For the Italian Oven, with headquarters in Latrobe, Pa., IPO success hinged on a business opportunity. Investors liked the chain's market positioning -- moderately priced dining on suburban fringes. Despite steady growth to $16 million in revenues, the company hadn't turned a profit by last November, when it went public. It had reported operating losses of $1.8 million in 1993 and of $2.8 million in 1994. And the IPO's timing was bad, right before Thanksgiving, the tail end of a banner year for investors. "They had made a lot of money in high-tech stocks over the last year, and we came along with a little meatball-and-spaghetti deal. It didn't have much sizzle," says CEO Jim Frye, who launched the company in 1989. But when the IPO dust cleared, the company was $14.5 million richer. It didn't turn a profit until January 1996. -- J.F.
* * *
6. Of course, you want to be the next Netscape.
So lavish has been the attention bestowed on the Web-navigating software company that many have canonized its story as the new model for taking a company public.
But it is simply wrongheaded, say many analysts, for the average company builder to emulate the Netscape formula. "I would tell entrepreneurs to pray they're not a Netscape," warns Benedetto of Benedetto, Gartland & Greene. "It's not a model to adopt. In fact, it's one to run from." Huh? Why wouldn't you want to wow Wall Street before showing any profits, go public after just a year and a half of existence, and see your stock price jump fivefold in four months?
Benedetto explains, "It looks awfully good to your net-worth statement for a short period of time, but if your stock zooms up well beyond its intrinsic value, it ends up chomping you in the butt later on." Shareholders, he says -- especially those who buy in near the peak -- start to expect the superhuman growth to continue. When the share price drops from its towering crest, they get acrimonious, insisting that management resuscitate the price with damaging short-term solutions. "The best that companies can hope for is a fairly valued stock, with increases in price representing improvements in the company, not just a hot market or speculation."
All of which will leave many Netscape wanna-bes undeterred. Predicts Rolf Selvig of VentureOne, in San Francisco, "No doubt there will be business plans flooding into people's offices, saying they're going to do it exactly the way Netscape did -- 'Eighteen months, and we're straight to the market!" -- J.U.
* * *
7. During your IPO, you're the center of attention.
Just the opposite is true. To get a sense of your standing in the pecking order, picture an inverted pyramid. At the top, put the institutional investors -- mutual funds, pension trusts, and the like. They control the money pot you want to tap, so they hold maximum leverage. Right below them, slot in the underwriters, the investment bankers who organize and sponsor the deals. In the descending strata, you've got venture capitalists, whose interest is protecting their investments, along with lawyers, accountants, and stock analysts, the foot soldiers of the campaign.
And way at the bottom? That's you. "A lot of people mistakenly think the company is the real client, because it's paying the fee," says Landry of TA Associates. "But the mutual funds keep the game going. The company is just a bit player, a blip on one particular day. It's one deal this year out of 600, and it might not be back in the market for a long time." -- J.F.
* * *
8. Somebody knows where the IPO market is headed.
Investors who regarded last year's IPO market as too chancy have their own blindness to blame for missing the most no-brainer payoff in a decade. On January 29, 1995, a trio of extraordinary signs virtually guaranteed a 12-month advance in stocks -- and, even more profitably, in initial offerings. (Gains in old-line issues boost the volatile IPO aftermarket all the more.) That promise was not seen in such shaky indicators as the CPI or the GDP, but came from a reliable source -- the NFL. What investor wouldn't have rushed to his or her broker, realizing that stocks had risen in 12 of the 16 years that a team from the National Football Conference won the Super Bowl, as the 49ers had that Sunday? Not to mention that the market had closed higher in the third year of presidential tenure 13 straight times and that not once in 110 years had stocks declined in a year ending in 5.
Sunspots and gamma rays also foretell markets, but not so starkly as when, on October 6, 1987, an eclipse darkened the moon, and eight business days later, Black Monday spread darkness across Wall Street. On August 24, Venus, Mercury, Mars, the moon, and the sun had converged in a tiny two-and-one-quarter-degree wedge of sky. That date fingered the top of the 1987 stock market, which soon dipped by half a trillion dollars. It also signaled the coming three-year swoon in IPOs.
It's no surprise, then, that Crawford Perspectives, an investment newsletter based on astronomical activity, boasts a demonstrably better record than the balance-sheet crowd. As for 1995, publisher Arch Crawford urged clients on December 3, 1994, to "cover any shorts and go back to the long position immediately!" For 1996, however, the astral indicators are quiet. "Usually, I have strong opinions," Crawford says, puzzled, "but I just don't see any big deal ahead for this year." -- Robert A. Mamis
