New stock issues pour forth despite sag in the market

It is a rare small-business person who does not dream of getting rich by selling shares in his company to the public. Last year, 237 companies went public, stuffing $1.4 billion into the pockets of the original owners.

The urge to make a bundle by going public has been strong enough to survive this summer's 146-point plunge in the Dow Jones industrial average as well as the bankruptcy of John Muir & Co., a key new-issues underwriting firm.

"The new-issues market has held up remarkably well," says Arnold Kroll, a partner at L. F. Rothschild, Unterberg, Towbin, which last week brought 1 million shares of Bolt Technology Corporation stock to the market at $13.75 a share. Bolt makes oil exploration equipment.

"The new-issue deals we are working on are all going forward," reports Donald Hebb, the Alex. Brown & Sons partner in charge of investment banking. "Companies already in registration are on schedule, and deals we are developing" have not been delayed, he says.

In fact, during the past month an average of about eight companies have come to market each week, according to data supplied by the newsletter Going Public: The IPO Reporter (1528 Walnut Street, Philadelphia, Pa. 19102). Thus companies are currently going public at the rate of 400 a year, while last year only 237 companies made an initial public offering.

Still, not every potential IBM is rushing to sell stock to the public. "Companies we are talking to who are planning to come to the market later this year now are asking whether or not they should offer securities," says John Dakin, a partner in the San Francisco securities firm Hambrecht & Quist.

And Morton Davis, president of D. H. Blair & Co., says his firm will delay a number of new issues it is slated to bring public in the next two months unless the market improves. "I never like to bring issues to a bad market. We don't operate in a vacuum," he says.

The market in which underwriters had to operate last week was unappealing. The Dow Jones industrial average plunged 28.35 points during the week to 861.68, its lowest close since it hit the 860.67 level last June 9. On the New York Stock Exchange 18 stocks hit new highs, while 570 posted new lows.

And slumping stock prices are the reason underwriters most commonly give for postponing an offering. Their fear is that buyers will not snap up the new stock at a price the selling company finds attractive.

Buyers will not usually pay more for a new company's shares than they will for stock in an existing company of comparable quality. So the recent stock market decline means new issues will sell for less than they would have before the market decline.

A company coming to market now made the preliminary decision to do so with its underwriter last June," notes Mr. Dakin, the Hambrecht & Quist partner. The underwriter is likely to have suggested a stock price "considerably higher than what you can expect to get today," he says.

For example, when Jefferson-Williams Energy Corporation came to market Sept. 1, the stock was priced at $11 a share. The initial prospectus for the stock indicated a proposed selling range of from $11 to $14 a share.

Since companies commonly issue a million or more shares, a price $3 below the hoped-for level means at least one less mansion in Beverly Hills for the company's founder.

Even if a founder owns the enterprise outright, he does not get to keep all of the proceeds from the stock offering. Part of them go to the underwriter who manages the stock sale.

Stock offerings work in one of two ways. In a so-called "firm" offering, the underwriter makes a commitment to buy all of the stock and then sell it to the public.

A "best efforts" approach to a stock sale is the one commonly used by firms without a strong track record. Here the underwriter agrees to act as an agent for the company in selling the stock.

The ability of a building General Motors to sell stock is closely tied to its underwriter's skill and reputation. So companies slated to be brought to the market by John Muir & Co. were devastated when that firm went bankrupt in August.

"There will be a few firms which Muir handled who will have to cancel or delay their stock offerings for a long time," says Norman G. Fosback, editor of the newsletter New Issues (3471 North Federal Highway, Fort Lauderdale, Fla. 33306).

One company Muir was slated to take public, U.S. Wind Turbine Inc., told Business Week that it would abandon plans to raise $2 million for the construction of commercial wind-powered electric generators, since no other underwriter would "go near an issue that had Muir's name on it."

Other Muir clients have not abandoned hope. Christie Energy Company was slated to go public in October with Muir as its underwriter. "We feel the original schedule is doable," a lawyer for Christie says. Although the company has not yet signed with a new underwriter, he said, "we do not want to convey the feeling of being unable to find anyone or panicking."

Even if Muir clients can find a new underwriter, they face considerable additional costs. For example, Marmaton Oil & Gas Company has lined up a new underwriter, a Marmaton executive says, but still faces the loss of certain up-front fees paid to Muir. "We got hit on that," said the executive, who asked not to be named.

While individual Muir clients may be inconvenienced, the firm's bankruptcy is not expected to have a significant effect on the overall new-issues market."I don't think their departure is going to be a key factor affecting the ability of companies to go public," Dakin says.

Market participants note, however, that the very smallest and most highly speculative companies, which Muir specialized in, might have trouble finding an underwriter.

In the current depressed market, the quality of the company being sold will be at least as important as the reputation of the underwriter. "In the feeding frenzy of a bull market, people snap at anything," says Mr. Kroll of L. F. Rothschild. "At this point in the market people are more selective."

Initial public-offering market Year No. of Dollar amount companies (millions) 1969 1,026 $2.605 1970 358 780 1971 391 1.655 1972 568 2.724 1973 100 300 1974 15 51 1975 15 265 1976 34 234 1977 40 153 1978 45 249 1979 81 506 1980 237 1.397 1981 (1st half) 259 1.933 Data: Going Public: The IPO Reporter

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