A guide to the uncharted territory of small-company public offerings
Whatever 1997 has in store for small-company initial public offerings, it's not likely to match the singular accomplishment of small enterprise--in many cases, really small enterprise--in 1996. In the best year ever for IPOs, exactly 200 operating companies (by Inc.'s measure) with revenues of $10 million or less went public, and of them, exactly 41 had revenues of $100,000 or less. You wouldn't know it by the celebrity lavished on Lucent, Revlon, and the big-deal end of the market, but those little companies represented more than one-third of the Year of the IPO. Unfortunately, despite the pink-cheeked promise of those companies, their shares didn't all go up. Still, the year featured several other types of small-company "ups." One was the rollup, an instant-revenue strategy in which an entrepreneur acquires a series of little independent businesses in the same unconsolidated industry, packages them under one corporate umbrella, and takes the whole lot of them public at once. Then the corporation applies the value of its new public stock to acquiring yet more little businesses in what, conceptually at least, promises to be a never-ending expansion.
Not uncoincidentally, another characteristic of '96 was the blowup. A blowup is a nasty surprise sprung on sanguine investors, in which a newly public company announces a horrible earnings quarter, thereby tanking its stock. And tied in with both of the foregoing is the lockup, the underwriter-mandated period of six months or more after an IPO, during which earlier investors (as opposed to current IPO investors, who widely indulge in "flipping" for immediate profit) are restrained from dumping their suddenly enhanced holdings into a fragile aftermarket. That interval of prohibition has hardly been noticed in the feeding frenzy of recent "up" markets, however, and it has gradually gotten shorter.
Then there are the traditional roundups, chronically inaccurate year-end evaluations of the market in Barron's and other representatives of the financial press. This year's roundups gave various tallies of the number of deals in '96, from fewer than 500 to as many as 850. The discrepancy is to some degree attributable to a custom dating back to the boiler-room days of the early 1980s, when financial commentators felt obliged to ignore offerings deemed unsuitable for laypeople's attention (with good reason, considering that some underwriters actually served time). And commentators remain judgmental to this day: for example, almost all the '96 roundups skipped offerings that came to market without the backing of investment bankers, although at least one issue managed by a company CEO thrashed the underwritten crowd. (See " You Don't Know Me....") And when the IPO aftermarket started to crumble at midyear, many blamed the malaise on a host of still-green companies that had been rushed to the market at any price to take advantage of its insatiable appetite for equities. "In many instances, the investors involved at the venture level and, of course, the people running the business think they actually have a good company," notes Tom Stephens, director of Institutional Equity Sales at Tucker Anthony Inc.'s office in Washington, D.C. "But the truth is, in bull markets people believe in bullshit."
Rightfully or not, many roundups, such as Renaissance Capital's otherwise thorough IPO Intelligence subscription letter, simply ignored issues that were priced at a putatively insubstantial $5 or less. That barrier left out 42 businesses, a dozen of which proved strong enough to trounce the year's 12%-or-so average gain of all IPOs, big and little. (See below.)
