Stock Crash Ruins Traditional Financing Route : Experts Warn Young Firms on ‘Going Public’

As a result of the stock market’s ongoing tumult, public offerings are no longer an attractive source of financing for growing young companies, two prominent regional investment bankers said Tuesday.

As a result, Orange County firms in need of financing should turn to private sources for capital, financiers Bruce C. Juell and Walter W. Cruttenden III told a group of business leaders and investors at a seminar sponsored by the Orange Coast Venture Group.

Venture capitalists can pick up sizeable investments in hungry young companies at bargain prices because of the current climate, said Cruttenden, chairman of Newport Beach-based Cruttenden & Co.

“No one is out there waiting to buy stock in new public issues,” agreed Juell, executive vice president of Bateman Eichler, Hill Richards in Los Angeles.

Offerings Canceled

Juell said that on Oct. 19, when the Dow Jones Industrial Averages lost a record 508 points, Bateman Eichler was involved in handling 23 public offerings that were to be brought to market that week. All were canceled.

Another 25 deals were pending or being contemplated, and most of those have been canceled, Juell said.

This week, he said, Bateman Eichler is involved in just three public offerings: for a utility, a bank and a well-established chemical company.

“Companies should not make their expansion plans depending on being able to go public,” Juell said.

In the face of a flurry of stock-repurchase announcements by local companies that have already gone public--more than a dozen in Orange County in recent weeks--Juell warned that firms should think twice because the money might be put to better use elsewhere.

But companies that can afford to buy back their stock can pick up the same excellent deals, as can venture capitalists, the two investment bankers said.

Some Have Recovered

Since the market crash on Oct. 19, the Dow Jones average and many of the major stocks it represents have recovered some of their losses.

But the stocks of smaller, secondary companies--a category that includes most public firms in Orange County--have continued to lose ground.

Some are selling at far less than half of their historic high prices and many are selling at less than the book value of the company’s assets, according to local broker and analyst Jeffrey Kilpatrick.

So while the county’s growth-oriented companies traditionally have been able to raise money for development and marketing by selling stock in the public market, “the stock prices are too low to raise much money, and investors are going to be afraid of buying new issues,” Cruttenden said.

And those few companies brave enough to try raising cash with a stock offering may find it difficult to find an investment banker willing to underwrite the effort. An underwriter purchases a company’s stock issues and then makes its profit by selling the shares on the open market at a higher price.

$1 Million Floor

Juell said Bateman Eichler does not want to do public offering work for companies that are earning less than $1 million a year because the firm fears involvement with companies that might withdraw their offerings because they are too weak to withstand market pressures.

Not only does an aborted offering cost the company a loss in legal fees and other costs, but the underwriter winds up spending a lot of time for a very little profit.

And “let’s say they do get sold at a fair price. A heavy burden is placed on the company to perform, and if they’re unable to perform, this tight market will make it more difficult than ever to get more capital,” Juell said.

Also, if the underwriter hangs onto a large amount of the company’s stock and its price falls below the initial offering price, the underwriter can lose a substantial amount.

That is why, Juell said, “when you’re public and not doing well, venture capitalists and an investment banking firm won’t touch you.”

He said many companies view the individual stock purchaser as a “sucker of last resort,” but few individuals are buying much stock now.

Still, said Cruttenden, private venture capitalists--who generally demand an active voice in setting company policy in return for their cash--are especially willing to invest now because they are going to get better deals.

ORANGE COUNTY VS THE DOW JONES AVERAGES

10/2-11/16 Index Oct. 2 Oct. 19 Nov. 17 % Change Dow Jones Industrial* 2640.99 1738.74 1922.25 -27.21 Orange County 100** 11.30 8.72 7.43 -34.25

*The measure of general price changes of 30 major industrial stocks traded on the NYSE.

**Average per-share price of the 100 largest publicly traded companies in Orange County.