Another Crush of New Stock Offerings Awaits Fall Shoppers
Wall Street is out to prove that, despite appearances to the contrary, not every company in America has already gone public.
A potentially heavy calendar of new stock offerings awaits investors returning from summer vacation this month, and demand for these securities will determine whether this year sets a record for new-share issuance.
Individual investors may find it easier to get their hands on some of these stocks, if only because institutional investors may be pickier about what they’re buying. But that’s all the more reason for small investors to remember that the rule with new stocks remains caveat emptor.
Still, on deck are some well-known names that could tempt buyers large and small: legendary rugged-apparel retailer Abercrombie & Fitch; American Airlines’ Sabre computerized reservations-system unit; and Arden Realty, one of the Southland’s biggest office building owners.
Brokerages may need big names to get people re-interested in the initial public offering (IPO) market, after Wall Street’s July slump made many buyers wary and took the steam out of what had been an IPO locomotive this year.
The market for new issues had zoomed in the spring as smaller stocks in general enjoyed tremendous demand. Investors were in a mood to speculate, and that is always a good environment for companies floating stock for the first time.
A total of 96 companies went public in May, raising $6.4 billion, according to Securities Data Co. In June, another 91 companies went public, raising $5.5 billion.
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But when worries about rising interest rates slammed Wall Street in early July, the bottom quickly fell out for many smaller stocks. Speculators turned cautious, and that meant turning a cold shoulder toward many IPOs.
In July, 64 companies were able to sell stock for the first time, raising $2.6 billion. Activity ebbed even more in August, when 58 IPOs hit the market, raising $2.5 billion, or just 40% of May’s total.
Only a handful of companies are set to try to come to market this week, because brokerages assume it will be tough to get buyers to put up their cash ahead of the August U.S. employment report due Friday. That report should be critical in determining whether the Federal Reserve Board decides to raise short-term interest rates to brake the economy’s strong pace.
“No one wants to commit to anything this week,” says Keith Kirkpatrick, editor of Going Public: The IPO Reporter, a newsletter in New York.
But if the employment report is weak enough to dampen worries about the Fed, and the stock market continues to revive or at least holds stable, brokerages have a load of IPO product they’d like to place in public hands.
IPO research firm Renaissance Capital Management in Greenwich, Conn., counts 144 offerings that hope to hit the market in the next eight weeks, says Linda Killian, a Renaissance principal. That isn’t much below the record eight-week calendar total of 156 in June, when the market was still flying, she says.
Even if the overall mood on Wall Street stays upbeat, however, potential IPO investors have been trying to drive harder bargains recently, and that could cause more companies to walk away from selling shares rather than sell themselves for what they consider too cheap a price, Killian says.
In spring “a lot of uncommitted and unknowledgeable investors were buying” IPOs at what now look like absurd prices, Killian says. Today, she says, “more deals are getting priced below the offering ranges” initially indicated by the brokerages handling the deals.
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Buyers naturally think they have good reason to try and whittle down the initial offering prices: More than a handful of IPOs have been flops this year and are already trading below their offering prices. Remember Internet-search firm Excite, which sold 2 million shares at $17 apiece in April? The stock price now is $5.75.
Of course, there always are duds among IPOs. What keeps investors coming back is the hope of getting in on the ground floor with a company that is primed for success.
Analysts suggest that would-be buyers this fall focus on an IPO’s price relative to what similar stocks are already selling for, relative to earnings, in the market (a good way to avoid overpaying).
And pay attention to the underwriter. “A lot of second- and third-tier underwriters were very active in August,” says Mark Basham, IPO analyst at Standard & Poor’s Corp. in New York. That suggests they may have been doing deals that bigger underwriters wouldn’t touch.
If you’re buying a new stock from an underwriter that has a limited track record with IPOs, you may be taking on two risks: First, the risk inherent in the IPO company itself, and second, the risk that the underwriter will fail to support the stock once it begins trading, which means that the price could quickly melt if the market mood turns glum.
If you’re still in the mood to shop, here are some of the IPO themes that could be hot this fall:
* Corporate “carve-outs”: These are spinoffs from major companies, and their appeal usually is their name-brand status and, often, long operating histories. Included on the current calendar are Abercrombie & Fitch, a division of retail giant Limited Inc.; Sabre, the American Airlines reservations division; and Cox Radio, currently a division of Cox Enterprises.
* Real estate investment trusts: There’s a buzz about two big deals. Arden Realty, which owns mostly suburban office buildings in Southern California, is viewed as a play on the region’s economic recovery. Dallas-based Prentiss Properties, meanwhile, is an owner of a diversified portfolio of 85 properties nationwide.
* Energy: This may be the “next big thing” for the IPO market, especially if oil prices stay up. Some deals expected to attract attention include Offshore Energy Development, a Woodlands, Texas-based natural gas exploration firm, and National-Oilwell of Houston, a manufacturer of drilling machinery and equipment.
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A Record Year
Initial public offerings of stock could set a record this year, but it will take a hot market between now and Jan.1 to make up for the slowdown of the last two months. The annual dollar volume and number of issues each year, and year- to- date 1996 totals:
IPO dollar volume (in billions)
‘96: $32.2
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Number of IPOs
‘96: 542
Note: Data excluded closed and investment funds.Source: Securities Data Co.
