Investment houses test climate for offering new stock issues
The new-issues stock market is finally poking its head out to see if its long Wall Street winter has ended. Although the Dow has made respectable gains since last November, new offerings have held back in both volume and performance, waiting to see if the rally would blossom. Recent activity indicates cautious optimism. Both February and March saw steady increases in the number of new issues, after a discouraging low in January.Skip to next paragraph
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The new-issues market plays an important role in the stock market. It is where investment banking firms -- E. F. Hutton, Salomon Brothers, Prudential-Bache, etc. -- bring their corporate clients to raise money through a stock or bond offering.
The volcanic tip of that market is initial public offerings (IPOs), where a company opens up to the public with its first stock offering. IPOs, in turn, sometimes bring in the ``hot deals,'' those where the stock rises to a premium over its offering price the minute it opens on the market.
From late 1982 through the end of '83, when the Dow soared, hot deals characterized the new-issues market. In 1982, for example, Lotus Development Corporation went public at $18 a share. As soon as trading opened, the stock popped to $22.
Another high-tech stock, Genentech, entered the market at around $35 and didn't stop climbing until it reached the mid-80s. Even plain old savings-and-loan stocks burned a path to premiums.
Those days vanished as the Dow headed for 1,100. The number of new issues crept steadily downward through 1984 as investors turned a cold shoulder on all but a few. But now the syndicate departments of both Wall Street and regional investment firms that place stock in the market report much brisker business.
``We're busy,'' says Richard Smith, syndicate manager at Prudential-Bache Securities. ``It's nothing like it was back in 1983, when we were working five deals a day. But the pace has become much quicker. . . . We have a number of deals ready to go, about six or seven. We did one today, two last week. We've been fairly active.''
``Right now, we have 28 deals on calendar,'' says David Weild, a syndicate analyst with the Denver-based Boettcher & Co. ``There was a point in January where we had, at most, 10 deals.''
Wall Street watches new issues closely. They act as a vote of confidence on the market by investors. If buyers think the market holds future strength, they look kindly on these offerings. New-issues investors are typically more sophisticated than most, and they want a strong stock market to support the downside of their purchases. ``It's still not one of those `anything goes' markets,'' says Mr. Smith.
To bring those buyers back, investment bankers avoid the speculative high-tech issues that were common two years ago. ``The quality of companies in general is much higher than what we saw at the height of the new-issue market in 1983,'' says Mr. Weild.
``I wouldn't say that the market is heating up. It is very receptive to high-quality IPOs,'' says John Rummo, first vice-president and syndicate product manager at E.F. Hutton in New York. ``It's a very selective market. Those companies that have a good history of earnings and are priced at a reasonable multiple are getting a good reception. It is unlike the hot market in 1983, where the frenzy kept feeding on itself.''