Success of New Stock Offerings Stuff of Dreams
William H. Gates III, 30 years old, reaped one of our economic system’s more spectacular rewards last month when Microsoft Corp., the company that he founded as a Harvard sophomore 11 years ago, sold stock to the public for the first time. As investors snapped up Microsoft stock at prices of up to $29 a share, they established a market value of more than $300 million on Gates’ own 11-million-share stake in his company.
Such are the rewards of the entrepreneur. And of his venture-capital backers, and his employees, too, who acquired Microsoft stock at an average price of 27 cents a share over the last decade as they worked to build the company into a leader in personal computer software.
Their stock, which they will be able to sell on the open market after meeting certain requirements of the Securities and Exchange Commission, is now worth 100 times that average price.
Less entrepreneurial than Gates, but no less acute in their market timing, the managing directors and principals of the Morgan Stanley investment firm also sold stock to the public for the first time last month. In their collective case, stock for which they had paid $15.33 a share on average rose on the market to more than $70 a share.
Many of Morgan Stanley’s 292 directors and principals became multimillionaires on the spot.
They are not alone. Microsoft and Morgan were but two of 118 companies that raised $2.15 billion with initial public stock offerings in the first three months of the year. And the pace is quickening, says Norman Fosback, editor of the newsletter New Issues, who has been watching an increase in SEC filings by companies wanting to go public.
Is this a healthy trend? Most assuredly. The continual founding and building of new businesses is the very lifeblood of our economy.
The late great economist Joseph Schumpeter went so far as to say that the entrepreneur, who brings about job-creating innovation and change, creates the economy’s only true “profit.”
The entrepreneur, of course, works for the promise of the capital gain that the new issues market delivers.
Ah, but the rising tide lifts only some boats. Sad, perhaps, but true, the investors who so eagerly snap up new issues seldom make money with them. A survey of all new issues from 1975 to 1985, published last year by Forbes magazine, found that only four in 10 new issues showed a profit from offering price to the then-market price.
On average, the highly risky new issues gave investors a return that failed to keep up with inflation.
Why, then, are investors so eager? Because they believe mistakenly that they are getting in on the proverbial “ground floor,” investing in a company about to take off. But, as we see from the examples of Microsoft and Morgan Stanley, the ground floor belongs to the existing shareholders--the founders and backers and employees. The new shareholders are paying those earlier owners, in a sense, for the progress of the business to date. They should invest with an eye to the future. And the future is always a long shot.
Which is a pretty good perspective for the investor in new issues. Just as you bet 20-to-1 shots at the race track hoping for the big score, so you should bet new issues hoping to find another Xerox.
Sometimes you can. Ten years ago, a company named for Seymour Cray, a genius who wanted to design and build the world’s largest computers, went public at $1.10 a share--adjusted for subsequent stock splits. If you had put the equivalent of $110 in that company in 1976, you would have $7,125 today. Put another way, if you had put $15,500 into Cray Research Inc., and held on, you would be a millionaire today.
That’s the kind of dream that keeps the new issues market going. Maybe, if you really think about it, it’s the kind of dream that keeps our economy going, too.
