The Year in IPOS
Investors flock, capital flows, and records fall. Initial public offerings are back
The initial public offering window, where humble private businesses sell overvalued slices of ownership to hopeful investors, was shut so tight in early 1991 that it seemed more productive to apply to lenders than to underwriters for financing. In the first three months of 1991 a mere 35 IPOs entered the public market -- a drizzle that, had it continued, would have turned the year into the worst climate for new public companies since 1982.
Fortunately for investment bankers, venture capitalists, and locked-in founders, the pace grew hotter with the weather -- and the stock market. In June alone there were 48 IPOs, and by calendar's end, with the Standard and Poor's 500 stock index up a rare 26%, 1991 had sired 395 public corporations, including 63 purely capital entities, such as mutual funds, financial institutions, and blind pools. While the total lagged behind a couple of brisker years, the dollar amount they raised -- $24.8 billion -- was Wall Street's highest yet, exceeding second-place 1987 by more than half a billion. The average flotation, $42.7 million, also set a new-issue record, asserting that there are plenty of hard-spending risk takers out there, even without a change in the capital-gains tax.
Granted, among the major beneficiaries of the spending spree were more than a dozen leveraged buyouts. These once-public companies had been taken private in the 1980s, when junk bonds were the craze, and were now returning to the public arena with their tails between their legs. More significantly, however, 1991's massive IPO financing trickled substantially into the coffers of small companies, providing even such incomeless operations as biotechnologists and research-and-development outfits with enough patient backing to give profit making the old college try.
Debt-saddled LBOs seeking surcease through a return to the public equity market included huge Owens-Illinois, at $528 million the year's largest IPO; Duracell International, $366 million; and York International, $184 million. Not to be outdone by the Stop & Shop chain's public reappearance with a $170-million offering, two relatively small food dispensers went public for the first time: Smart & Final, a warehouse grocery chain, with a $95-million offering, followed by Super Rite at $32.6 million.
On sale as a factory reject was AnnTaylor Stores, whose since-banished CEO was being paid $2 million a year to oversee the 177 outlets' steady decline. An LBO spun out of Canada's bankrupt Campeau Corp., AnnTaylor marketed its IPO stock better than its fashionable off-the-rack stock: seven and a half months after the successful flotation the price per share had plunged 42%. Retail liquidator Filene's Basement was a similar but far less defective piece of returned merchandise. Freed by way of a public offering from the ham-handed folks upstairs at Federated Department Stores, its stock more than doubled in eight months.
At least part of the difference between the two retailers was that the year's economic frame of mind favored operations that proffered basic goods at basic prices. The frugality of The Basement echoed the turn-of-the-century theme of Montgomery Ward, J. C. Penney, Sears Roebuck, and the like -- all merchandisers that have grown too cumbersome to adapt that theme to the consumer climate at the end of this century. In their place 23 small retailers boldly went public in 1991, many of them delivering double-digit stock-market returns before year end. Among them, Rag Shops (a June IPO) gained 80%; Goody's Family Clothing (October), 77%; and December IPO Sam & Libby returned 36% in only 28 days.
All this -- performed at the core of a shopper meltdown -- added up to 21 apparel-manufacturing and -retailing enterprises going public. Demonstrating how times have changed, only one retail IPO, CompUSA, sells computers. After a decadelong trend that had electronics manufacturers at the front of the parade, not one 1991 new issue makes a computer system.
The year 1991 documents that the repository of speculative capital has pretty much moved from junky garages to antiseptic laboratories. Strongly outpacing the 12% health-industry component of the 1990 gross national product, nearly 30% of the operating-company IPOs were involved with health products, instruments, or delivery. All of the first five IPOs out of 1991's slow-to-open gate are health-related enterprises, as are 110 of the year's 395 IPOs.
Indeed, using only the products of 1991's medical and biological issues, you could just about construct an entire body, adapting such components as Somatogen's blood substitutes, Danek Group's spinal implants, Osteotek's bones, and Mitek Surgical Products bone connectors. If in the end it didn't tick, you could turn to Stewart Enterprises' death-care services.
Of that array of medical and biological entities, four companies concentrate on the betterment of beasts rather than humans. Deprenyl Animal Health, public last March, makes veterinary pharmaceuticals. BallistiVet markets a system to implant pharmaceutical "biobullets" in livestock. A third, Veterinary Centers of America, conducted its dog-and-pony shows in October. Further defining a marketing trend toward the promotion of animals' well-being, the products of bioscience lab Embrex are designed to help raise healthier chickens.
One of the year's largest IPO fundings went not toward saving lives but toward smearing them. Raising $151.2 million, The Enquirer/Star Group, publishers of checkout-stand reading material, came out in July. To handle its products and other detritus, four companies involved in waste management and environmental cleanup also went public in 1991.
Some businesses wash the hands of others, neatly fulfilling the free market's get-you-coming-and-going tradition. Even as Saratoga Brands deep-fries potato chips, and Suprema Specialties concocts gourmet cheeses, Jenny Craig's weight-loss centers trim the fat off the land. And as Candy's Tortilla Factory pounds out corn pancakes, and Interstate Bakeries devise succulent pastries, Bio-Dyne assembles exercise equipment.
Food definitely was big in 1991. A pair of peanut processors also contribute to the common girth: Jimbo's Jumbos and John B. Sanfilippo & Son. With fare ranging from IHOP's waffles to Bertucci's pizzas, a platter of eight eatery chains mold yet more clients for the shape-up industry. But investors found the most piquant restaurant recipe had more to do with its delivery than its cuisine. Checkers Drive-In Restaurants dispense hamburgers from a central modular kitchen. Nothing new there, except that not only are there no tables inside a Checkers, there's hardly an inside at all -- just enough to support one walk-up and two drive-through windows per site. The high-margin, low-dawdle concept boosted franchisor Checkers's stock from its November offering at $16.00 to a year-end closeof $27.50.
Because 1990 had so unnerved venture capitalists and investment bankers, 1991's deals tended to be more reasonably priced than IPO avarice generally allows. As modest but welcome proof, 12 issues leapt 50% or better as soon as they were released from the underwriting syndicate. The leading first-trading-day gap was chalked up by a manufacturer of product-safety tests. Ropak Laboratories' offering was bid on the open market at 122% the IPO price. The next 11: Alteon, an R&D company in diabetes drug therapy, up 92%; IPS Health Care and Healthcare Imaging Systems, both in magnetic-resonance imaging services, up 88% and 70%, respectively; Megacards, publishers of sports memorabilia, up 70%; Cybernetics Products, a manufacturer of tools and equipment for the electronics industry, up 67%; Medical Marketing Group, a licenser of pharmaceutical-marketing programs, up 66%; Sepracor, a manufacturer of pharmaceutical compounds, up 55%; Grand Casinos, a developer and manager of gambling facilities on native American reservations, up 55%; Mitek Surgical Products, a supplier of implants, up 55%; Licon International, a maker of industrial-waste-cleanup equipment, up 53%; and Seismed Instruments, a manufacturer of cardiology instruments, up 50%.
Old-time marketers hold that a sudden strong move in a stock is soon followed by another strong move. On balance, however, the dozen fast starters just described gainsay that assumption. Despite the steady advance in the secondary-stock market overall -- the NASDAQ Composite Index was up 57% for the year -- 8 of those early movers subsequently eased from their first-trade heights. Three actually ended the year even lower than their IPO prices. Only 4 of the top 12 kept climbing.
The number of companies simultaneously going public and earning a place on the Inc. 100 (see chart, No. 05921081, May 1992) was disproportionately plentiful in 1991 -- more than twice the norm. Oddly, of the 19 IPOs that demonstrated sufficient revenue growth to make the list, 9 are computer related. By contrast, there was no biotech company, fast fooder, retailer, or apparel manufacturer.
Apparently, brisk revenue growth counts for little when it comes to aftermarket IPO investment. Only 3 of the Inc. 100's IPOs are among the 38 IPOs whose stock doubled or more by December 31: Value Health, Quarterdeck Office Systems, and Mitek Surgical Products. Was it profitability that counted? Hardly. Whereas Quarterdeck's prospectus paints a rosy five-year history of uninterrupted earnings growth, Mitek's shows a dreary pattern of losses.
The average deal, whose average share cost $11.43, gained 30% over its offering price by December 31. Just 9 were reduced by more than half in the aftermarket. Valley Systems, an industrial-cleaning service with $14.9 million in revenues in 1990, enjoyed the year's largest increment, nearly quintupling its offering price. In second place, with a gain of 373%, was MedImmune, a developer, manufacturer, and marketer of vaccines. The perennially profitless corporation lost $4.1 million on 1990 sales of $3.3 million. Such is the magic of raising capital through a public offering: try getting a banker to lend you $23 million -- the sum MedImmune fetched in its IPO -- with a history of no earnings.
As always in young-company IPOs, it was buyer beware. Hardly had six-year-old Ropak Laboratories traded at more than double its offering price when it released first-quarter results. Unfortunately for its high-flying stock, those results showeda loss of $907,000 on revenues of $281,000. Ropak Labs' stock wilted. Was the loss sneaked in under cover of IPO by management or an underwriter in an attempt to mislead investors? Not atall. As the Securities and Exchange Commission requires, the offering prospectus had diligently disclosed -- to the few who bothered to read it -- all that was known about the company at the time, including the probability of the upcoming debit, due to a onetime write-off. Of course, the company probably could have taken the write-off prior to the offering. But then it might not have raised as much capital to absorb it.
Like the contents of a time capsule, a sampling of 1991 offerings vividly portray U.S. culture toward the century's end.
* Video Lottery Technologies, which manufactures video-game terminals that are installed in bars and then shares revenues with the government, raised $39.9 million. Advanced Promotion Technologies, which designs and markets video-screen advertising at supermarket-checkout counters, raised $18 million.
* Ezcorp, which operates pawn shops, raised $24.4 million. First Cash, which also operates pawn shops, raised $4.5million. The Money Store, which makes personal loans, raised $35.2 million. World Acceptance, which makes consumer loans, raised $21 million. Credit Depot, which extends high-risk loans, raised $3.9 million.
* Marvel Entertainment Group, North America's largest creator and publisher of comic books, featuring Captain America, among others, raised $69.3 million.
* Sports Heroes, Megacards, and Sports Media all exploit adulation oftop professional athletes, who, by the way, sign contracts worth more than any of those companies was able to raise -- $4.5 million, $4.1 million, and $3.8 million, respectively.
* Insurance Auto Auctions, which buys totaled cars from insurers and resells them, raised $22.9 million. Custom Chrome, which manufactures and distributes parts for Harley-Davidson motorcycles, raised $25 million.
* Koo Koo Roo, which franchises fast-food dining, raised $6.3 million. Sonic, which franchises really fast-food dining, raised $46.3 million. The aforementioned Checkers Drive-In Restaurants, which franchises fast-as-you-can-motor-through-them dining, raised $33.6 million.
* Restor Industries, which repairs pay telephones, raised $5.3 million.
Even a railroad, Wisconsin Central Transportation, managed to sell itself into the public market in 1991. The carrier proved that 1991's IPO window opened plenty wide for those prepared to chug on through. The many private companies wary of Wall Street's promise of easy money might do well to observe that the slightest amount of money raised by an operating company in a 1991 IPO was a hefty $2 million by Lancit Media Productions, a very small-cap producer of television projects. Lancit stock came out at $1.50 in June and ended the year at $4.00. In six months its owners had become 167% richer.
Still want to keep trying your banker?* * *
This article is based in part on data supplied by IDD Information Services, in New York City.* * *
1991's Most Active Managers
The role -- and income, at 10% or so of gross -- of investment banking was revivified in 1991. The 10 underwriters bringing the most IPO deals to market:
|Firm||Number of deals||Total ($ million)||Average raised ($ million)|
|1.||Alex. Brown & Sons||38||$5,948||$157|
|6.||Shearson Lehman Bros.||17||1,598||94|
|9.||Smith Barney, Harris Upham||13||369||28|
|Top 10 totals||190||$19,027|
|Totals for all IPOs||395||$24,843||n|
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