Xircom Proves IPO Risk : Investments: The Calabasas electronic component maker’s initial public offering was at $14 a share. Months later, the price is well below that level.

If investors need another example of why initial public stock offerings are risky investments--and they don’t--Xircom Inc. is a case in point.

Xircom is a 4-year-old Calabasas company that makes electronic components to link personal computers--particularly portable “notebook” or laptop computers--with other computers, printers and databases that make up so-called “local area networks.” Such networks are increasingly common in offices and factories.

The company, whose fiscal year ends Sept. 30, has grown quickly. In the nine months ended June 30, Xircom earned $4.3 million on sales of $42 million. And last March it raised about $37 million in net proceeds with an initial stock offering of 4 million shares at $14 apiece.

Xircom itself sold 2.87 million shares, and its two founders--J. Kirk Mathews, who is chairman, and Dirk I. Gates, its chief executive--each sold about 274,000 of their Xircom shares, bringing them $3.8 million apiece. (Mathews and Gates continue to own 17% and 16% of the company, respectively.)

Then the fireworks began. Within a month Xircom’s stock, buoyed by recommendations from analysts, soared to $22 a share in NASDAQ trading. Two months after that, the stock had plunged to only $7.75.

It’s rebounded somewhat since, closing Monday at $10 a share. But although Mathews, Gates and the other original Xircom holders got $14 a share for the stock they sold, the investors who bought Xircom’s initial public offering (IPO) and still own the stock are under water by 29%.

It’s an old story with IPOs. Even in the go-go 1980s, only a third of the new stocks sold during the period were trading above their initial offering price when the decade ended, according to a study by economist Porter K. Wheeler of The Jefferson Group, a consulting firm in Washington. People keep buying IPOs, though, because a few--such as Amgen Inc. and Microsoft Corp.--have soared in price.

Not only did Xircom’s stock fall, but the analysts for the two investment firms that managed its offering--Morgan Stanley & Co. in New York and Hambrecht & Quist Inc. in San Francisco--earlier this month shaved their estimates for Xircom’s fiscal 1992 profit.

What went wrong? Until now Xircom has been a company with basically one product line, that being its local-area-network (LAN) adapters, and Xircom contends there’s been little competition. Sales of those products are “very healthy, and we’re continuing to grow that business very strongly,” said Gates, 30.

However, Xircom also is launching product No. 2, called Network Simplicity, which enables personal computer users to easily create their own LANs, as opposed to tapping into established LANs. But snags in the product’s software have developed and sales of Network Simplicity have been delayed.

It’s the kind of misstep that’s always dangerous for stocks of companies that have just gone public. Investors in new issues don’t like negative surprises so soon after an IPO, and if they get surprised, they usually punish the stock’s price.

“In today’s marketplace, you drop a hatpin and it’s a shocking tidal wave” to Wall Street, said Bob Mescal, an analyst with the newsletter New Issues.

“First, interest in Xircom got a little overheated,” which sent the stock sharply higher, said Steven D. Levy, who follows the company for Hambrecht & Quist. “Then people started getting nervous about comments the company had made about Network Simplicity” having problems, he said.

But Gates remains upbeat about Xircom’s growth. Xircom last week said its fiscal third-quarter profit nearly tripled from a year earlier, to $1.62 million from $561,000, while its sales more than doubled to $14.6 million from $6.80 million.

As for Network Simplicity, Xircom wants to sell it through retail outlets, such as Sears Business Centers, from which individual computer users can increasingly buy most of the equipment they need.

Network Simplicity is being developed with the help of software created by Novell Inc. of Provo, Utah. “There’s been a few hiccups in that piece of software that Novell is ironing out,” Gates said, adding, “To be fair, there’s been hiccups on both ends.” But he expects the problems to be fixed within the next three months, and “we’ll be back on track with that product.”

Even if all had gone smoothly, Network Simplicity was not expected to contribute more than 10% of Xircom’s overall earnings, at least not initially, Levy said. So Levy said he simply excluded the new product from his Xircom forecasts, and that’s why he cut his estimate for Xircom’s fiscal 1992 profit to $6.2 million from $6.5 million.

Xircom’s main business, though, is doing well, he said. “Every indication we’ve gotten, not just from the company but from distributors and customers, leads us to believe this is a strongly growing product,” he said.

Mescal said New Issues is still recommending Xircom to investors, given the stock’s low price relative to the IPO price. “We bought the stock and we’re still buying it,” he said. “The fundamentals”--Xircom’s sales and profit outlook--”haven’t changed at all,” Mescal said.

Xircom’s products are popular because they enable personal computers to easily connect with LANs. It’s a connection that otherwise can be difficult and expensive. LANs are complex systems that often require computer experts to link the various pieces of equipment, particularly if the pieces are made by different manufacturers.

But Xircom’s products, which are about the size of a pack of cigarettes and cost between $400 and $1,000, solve the problem. A cable from the LAN is attached to Xircom’s adapter, and the adapter is plugged into the personal computer. It’s that simple. And the adapter works with any make of computer.

“Our major claim to fame is we created the first universal method to connect any laptop or notebook machine to a LAN,” Gates said.

Gates and Mathews, 50, founded Xircom after leaving senior management posts at Pertron Controls Corp., which made components, including LAN equipment, for automating factories. They left after Pertron was acquired by Square D Co., a giant manufacturer of electrical controls and components.

“Kirk and I didn’t like being at the bottom of a billion-dollar bureaucracy,” Gates said.

One threat on Xircom’s horizon is the prospect that computer makers would build the equivalent of Xircom’s LAN adapters directly into their machines, making Xircom’s products unnecessary. But Gates said that isn’t likely to happen.

Various LANs have different types of wiring, and “for a computer manufacturer to address them all gets to be rather difficult,” he said.

Also, Gates estimates that only a minority of the people who own personal computers, particularly portable machines, want to be connected to LANs. That’s plenty of business for Xircom, but probably not enough for the computer makers to bother installing the extra component on their assembly lines, he said.

Xircom Inc. at a Glance Xircom Inc. makes components that enable personal computers to be linked to printers, databases and other computers to comprise so-called local area networks. The Calabasas-based company, which was founded in 1988, raised about $37 million last March through an initial public stock offering.