The Fingers Pointed At ShearsonGary Mcwilliams
As initial public offerings go, it was hardly an easy sell. Compu tervision Corp., the tattered remains of Prime Computer Inc.--taken private in a 1989 leveraged buyout--was mired in a three-year string of losses and expected yet another loss for the quarter ending Sept. 27. The IPO, $600 million in combined equity and debt, was launched on Aug. 14, a time when the market, especially for high-tech issues, was depressed. But Shearson Lehman Brothers Inc., a unit of American Express Co. and the lead underwriter, was so determined to take the Bedford (Mass.) software company public that it twice lowered the offering price, from $19 a share to $12, and added two weeks to its sales push to lure investors.
Investors who succumbed to Shearson's pitch are likely kicking themselves. On Sept. 29, a mere 45 days after the IPO, Computervision announced that its revenues and operating profits would be "substantially below" the company's plan. The next day, its stock fell 3 1/4 to 6 and later to 5 1/2, the ninth-largest decline in the past 12 months among IPOs priced at $10 or above, according to data from Investment Dealers' Digest Information Services Inc.
Investors are plenty angry at Computervision. But most of their ire is aimed at Shearson. The firm's interest in the deal was much more than that of an underwriter. It had helped finance J.H. Whitney & Co.'s $1.3 billion acquisition of Prime with a $500 million "temporary" loan. Unable to refinance the debt in the sagging junk market, it ended up with the liability on its balance sheet. In 1990, Shearson obtained two seats on the board of Prime's parent company in exchange for extending the repayment terms of its loan. "Shearson was desperate to get out of the situation," says George E. Lee, a bond analyst at Duff & Phelps/MCM Investment Research Co. "They were determined to get the deal off their books at any price."
Shearson is now the target of 10 lawsuits in U.S. District Court in Boston by Computervision investors that allege that the firm had a conflict of interest, that it knew bad news was coming but did not disclose it in the prospectus. "There was nothing sudden about any of this," says Richard D. Greenfield, a Haverford (Pa.) attorney representing several shareholders.
`COMPROMISED.' According to one suit, "Shearson, by reason of the fact that certain of its affiliates were creditors of the company, had a powerful motive to effectuate the sale of the shares." As a result, the suit says, "the objectivity of Shearson as an underwriter was materially compromised." A spokesman says Shearson "believes the suits filed are without merit and intends to contest them vigorously." In an Oct. 6 letter to brokerage managers, the firm insisted that it was "both surprised and disappointed" by Computervision's announcement. Quoting Computervision executives, the letter said that the quarter's downturn was not apparent until the very end. "About 70% to 80% of its orders (and hence, its revenues) are traditionally booked in the last two weeks of September. After Labor Day, when the currency crisis hit Europe, customers froze orders and spending, quickly and dramatically affecting the company's revenue picture for the quarter." Shearson will release its own analysis later this month.
But Duff & Phelps's Lee was only slightly surprised by Computervision's announcement. "What happened in the third quarter," he says, "verifies what I had been thinking. I've had real questions on how well the company has been doing in competing for new customers."
Beyond the facts of the situation is the propriety of an investment banking firm lead-managing a deal in which it has such a powerful vested interest. Samuel L. Hayes III, a professor of investment banking at Harvard business school, says taking the lead role was unusual, given Shearson's huge financial stake. "It's much more common for a securities firm with a potential conflict of interest to go the extra mile and avoid being the lead manager," he says. The Shearson spokesman denies any interest conflicts and says there is nothing unusual about its role. He notes the company several times has led underwritings in companies in which it held positions.
STILL LINKED. Shearson may have had other reasons for swiftly taking Computervision public. There has been wide speculation that AmEx wants to sell the brokerage unit (BW--Aug. 24). Converting the illiquid Prime debt into publicly traded stock may help AmEx put a price tag on Shearson. Though AmEx denied the speculation, sale rumors picked up on Sept. 14 when Shearson abruptly sold its Boston Co. private banking and money management division to Mellon Bank Corp.
Even after the deal, Shearson's fortunes remain linked to Computervision. It remains a big stockholder. It owned just 13% of the company after the offering but increased its stake to 22% in part to help stabilize Computervision stock when its price began dropping just after the IPO. Because of the stock's decline, Shearson may have to take a $100 million pretax charge in its third quarter. Hambrecht & Quist Inc. analyst Robert G. Herwick expects Computervision's third-quarter revenues to fall to $230 million, vs. $280 million for the same quarter last year. That should increase its loss to as much as $75 million, he says. "The financial future of the company is again uncertain," adds Charles M. Foundyller, president of market researcher Daratech Inc.
With its August IPO, Shearson must have figured it was at last getting rid of one of the firm's worst nightmares. But that nightmare is not only still haunting the firm, it could get worse.
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