Slow Year for IPOs of California Companies

For a quick summary of the market for initial public stock offerings, look no further than the reception investors gave computer disk-drive maker Seagate Technology Holdings on Wednesday.

After the company priced its new shares at $12 each late Tuesday -- compared with expectations of $13 to $15 -- Seagate slumped to close at $11.50 in its debut trading session on the New York Stock Exchange, rendering it “broken” in market-speak.

Seagate, which is incorporated in the Cayman Islands but is run from Scotts Valley, Calif., is one of only 16 California companies to be taken public this year. Indeed, 2002 is shaping up to be the slowest year for IPOs by California companies since at least 1980, according to data tracker Thomson Financial.

The national picture isn’t much better: A total of 82 companies nationwide have floated IPOs this year, also the slowest pace in at least a decade.

The long bear market has made many investors unwilling to take a chance on shares of new companies. That has been particularly true in the technology sector, which dominated the IPO business in the late 1990s. Many of that era’s tech stock offerings -- including a long list of California firms -- have crashed and burned.

Some analysts found what little hope they could in Seagate’s ability to raise $870 million in a brutal market climate for tech shares.

“The fact that Seagate is a ‘broken’ deal is tremendously disappointing. It’s a benchmark deal, the last big one for 2002,” said David Menlow, head of IPO Financial Network in Milburn, N.J. “But the fact that an $870-million tech deal got done at all is impressive.”

Seagate is an atypical IPO. It was a public company until two years ago, when it was taken private in a leveraged buyout. The firm isn’t a fledgling business: It’s the largest maker of computer disk drives, with annual sales of about $6 billion.

Despite the stock’s fall on Wednesday, some experts see signs that the IPO market has stabilized and could be poised for recovery.

“The prospects for IPOs and secondary offerings have turned positive,” said Ed Wedbush, chief executive of Wedbush Morgan Securities, a Los Angeles-based investment bank. “The deals are getting done, a few of them every week.”

Still, investors have good reason to be wary: Of the 16 California companies that have gone public this year, shares of 10 of them are trading below their offering prices.

As for 2003, much depends on whether the stock market overall continues to rebound from the five-year lows of October.

The IPO market has perked up since October as investors have “tested the waters” with deals such as Wynn Resorts Ltd., the Stephen Wynn-led company that is building a Las Vegas luxury hotel, said Ben Holmes, who covers new issues for Morningnotes.com in Boulder, Colo. Wynn Resorts was priced at $13 a share. The stock has since notched a modest gain, closing at $13.25 Wednesday.

Some recent deals have fared better, Holmes said, pointing to Portfolio Recovery Associates Inc., a Virginia company that collects on defaulted consumer loans, and Chicago Mercantile Exchange. Those stocks are up 43% and 29%, respectively, from their offering prices.

Although the backlog of California IPOs remains thin, investors’ appetite for new stocks could be whetted in 2003 if some upcoming big deals perform well.

Los Angeles-based real estate firm Maguire Properties Inc., whose $750-million IPO might come as soon as January, stands to benefit if the economy looks strong, Holmes said: “In a rebounding economy, does commercial real estate become a darling sector? It may, as businesses look to increase their workforce and need more space.”

In the tech arena, NPTest Inc., the San Jose-based semiconductor testing unit of Schlumberger Ltd. that hopes to raise $489 million, also could be a closely watched deal if it materializes in the first quarter.

But some veteran investors warn that there could be more pain coming for the tech sector.

“Some of us remember that when the stock market tanked in October 1987, the IPO market didn’t come back for high-tech companies until the middle of 1991,” said Fred Haney, a venture capitalist with Arcturus Capital in L.A. “If you look back at the stock market charts, that 1987 sell-off looks like a blip compared to this time around. Plus, the technology business sector is in a real state of recession, if not depression.”

Even so, some private California tech companies say they are guardedly optimistic that a strong IPO market will return in late 2003 or early 2004, allowing them to go public.

“I’m absolutely hoping to head in [the IPO] direction at that time, but it will all depend on whether the capital market comes back,” said Cyrus Hadavi, chief executive of L.A.-based Adexa Inc., a supply-chain software company launched in 1994.

Adexa landed $15 million in venture capital financing in the third quarter, the fifth infusion for the company. Hadavi, who has trimmed his payroll to 250 employees from 410 at the end of 2000, said his company should not need any more venture funding, but he isn’t taking any chances.

“I’ll be using that money very carefully,” he said.