Back To Basics

The high-tech boom went bust, and investors started looking for managers with proven track records, and flocking to companies like Roto-Rooter and OshKosh BhGosh.

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Back in 1983, when the market for initial public offerings roared, the roster of best-selling new issues read like a venture capitalist's fantasy. Scores of young companies named Bio-this and Micro-that were raising money at prices that harkened back to the go-go years of the late 1960s. No matter that many of the businesses were embryonic and expecting to lose money for several years. Investors seemed convinced that, with the right amount of cash, these fledgling enterprises were going to transform the way we work and live.

How swiftly things change. The 1983 market is a distant memory these days, and so are the visions that fueled it. Many of its most active investors are on the sidelines, licking their wounds. As for the 1985 new issues market, it looked nothing like its legendary predecessor. The exotic was out, and the mundane was in. In place of companies whose names ended in "-onics," the year's hot IPOs included an "-ooter," as in Roto-Rooter, the sewer cleaning company; an "-osh," as in OshKosh B'Gosh, the clothing maker; and an "-eese," as in Pasta & Cheese, the food packager and retailer.

To be sure, Wall Street's newfound enthusiasm for down-to-earth companies had much to do with its earlier voyage into the IPO stratosphere. During the record-shattering year of 1983, 673 companies collectively raised nearly $12.5 billion in IPOs -- almost four times the amount companies had garnered in the previous record year of 1981. (These figures do not include "best efforts" issues or offerings priced below $1 a share.) In the heady aftermarket, moreover, many new issues soared, only to come crashing back to earth as the investing public lost faith in their ability to perform. Naturally, the stocks that had risen to the highest multiples had the furthest to fall. These were mainly the stocks of young technology companies, one of the more infamous examples being Diasonics Inc., an extraordinarily well-financed maker of medical diagnostic equipment. After going public at $22 a share, more than 70 times its prior year's earnings, it quickly climbed to 27 1/4. Within a year, however, the company was reporting losses, and its stock price had plunged to 5 1/4; last year, it dropped to 2 1/2, before creeping up to around 4. A similar fate befell many other stars of the 1983 new issues market -- TeleVideo Systems, Kaypro, and Seeq Technology, to name but three.

Having been bloodied to the tune of several billion dollars, many investors, institutional and otherwise, were less than eager to chase after high-tech IPOs again. During the first nine months of 1985, for instance, makers of electronic equipment and instrumentation accounted for just 2.1% of the IPO dollars raised, compared with 11.2% of the IPO dollars during 1983. Manufacturers of other kinds of machinery and computers didn't fare much better, accounting for only 2.4% of the dollars raised through mid-November 1985, versus 11.6% in 1983.

Moreover, underwriters of hightech deals really had to sell their offerings in 1985. That was hardly the case in 1983, when "you filed the prospectus, and the crowds appeared," recalls William R. Hambrecht, president of San Francisco-based Hambrecht & Quist Group, which managed 26 offerings that year. Now he finds that investors do their homework and want to be convinced beyond a reasonable doubt that a company will make it -- that is, if they are willing to listen at all.

Which is not to say that investors have been turning a deaf ear to new issues in general, or that 1985 was a bad year for IPOs. On the contrary, it was a very good one. Granted, the market started off slowly, but by mid-December, companies had sold $8.1 billion of equity, more than twice what was raised in all of 1984, making 1985 the second most active year ever.

As a rule, investors tended to look most favorably on new issues of companies in changing industries -- notably, financial services, including banks; and health care, including health maintenance organizations. Another industry segment that picked up a big following in 1985 was retailing and wholesaling. As a group, nonfood retailers and wholesalers raised 11.4% of the IPO dollars in 1985, up from 6.6% in 1984 and 8.8% in 1983. Especially popular were retail chains specializing in consumer electronics, and membership discount stores that sell everything from food to lawn furniture, but only to customers who have paid a membership fee. In recent months, there were five deals in the first category and four in the second.

Industries aside, the 1985 market required a more circumspect approach on the part of issuing companies. Greed was out. Unlike 1983, when company founders were almost expected to use their IPOs for their own enrichment, those looking for personal liquidity in 1985 were wise to be discreet. One who found that out was Austin O. Furst Jr., the 42-year-old founder and chief executive officer of Vestron Inc., a Stamford, Conn., publisher of prerecorded videocassettes. The company's preliminary prospectus, filed last September, indicated that 5.4 million shares were to be sold by the founder and an equal number by the company, raising a total of up to $205 million. After the offering, Furst would not only be richer, by about $100 million, but he would also still own 70% of Vestron's stock. This did not sit well with institutional investors. When Vestron came to market a few weeks later, the offering had been scaled down to $70.2 million; was pegged at $13 a share, instead of the original $16 to $19; and did not include any founder's shares.

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