After The Binge, Investors Are On A Crash Diet

On weekends, long lines of hungry customers are standard fare at the Hilltop Steak House in Saugus, Mass. But Hilltop has had less success drawing a crowd of investors. The restaurant's plans to open branches throughout New England suffered at least a temporary setback in mid-June when it withdrew the $25 million initial public offering (IPO) it filed in April. "The price that we could get just kept getting lower and lower, so we decided to pull back," says Hilltop President Kevin J. Leary.

He has plenty of company. Despite underwriters' furious efforts to drum up buyers, companies large and small are finding it harder to sell stock. Of the 150 IPOs that came to market in the second quarter, 60 were offered at a price below the bottom of the range suggested in the offering documents. And more companies are postponing or withdrawing issues altogether (table). Companies also are yanking secondary offerings. On June 29, Callaway Golf Co., maker of the popular Big Bertha driver, bailed out of its attempt to sell holdings of its big institutional investors.

Don't expect Callaway and Hilltop to test the market again anytime soon. An early revival of interest in new issues is unlikely, so companies and their underwriters must find other ways of raising money. And the few brave issuers that are going ahead with their stock sales are in for a scary few weeks.

`BACKED UP.' What's slowing down the deal flow? A market suffering from indigestion. After an 18-month stock-buying binge that drove many indexes to all-time highs and helped hundreds of companies erase debt from their balance sheets, yield-hungry investors have finally pushed back from the table and said, "Enough!" Since early June, the pace of new money flowing into equity funds has slowed from the record set in the first five months of 1992, when some $34.7 billion poured into stock funds, according to the Investment Company Institute, the mutual fund trade group.

Meantime, brokerage firms are bracing for merely strong results after terrific first-quarter earnings of $2.06 billion. Already, PaineWebber Group Inc. says its second-quarter profits will be about $47 million, one-third less than its record first quarter. Anticipating a slowdown in underwriting and commission income, brokerage stocks have dropped some 30% since their early-year highs. And a number of underwriters are dealing with the drop in prestige that accompanies the withdrawal of a high-profile deal. Says one executive at a major investment bank: "Everything is backed up, and clients are not happy." That's the case at Goldman, Sachs & Co., which had to pull a $1.4 billion global offering for Banacci, a big Mexican financial company, in the wake of the Mexican market's mid-June plunge.

The first cracks in the market appeared this past spring. In April, American Express Co. raised $968 million by spinning off part of its First Data Corp., but only after reducing its offering price to $22 a share, below the $24 to $26 it anticipated. On June 18, citing lack of institutional interest, GPA Group PLC, the Irish aircraft-leasing giant, withdrew its $900 million offer.

BAROMETERS. Today, it's a buyer's market. Underwriters are bringing out only their best deals, such as General Motors Corp.'s record $2.15 billion offering. The key to GM's warm reception: conservative pricing. Brought out at 39, the shares recently have traded near 44. But investors shouldn't expect all new issues to behave as well. Some 35 of the 45 biotech IPOs brought to market this year are trading below their offer price. "For individuals to be involved in this IPO market is like challenging Saddam Hussein with a pocketknife," says Richard B. Hoey, who manages the Dreyfus Growth & Income Fund.

Issuers, meanwhile, can only kick themselves for missing their shot. That's the story at Gulfstream Aerospace Corp., which tried to go public again after a leveraged buyout. At Callaway, some big institutional shareholders, including General Electric Investment Corp. and Banc One Capital Corp., had wanted to cash out. But they will have to bide their time and hope for a sunnier climate for selling equity.

Wall Street's eyes are firmly fixed on two pending megadeals. Equitable Life Assurance Society plans to sell more than $600 million in stock in mid-July as part of its conversion from a mutual to a public company. And Wellcome PLC is readying the largest global deal to date: a mammoth $5.64 billion stock offering by early August to international investors. With drug stocks plunging almost daily, U.S. lead manager Morgan Stanley & Co. has a tough selling job ahead. "Wellcome will probably get done, but it could weigh on the market if drug stocks are making new lows when they bring this to market," says Hoey. When outfits like Wellcome and Morgan are sweating, other issuers and underwriters must be breaking out in hives.

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