IPOs Latest to Feel the Bite Of Interest-Rate Hikes
ADD one new casualty to the Federal Reserve Board's policy of increasing interest rates in the United States: IPOs, or initial public offerings.Skip to next paragraph
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IPOs are new public stock companies that create thousands of jobs, provide added competition for established companies, and bring innovative products to market. Unfortunately, stock market experts say, this recent round of interest-rate hikes is reducing the number of new IPOs coming to market. That means fewer jobs, less competition, and presumably fewer new products or services for consumers. Fewer IPOs also mean fewer publicly traded stock companies for the financial community to invest in.
``The impact is indirect but still very evident,'' says Claudia Mott of Prudential Securities Inc. ``Because higher interest rates translate into a slower economy and a slower stock market ... it is harder for new public companies to come to market.''
Ms. Mott says Prudential Securities anticipates a much slower year for IPOs in 1994 than 1993. ``The volume of new offerings is down dramatically for April and May of this year,'' she says. Through May, the Standard & Poor's new issue index, which monitors IPO valuation gains, is down about 7 percent. The Russell 2000 index, which follows smaller capitalization stocks - medium-sized companies - is down only about 5.2 percent for the same period, Mott notes.
``As interest rates rise, there is always some point at which there is a negative impact on equities, in general, since competing financial instruments become more attractive,'' says Perrin Long Jr. of First of Michigan Corporation. ``We've probably reached that point on the Dow [Jones industrial average]. Currently, there's a lack of demand for equities, and a number of IPOs haven't done too well on a price basis in recent months.''
The Dow is now in the 3750 point range. Mr. Long says it will ``take a market rising towards 4200 points by next year at this time'' before IPOs look attractive.
The Fed has raised interest rates four times this year to slow the economy and avoid future inflationary pressures. On June 8, Federal Reserve Chairman Alan Greenspan told a banking conference in London that inflation is ``clearly restrained'' in the US, suggesting more interest-rate hikes may not be necessary now.
IPO market growth has been dramatic in recent years. In 1991, there were about 367 IPOs that went public; in 1992, 518; and in 1993, 716, according to Prudential Securities and Securities Data Corporation, a financial information company in Newark, N.J. The number of new IPOs in 1994 will be below the record number issued in 1993, Mott says.
IPOs can be risky investments. The average IPO gains 11 percent in valuation from the original asking price on the first day of trading; the average return for issues bought after that is only around 0.1 percent. It may be some time before conditions are favorable for IPOs, experts caution. Dennis Jarrett, chief market technician for Kidder, Peabody & Co., says the market could still move from 3400 points to 3200 points on the Dow before market valuations start to rise.