Surging IPO market shows little sign of slacking off Despite some duds, cash is pouring in

October 10, 1993|By Ian Johnson | Ian Johnson,New York Bureau

New York -- What's new in stocks this fall? A company angling for $60 million to build an observation tower in Las Vegas. Another that has racked up millions in losses trying to tutor schoolchildren. And a computer systems company that even its backers think might collapse.

Such initial public offerings, scheduled this fall, would trigger alarm bells in any other year. When so many companies are issuing stock, and investors are hungry enough to buy into such dubious deals, it's usually time to bail out of the market.

"We've been seeing 60 companies a month issue stock for the first time. Usually, 40 is the signal to sell stock because the market is overheating," said Robert Natale of Standard & Poor's Corp.

But Mr. Natale and other stock market analysts believe that the current bull market is different. Sure, a record number of companies are going public, and some duds are being offered, but the current IPO market is so strong that analysts see little likelihood of a collapse.

If true, the surging IPO market strengthens a 1990s trend toward public trading of small companies. Even the go-go 1980s saw only an annual average of $7 billion flow into new-company stocks; the first four years of this decade have averaged $20 billion.

Last year, for example, 524 companies raised $26.6 billion from equity markets. This year, both those records should fall. Through September, 374 companies had issued stock worth $25.1 billion, with 200 more companies in the works for the remaining three months.

"These numbers would suggest froth in the market, but it's really a disciplined market," said William Smith, an analyst at 'u Connecticut-based Renaissance Capital, which evaluates IPOs for big investors.

Mr. Smith points out that several IPOs have been rebuffed by the market. "If investors were really buying everything in sight, they wouldn't be rejecting some IPOs."

Maternity wear retailer A Pea in the Pod, for example, had hoped to sell its stock in mid-September for between $13 and $15 a share but had to settle for $12. Since then, the stock has dipped further, to close Friday at $11.875.

And when basketball legend Wilt Chamberlain tried earlier this year to raise $10 million to open a New York restaurant, he was forced to withdraw the IPO after traders shot down the stock's price from $7.50 to $6.

Another sign of the market's sobriety: For every Las Vegas tower-builder who tries to raise money, there's a high-quality company issuing stock. Recently, for example, two prominent booksellers, Barnes & Noble Inc. and Books-A-Million Inc., have gone public.

The big attraction for companies is a red-hot market that offers a good price for their stock. "The cash is available," said Gar Richland, head of investment banking for Baltimore's Alex. Brown & Sons Inc.

The market is hot, Mr. Richland says, because investors continue to pump money into mutual funds, giving money managers the cash to buy IPOs. In August, for example, investors concerned about the low interest rates paid by banks put a record $24.8 billion into the funds.

A longer-term trend has been the resurgence of small stocks. Although blue-chip consumer companies were Wall Street darlings in the 1980s, smaller companies able to take advantage of the herky-jerky economy are now in favor. Many analysts believe that small stocks are in the middle of a seven-year bull market.

New small-company stocks also look attractive because they're often cheaper than stocks of established companies, Mr. Richland says. And although the market has rejected some IPOs, most fare well, at least initially.

Local companies have been quick to cash in.

Baltimore-based Atlantic Beverage Co. Inc. filed on Sept. 24 to issue $11.5 million in stock. Atlantic, the largest independent wholesaler of nonalcoholic beverages in the Baltimore-Washington area, wants the money to repay old debts and expand its operations.

Two money-losing Columbia companies also have registered to sell stock.

Martek Biosciences Corp., a biotech company seeking $37 million, makes nutritional and medical products based on culling microalgae. The company lost $1.2 million on revenues of $3.9 million last year.

Meanwhile, Sylvan Learning Systems Inc. is hoping for $31 million to expand its tutoring centers. It lost $4 million last year as its revenues climbed to $11.7 million.

Still, investors should be wary.

"The numbers are great, but there is some concern that some of the IPOs are bogus," said Ivan Cintron, assistant editor of The IPO Reporter.

One of the most ridiculed is an IPO made by the Stratosphere Corp., a Delaware company that wants to build a 1,012-foot-high observation tower in Las Vegas. The tower is already 404 feet high, but developers say they need the $58 million in proceeds from the IPO to complete it and even more to develop a theme park.

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