Prospectuses are begining to peep through the tulips. The market for new stock issues has begun to bloom on Wall Street.
Last week, notes Norman G. Fosback, the editor of New Issues, a Ft. Lauderdale, Fla., newsletter, was the first time all year that investors were treated to any color at all.
Data Switch Corporation, a manufacturer of central switches for large computers, went public at $12.50 a share and immediately climbed to $15.50. This was the best reception for a new public issue during the year. It marked a change in investors' hearts from earlier this year, when Godfather's Pizza expected to come to market at $16 a share, but found it had to lower the price to $9.75 in order to sell its shares. Since then, the pizza company's shares have risen to $12.
Behind the rising interest in new issues is the climbing market. ''It takes a healthy stock market to generate interest in new issues,'' Mr. Fosback commented. Peter Lynch, a portfolio manager for the Fidelity Magellan Fund, a mutual fund that has been a steady buyer of new issues, adds that ''it takes a couple of successful offerings to make people notice.'' And, he adds, ''it takes the right kinds of companies.'' Last year, underwriters were floating new issues in drilling companies and biotechnology companies - areas investors were not particularly interested in. Now, Mr. Lynch says investors are interested in banks, utilities, and retailers - areas where there are few new public offerings. ''What's needed is a unique kind of company,'' he concludes.
A lot of Wall Street brokers think this order will be filled by mid-May, when the Securities and Exchange Commission is expected to release the prospectus on a new company called Convergent Technologies Inc. It will be underwritten by L.F. Rothschild, Unterberg, Towbin and Hambrecht & Quist, two of the most respected underwriters on Wall Street.
According to one broker associated with the underwriting team, there are already orders for 8 million shares - and the deal only calls for the issuance of 4 million. Adding fuel to the fire is the additional recommendation this week of Mr. Fosback. Finally, starting this week, the underwriters take the company out for ''a road show,'' where prospective institutional investors can meet the top management and look at its products. In theory, a broker says, prospective buyers can only ask questions relating to the prospectus.
Mr. Fosback says he likes the company despite a number of drawbacks. Chief among the drawbacks, as investors will find once they dig into the prospectus, is the valuation the underwriters have placed on the new company. For example, last year the company had sales of $13 million and a profit of only $770,000. But with nearly 20 million shares outstanding and an offering price of $15 a share, the company will start with a capitalization of a hefty $300 million. Mr. Fosback expects Convergent Technologies to earn - after adjusting for the offering - about 20 cents a share in this year. Thus, he estimates it will sell at 75 times earnings - more than any stock on the New York Stock Exchange today. Investors will be paying a large premium for the company's expected growth.
The company's product is not unique: It manufactures small microproccesor-based computers in a unit designed to fit at the user's desk. What makes these computers different from others made in Silicon Valley, Mr. Fosback says, is the ''architecture.'' By clustering terminals in a ''work station,'' the user can perform tasks faster because the station is devoted to that person's needs. In a normal central processing system, individuals share the memory of the central units and may not have as fast processing time. Mr. Fosback commented that ''anyone can do this; there is no guarantee that one year or five years from now they won't.''
Short of simple greed, why would such respected underwriters sell the company in this market at such a high price? According to Mr. Fosback, there are at least three reasons he likes the stock offering. First, he likes the underwriters. They are the leading new-issue underwriters, known for picking winning stocks (Genentech, for example). Second, the managers of the firm are all experienced, coming to the company from such companies as Digital Equipment, Intel, Xerox, Four-Phase Systems, and Honeywell. And the company has arranged for some unusual sponsorship from its customers.
If Burroughs, a major customer, purchases 10,000 work stations through 1983, the Detroit-based computer company will receive warrants to buy 500,000 shares of Convergent stock at $7 a share and warrants to buy an additional 1 million shares at $9.80 a share. The warrants are fully exercisable after the company has bought at least 35,000 work stations by 1986. Convergent has comparable, but not similar, deals with Thomson-CSF and NCR Corporation, which are also customers.
Mr. Fosback says this deal ''gives the customers the potential to get a big discount on the purchase of the work stations'' while at the same time giving Convergent the potential for large orders. The company's backlog is officially listed at $46 million. But one broker familiar with the company says it has a ''soft order book'' of $300 million. And he says its customers have indicated that the real ''soft order book,'' that is, nonfirm orders, is really $750 million. With these kinds of numbers circulating Wall Street, it's not surprising the deal is considered hot.
Last week the stock market pulled back from its recent advances as investors became concerned about rising interest rates, the budget impasse in Washington, and international tensions over the Falklands Islands crisis. The Dow Jones industrial average dropped 13.80 points, closing at 848.36.