IPO fever is cooled by market Lucrative business for Wall Street is drying up

Worst since 1974

Clients delay offerings or scrap them and raise capital elsewhere

Investment banking

September 20, 1998|By Bill Atkinson | Bill Atkinson,SUN STAFF

The stock market's dizzying swings have not only unnerved investors, but have slammed the brakes on the once speeding business of initial public offerings.

Big investment banking firms such as Morgan Stanley Dean Witter, Goldman, Sachs & Co., and BT Alex. Brown Inc. have made fast money bringing companies to the public market over the past several years, but now business is quickly drying up.

L No IPOs came to market in the first two weeks of this month.

"The well is dry," said John E. Fitzgibbon Jr., editor of IPO Reporter, a New York-based newsletter that tracks IPOs. "It is like the Sahara Desert in the middle of summer at high noon."

Clients primed to raise money publicly are postponing offerings, others are scrapping deals, and still others are finding alternative ways to raise capital, experts say.

"It is frustrating," said Edwin J. Bradley Jr., equity syndicate manager at Baltimore-based Legg Mason Inc. "It is difficult to get anybody's attention to a new issue."

The global volatility hit the IPO market, which had been humming along this year, like a bucket of ice water in August. Nineteen companies nationwide went public last month, compared with 47 in August 1997 and 61 in August 1996, according to the IPO Reporter.

In the first eight months of the year, 326 companies went public, raising $31.3 billion, compared with 381 deals worth $23.7 billion in the same period in 1997 and 556 deals worth $32.4 billion in the same eight months in 1996.

"The last time we have seen a month this bleak, you have to reach back to September 1974 when none were priced," said Fitzgibbon.

A calm stock market, or at least one that is somewhat predictable, is critical for investment bankers because that allows them to more accurately gauge the price at which investors will buy stock in a company coming to market.

Investors are also more willing buyers, even eager ones, especially for companies perceived as hot.

But when the market goes through wide swings, the investment bankers, who buy the stock in the IPO and sell it to the public, grow nervous. They fear that they stand too great a chance of losing money if the price falls and they can't sell the shares to investors.

In addition, company executives are reluctant to try raising money during rough markets. They worry that shares will be sold too cheaply and that the value of the company will shrink.

"When the market comes down, losses pile up on the books," Fitzgibbon said. "They [investment bankers] are not going to take these chances."

Taking companies public can be a lucrative business for investment bankers when the stock market is rising.

Legg Mason managed or co-managed 56 deals last year, a record for the company. Its investment banking revenue, largely from public offerings, soared 35 percent to $97 million in its fiscal year that ended March 31 and represented about 11 percent of total revenue.

This year, Legg Mason has done 29 deals, and seven more are coming up, "none of which are all-systems-go," Bradley said.

The deals were flowing in the first half of the year, he said, but in August the stock market went haywire and the "brakes were put on."

Bradley said Legg Mason is helping clients raise money through other channels, including private placements.

"I don't need the market to be up 1,000 points from here," he said. "What we need is a period of time where the market is not up or down 100 points every day."

Others companies are feeling the pinch, too.

BT Alex. Brown Inc., known for taking public technology and health care companies, has led or co-managed 113 deals this year, raising $19.5 billion. But business tailed off sharply just weeks ago, said Michael Ott, head of equity syndicate.

The company, which is owned by Bankers Trust New York Corp., was on track to exceed the $21 billion it raised last year for 179 companies.

"We were at a pace to raise more money for people than we ever had," Ott said.

Typically at this time of year, 30 to 40 companies might be on the road marketing themselves to raise money in public offerings. Currently, there are two IPOs and one secondary offering coming up, he said.

Ott is advising clients to "sit tight."

He thinks high-quality companies with a special niche can tap the market but that one of the keys for a broad revival hinges on stronger performances from smaller publicly traded companies, which have been shunned by investors.

"Value has to be realized, and money has to be made in the secondary market before the IPO market can come back to full strength," he said.

Charles Newhall, general partner at New Enterprise Associates, a Baltimore-based venture capital firm, said at least four companies in which his firm has invested have put their offerings on hold because of the unsettled stock market.

Newhall said he is telling the companies to raise equity privately -- more than they need -- and "just get on with life."

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