Many Young IPOs Don’t Get the Help They Need
Like newborn calves on wobbly legs, companies selling stock to the public for the first time often need plenty of help from their investment bankers to get up and running as publicly traded entities.
Yet in a hot stock market, an increasing number of companies aren’t getting the support they need once their initial public offerings of stock are completed, some market experts say.
“Many underwriters are nonchalantly walking away from a company that has trouble in the marketplace or sees [its] operating results suffer,” says Samuel L. Hayes III, a Harvard professor and Wall Street historian.
Investment bankers, he says, often “don’t feel any obligation to help a company turn things around if there is not another deal coming” from that company.
The result: Many IPOs crash and burn--hurting the companies and aggravating the stocks’ investors.
In a typical deal, investment bankers value a company, structure the financing and then sell the stock. Post-deal, the banker is supposed to write research reports to update investors on the company’s financial prospects.
And most important, the banker is supposed to be a “market maker,” buying and selling as necessary to maintain a liquid market for the company’s stock.
Yet, in a recent study of IPOs that came to market between 1979 and 1991, Iowa State University business professor Richard B. Carter found that, on average, IPO stocks under-perform the market overall by more than 20% in the three years after their debut.
That means that true buy-and-hold investors would have been better off putting their money elsewhere.
Of course, how a stock fares can depend on many factors, including simple investor fickleness. But Carter also discovered that the IPO stocks’ performance varied depending on the reputation of the investment bank that led the underwriting effort.
“The better underwriters,” Carter said in the study, slated to be published in the Journal of Finance, “are better able to assess the long-term performance of a company.”
Jack E. Fitzgibbon, editor of IPO Aftermarket, a New York-based newsletter, noted that savvy investors often pay more attention to the reputation of the investment banker than they do the company itself when deciding which IPOs to buy.
“There’s a saying: If you don’t know the horse, bet on the jockey,” Fitzgibbon said. “That’s what many investors do with IPOs.”
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That strategy certainly seems to have worked in the case of IPOs lead-managed by California-based investment banking firms in the last 5 1/2 years.
An IPO study performed for The Times by CommScan, a New York-based data-tracking firm, found that the top tier of California-based underwriters--the three firms that boast the most IPO deals and that are the best-known California names on Wall Street--also boast the strongest overall post-debut performance of IPO shares among all California underwriters.
Those three firms are Montgomery Securities, Robertson Stephens & Co. and Hambrecht & Quist, all based in San Francisco.
In general, fewer of the IPOs brought to market since January 1992 by the big three California firms have recently been trading below their IPO prices, compared with IPOs of most smaller California underwriters.
What’s more, a higher percentage of the big three firms’ IPOs since 1992 have recently been 100% or more above their IPO prices, compared with IPOs of the smaller underwriters.
Specifically, the CommScan study showed:
* Between 42% and 45% of the big three firms’ IPOs were trading at less than their IPO price when CommScan surveyed in late June.
By contrast, 86% of Los Angeles-based underwriter Boston Group’s IPOs were trading below their IPO prices. The figure was 63% for Wedbush Morgan Securities, another L.A. firm.
* The percentage of IPOs up 100% or more from their offering prices ranged from 18% to 24% for the big three firms, while seven of the eight smaller underwriters had weaker results.
* Compared with the IPO performance of the 20 largest U.S. investment banks--most of which are in New York--the California firms overall fared less well. On average, only 34% of IPOs underwritten by the major firms since January 1992 are below their offering prices; and 23% are up 100% or more.
Overall, the study strongly suggests that an IPO stock’s long-term performance does indeed correlate with the experience and depth of its underwriter. The biggest firms, naturally, have their pick of many more potential deals--and thus have more opportunities for success with IPOs.
California’s largest investment bank, Montgomery Securities, receives hundreds of business plans from companies each year looking to go public. Most don’t make it very far.
“When I look at a business plan, something will say to me this is not a company ready to be a public company, and I will throw it here,” said Michael T. Moe, a principal at Montgomery, pointing to the trash.
Even so, the deal pace at Montgomery has been frenetic in the 1990s. The firm is desperately looking for more space to expand from its crowded offices in the Transamerica pyramid in downtown San Francisco with views of the bay from the trading floor.
Montgomery has grown to about 1,400 employees from 364 employees in 1990. Just acquired by NationsBank Corp. of Charlotte, N.C., for $1.2 billion in cash and stock, Montgomery was a team member on more IPO deals in 1996 than any other firm in the nation and through July of this year is ranked third as lead manager.
Montgomery’s co-founding chairman, Thomas Weisel, said that while IPO fees make up only about 25% of the firm’s revenue, such deals are an incredibly important part of the firm’s business, as the companies it takes public continue to grow and come back to the market for additional capital.
While Weisel said Montgomery will underwrite an IPO for a company that doesn’t yet have a successful track record in terms of sales or earnings, a strong management team and cutting-edge products are a must.
With IPOs, “we’re dealing with a size of company that is somewhat fragile,” Weisel noted. Continuing support from the underwriter often is crucial to a firm’s success, he said.
He said that Montgomery continued to support Amgen Inc.’s 1983 IPO with research and market-making even after the biotech firm’s stock dropped below $5 a share. Amgen went on to become the most successful biotech company in history.
“There are lives and second lives and third lives for young companies,” Weisel said.
But some underwriters have not built up the infrastructure to provide the kind of support needed for some young IPOs, Weisel said--an issue that he said should be a “legitimate concern” for small companies looking to go public.
Yet even Montgomery has had its share of IPO bombs.
Unify Corp., a high-tech company that sold $25.6 million of stock to the public at $12 a share through Montgomery in June 1996, saw its stock rise to a high of $14.25 just months later. But in the last eight months, the San Jose firm’s stock has fallen more than 80% because of disappointing results. The stock now is at $2.69 a share.
“Obviously, sometimes we’re wrong,” said Montgomery’s Moe. “But on those companies we’re still providing research; we still make a market in their stock. No one else might care about them, but we don’t abandon them.”
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Below the top three California underwriters are eight smaller firms that have had less success, overall, with IPOs, according to the CommScan study.
Irvine-based Cruttenden Roth, for example, has been lead underwriter for 25 IPOs since January 1992 and through June of this year. While 46% of its IPOs have recently been trading below their IPO price--a percentage just slightly worse than the big three firms’ numbers--only 8% of Cruttenden’s IPOs are up 100% or more.
Two of Cruttenden’s 25 IPOs have been delisted, meaning they have performed so poorly that they no longer trade in the main Nasdaq market. Including those, six Cruttenden IPOs have fallen to less than $3 a share.
Byron Roth, president of Cruttenden, points out that his firm does smaller IPO deals than the larger firms, with the average deal size $10 million and the average price per share $6.60. This makes their deals more volatile, Roth said.
“We tend to take companies public a little bit earlier than the Bay Area guys do,” Roth said. “There’s no doubt we’ve made mistakes. Those things happen. But in our American free enterprise system, you never know where the next Microsoft might be.”
And Cruttenden has had some major successes, such as Eltron International, a Simi Valley-based maker of bar code labels, which went public in 1994 at $3 (adjusted for a stock split) and now is at $30.13 a share.
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Another firm in the second tier of underwriters is San Francisco-based Volpe, Brown, Whelan. A total of 67% of the firm’s 24 IPOs since January 1992 recently were trading below their IPO price, CommScan found.
The 10-year-old Volpe, with 165 employees, specializes in volatile, complicated sectors of the health-care and technology industries.
“Some are going to succeed and some are not. We’re going to have some go up tenfold and others that go down,” said Tom Volpe, company principal. “Any time you get into an active public market, companies have a propensity to go public earlier and earlier, and that means it’s riskier and riskier.”
Yet a much smaller firm than Volpe--San Francisco-based Sutro & Co.--can lay claim to the best IPO performance record of any California underwriter in the 1990s.
Sutro has been lead manager for just six IPOs since 1992, but 50% of those stocks have risen 100% or more from their IPO price. And just one is below its IPO price.
However, Sutro has retreated from the underwriting business in recent years and hasn’t been lead manager on an IPO in four years.
* ‘FALLEN ANGELS’: A fickle market can be harsh on firms that go public too fast. A1
IPO Boom
Although the pace has slowed this year, the number of initial public offerings of stock, mostly by young, up-and-coming companies, has soared with Wall Street’s bull market. Number of IPOs nationally each year since 1990 and year-to-date:
1997 to date: 375
1996: 874
Source: Securities Data Co.
California Underwriters: An IPO Scorecard
There are many ways to measure the success of an initial public stock offering, or IPO. In the short term, an IPO is considered to be a hit if the stock soars immediately after the offering. But what happens after that? This chart gauges the long-term performance of IPOs underwritten by 11 California-based investment banks between January 1992 and last June. Two key performance figures are shown: the percentage of each company’s IPOs that now are trading below the IPO price; and the percentage of each company’s IPOs that now are trading 100% or more above the IPO price. The stocks were measured as of June 25 by CommScan, a New York-based IPO data-tracking firm.
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Dollars Pctg. of Pctg. of Number raised issues below IPOs up Underwriter of IPOs (mills.) IPO price 100% or more Montgomery Securities 127 $4,550 45% 22% Robertson Stephens 106 4,060 44 18 Hambrecht & Quist 101 2,890 42 24 Cruttenden Roth 25 225 46 8 Volpe Brown Whelan 24 631 67 8 Jefferies 9 331 56 11 Wedbush Morgan 8 104 63 13 Boston Group 7 87 86 0 Pacific Growth Equities 7 122 57 14 Sutro 6 116 17 50 Van Kasper 4 50 50 0 Avg. of 20 largest U.S. underwriters 93 8,190 34 23
No. of IPOs Underwriter delisted Montgomery Securities 4 Robertson Stephens 0 Hambrecht & Quist 2 Cruttenden Roth 2 Volpe Brown Whelan 0 Jefferies 0 Wedbush Morgan 1 Boston Group 0 Pacific Growth Equities 0 Sutro 0 Van Kasper 0 Avg. of 20 largest U.S. underwriters 1.3
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Source: CommScan
