INVESTMENT OUTLOOK : ASSESSING 1987 : WELCOME TO THE MARKET : 1987: the Best and Worst Year for Initial Public Offerings
1987, which began as the best of years for initial public stock offerings, became the worst in memory overnight as the stock market collapsed.
“It’s a scene of devastation,” said Paul Simmonds, research director for the Institute for Econometric Research, the Largo, Fla., publisher of the IPO Letter. “Offerings have been withdrawn, prospectuses aren’t being printed, institutions aren’t buying. The market’s dead in the water.”
The initial offering market’s plunge is likely to take a particular toll on California, where high-technology industries have an unusual reliance on initial public stock offerings, or IPOs, as a source of capital and a personal financial incentive that has spurred executives, engineers and others to their best performances.
While all stocks have been hurt in the market’s collapse, IPOs have been particularly penalized because they typically involve young companies whose futures are less clear. Investors assume that such young companies are more likely to be hurt if a recession does set in, as some now fear.
As interest in new issues has cooled, some planned offerings have been postponed, while others have been marked down sharply in value. Many young companies that planned to make offerings in the months ahead wonder when--or if--they will be able to sell their stock to the public.
The euphoria of the market seemed at a peak just before the crash. By Oct. 12--one week before the crash--1987 had already been established as the highest volume year ever for initial offerings, with $22.5 billion raised in 507 offerings, according to a New York newsletter called Going Public: the IPO Reporter.
That compared to $22.4 billion that was raised in 719 offerings during all of 1986, the newsletter said.
In fact, the two largest initial offerings of 1987 were also the largest U.S. IPOs of all time. They were the Nuveen Municipal Closed-End Bond Fund, which raised $1.58 billion in June, and Consolidated Rail Corp., the Conrail freight railway, which the federal government sold to the public in March for $1.45 billion.
The strength of the market during the first 9 1/2 months of 1987 was reflected in the pricing of many new issues at high multiples of their annual per-share earnings, Simmonds noted. Most had multiples--stock price to earnings ratios--in the high 20s or low 30s.
“Now they’ll settle back to more reasonable levels--maybe in the range of 15 or 20 times earnings,” he said. “Some, of course, won’t get that high.”
Many of the year’s new offerings lost one-third of their value--and some as much as 50%--in the aftermath of Black Monday. As of the end of November, the last 100 stocks to go public had declined an average of 27% from their initial offering price, according to Susan Gallant, editor of Going Public.
“That’s by far the biggest decline in the two years we’ve been keeping records,” she said.
By comparison, the Dow Jones industrial average, made up of blue chip stocks, was off 18% between the opening of trading on Black Monday and Nov. 30; and the NASDAQ composite index of over-the-counter stocks had declined 25%.
Charles Schwab & Co., the nation’s largest discount brokerage, sold 8 million shares at $16.50 apiece on Sept. 22, raising $132 million. The issue was the fourth largest among California companies in 1987.
But the San Francisco company sustained a loss of $22 million in the market’s plunge, largely because one customer, a wealthy Hong Kong investor, could not meet margin calls--requirements that he put up additional cash to cover the declining value of his stock acquired through the brokerage firm. As word of those losses spread, Schwab’s stock skidded, too, and closed Monday at $6.625, down 60% from its offering price.
Arco Chemical, the former chemical division of Atlantic Richfield, sold 13.5 million shares at $32 apiece on Sept. 28 to raise $432 million. Expected demand for the shares was so great that the offering price had been raised from the $26- to $29-a-share price that originally had been anticipated. But Arco stock fell along with the others, sinking to as low as $17 after the market’s plunge.
Of the 13 companies that have gone public since the crash, five have been the sort of high-grade bond funds that attract investors because of the dividends they pay, and were thus resistant to the stock market rout. Most of the others are small concerns that each raised less than $5 million, said Gallant of Going Public.
She said that since the crash, there has been only one IPO of the kind that would attract institutional investors. This stock, a Boston waste management firm called Clean Harbors Inc., came public Nov. 24 at $9 a share, scaled back from an expected $13 to $15. The size of the offering also was reduced to 1 million shares from the initially planned 1.3 million.
An estimated 200 other companies have held back their offerings to reevaluate their prices or to wait for further developments in the economy and stock market. “At the very least, after what has happened, underwriters will feel they have to reassess what the company is worth,” Simmonds said.
Other companies will choose to sell stock privately or even to sell their entire business, he said.
Dozens of high-technology companies are among those that have been held up, including Access Technology, a San Jose software firm, and Altera Corp., a Santa Clara computer chip manufacturer. Others that have been put on hold include McClatchy Newspapers, owner of the Sacramento Bee and other papers, and MTM Entertainment, the TV production company that has actress Mary Tyler Moore among its directors.
MTM Entertainment proposed to sell 4 million shares at $25 to $28 apiece last month, including 644,000 owned by Moore. The deal would have brought her gross earnings of $16.1 million to $18 million. Now she may have to settle for less.
In every catastrophe there is opportunity, investment advisers are always ready to point out, and they say that the current climate is no exception. “If you were looking to get into the market at low prices, well, here they are,” Simmonds said.
1987’S BIGGEST INITIAL PUBLIC STOCK OFFERINGS
IPO INITIAL ISSUER DATE PROCEEDS PRICE Nuveen Municipal Closed-End Bond Fund 6/17 $1.58 billion $10 Consolidated Rail Corp 3/26 $1.45 billion $28 Duff and Phelps Selected Utilities Fund 1/21 $1.2 billion $10 MFS Multimarket Income Trust 3/5 $1.1 billion $10 MFS Government Markets Income Trust 5/22 $850 million $10 ACM Government Income Fund 8/21 $522 million $12 Gobal Government Plus Fund 7/24 $520 million $10 Dreyfus Strategic Municipals 9/28 $450 million $10 Arco Chemicals 9/28 $432 million $32 Carnival Cruise Lines 7/24 $365.8 million $15.50
11/30 ISSUER PRICE Nuveen Municipal Closed-End Bond Fund $8.75 Consolidated Rail Corp $24.625 Duff and Phelps Selected Utilities Fund $8.25 MFS Multimarket Income Trust $9.625 MFS Government Markets Income Trust $9.875 ACM Government Income Fund $11.50 Gobal Government Plus Fund $9.375 Dreyfus Strategic Municipals $9.125 Arco Chemicals $23.125 Carnival Cruise Lines $9.00
Source: Institute for Econometric Research
CALIFORNIA’S TOP IPOS IN 1987
Petrolane Partners LP, Long Beach 3/19 $256.25 million American Health Properties LP, Beverly Hills 3/19 $200 million TCW Convertible Securities, Los Angeles 2/26 $200 million Charles Schwab & Co., San Francisco 9/22 $132 million All Star Inns, Santa Barbara 3/27 $72.5 million
Petrolane Partners LP, Long Beach $20.50 $16.625 American Health Properties LP, Beverly Hills $20 $14.50 TCW Convertible Securities, Los Angeles $10 $6.375 Charles Schwab & Co., San Francisco $16.50 $6.625 All Star Inns, Santa Barbara $12.50 $7.375
Source: Going Public: The IPO Reporter
