Shirk, a researcher for the newsletter New Issues. "Now, you're lucky to see 20%."
An IPO revival is still not in sight. Among the big investors that buy these stocks, "there's reluctance and resistance to talking about new names," says David H. MacCallum, head of life sciences investment banking at UBS Securities Inc. Part of that is caused by market skittishness, and part the fact that mutual-fund managers in particular have relatively little to spend. Cash levels are low, and inflows to funds, as much as $1 billion a day a few months ago, are estimated to be $3.5 billion for all of July.
JITTERS. The investment banks use the initial offering price as a benchmark to measure the performance of their IPOs. Using that gauge, Donaldson, Lufkin & Jenrette Securities Corp. has this year's best record among the major underwriters. Its 15 deals are up an average of 23.1% over their opening price, and more important, only two are trading below it. Hambrecht & Quist, which is planning its own IPO in August, has an average of 21.3%, although 7 of its 16 IPOs are trading below their initial price. At the other extreme, there's Dillon, Read & Co., whose six deals are down an average of 24.6%, and UBS Securities, down 34%. UBS's MacCallum says his firm's results are low because five are biotech and medical-device companies, which, have been hit among the hardest in the IPO rout. Dillon Read did not respond to requests for comment.
True, the underwriters can't be held responsible for a price decline that sweeps through the market because of, say, inflation or interest-rate jitters. But they can be taken to task when the declines come from problems with the companies they backed. Few investment banks haven't suffered some embarrassing "blowups." That's when a newly minted company blows its first or second earnings report, a major product flops, or a key executive bolts. The due diligence for IPOs is more rigorous than for established companies, notes Sanford R. Robertson, chairman of Robertson, Stephens & Co. "So when one blows up, it really reflects on your [investment] banking."
No one at Oppenheimer & Co. would comment about Dignity Partners Inc., brought public in February at 12. Dignity purchases life-insurance policies of the terminally ill, mostly AIDS sufferers, giving them cash to use while they're still alive. But good news for AIDS victims--the recent International Conference on AIDS reported that with new therapies, many can live with the disease--was deadly for investors. On July 16, Dignity halted purchases of new policies, and the shares plunged. They are now 75% down from their high. Dignity did not return calls.
Another one of the year's worst blowups is Cerion Technologies Inc., a manufacturer of magnetic thin film disks used in computer drives. The company went public on May 24 at 13 and traded as high as 19 1/2. Cerion started falling in June, along with the other tech stocks. But on July 9, Cerion announced that its largest customer, accounting for 34% of sales, had canceled all its orders. The stock collapsed and now sells at 4. James P. Hickey, a principal at William Blair & Co., Cerion's underwriter, says the prospectus listed the dependence on a few large customers as the stock's No.1 risk. Still, "it's a tremendous disappointment," says Hickey. "We got a lot of flack from investors."
AFFORDABLE. The bright spot in the IPO debacle is that the prices are lower--and there are fewer investors bidding for shares. James "Chip" Roberts, a portfolio manager at Oberweis Emerging Growth Fund, says he has been able to buy stock in two companies in recent weeks that three months ago he would have had to pass up. Both companies, Multiple Zones International Inc., which sells computers and software by catalog, and Research Engineers Inc., which designs software, went public at prices below what issuers first sought.
Investment bankers have also tried to talk up the market-mauled IPOs, arguing that the companies are still sound. John K. Skeen, research director at Montgomery, says that of his firm's 20 IPO deals this year, there are only four in which the fundamentals have changed for the worse. One chief of investment banking at a major underwriter recalls it wasn't that long ago, the summer of 1994, "when you couldn't give away these [IPO] stocks." Since then, the S&P New Issues Index has risen 133%, even counting the recent sell-off.
Three weeks ago, you couldn't give away blue chips, and now investors are clamoring for them. It will take more than three weeks, but investors have short memories. Before long, they'll likely be clamoring for IPOs as well.