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INVESTMENT OUTLOOK : ASSESSING 1987 : WELCOME TO THE MARKET : 1987: the Best and Worst Year for Initial Public Offerings

December 06, 1987|PAUL RICHTER | Times Staff Writer

NEW YORK — 1987, which began as the best of years for initial public stock offerings, became the worst in memory overnight as the stock market collapsed.

"It's a scene of devastation," said Paul Simmonds, research director for the Institute for Econometric Research, the Largo, Fla., publisher of the IPO Letter. "Offerings have been withdrawn, prospectuses aren't being printed, institutions aren't buying. The market's dead in the water."

The initial offering market's plunge is likely to take a particular toll on California, where high-technology industries have an unusual reliance on initial public stock offerings, or IPOs, as a source of capital and a personal financial incentive that has spurred executives, engineers and others to their best performances.

While all stocks have been hurt in the market's collapse, IPOs have been particularly penalized because they typically involve young companies whose futures are less clear. Investors assume that such young companies are more likely to be hurt if a recession does set in, as some now fear.

As interest in new issues has cooled, some planned offerings have been postponed, while others have been marked down sharply in value. Many young companies that planned to make offerings in the months ahead wonder when--or if--they will be able to sell their stock to the public.

The euphoria of the market seemed at a peak just before the crash. By Oct. 12--one week before the crash--1987 had already been established as the highest volume year ever for initial offerings, with $22.5 billion raised in 507 offerings, according to a New York newsletter called Going Public: the IPO Reporter.

That compared to $22.4 billion that was raised in 719 offerings during all of 1986, the newsletter said.

In fact, the two largest initial offerings of 1987 were also the largest U.S. IPOs of all time. They were the Nuveen Municipal Closed-End Bond Fund, which raised $1.58 billion in June, and Consolidated Rail Corp., the Conrail freight railway, which the federal government sold to the public in March for $1.45 billion.

The strength of the market during the first 9 1/2 months of 1987 was reflected in the pricing of many new issues at high multiples of their annual per-share earnings, Simmonds noted. Most had multiples--stock price to earnings ratios--in the high 20s or low 30s.

"Now they'll settle back to more reasonable levels--maybe in the range of 15 or 20 times earnings," he said. "Some, of course, won't get that high."

Many of the year's new offerings lost one-third of their value--and some as much as 50%--in the aftermath of Black Monday. As of the end of November, the last 100 stocks to go public had declined an average of 27% from their initial offering price, according to Susan Gallant, editor of Going Public.

"That's by far the biggest decline in the two years we've been keeping records," she said.

By comparison, the Dow Jones industrial average, made up of blue chip stocks, was off 18% between the opening of trading on Black Monday and Nov. 30; and the NASDAQ composite index of over-the-counter stocks had declined 25%.

Charles Schwab & Co., the nation's largest discount brokerage, sold 8 million shares at $16.50 apiece on Sept. 22, raising $132 million. The issue was the fourth largest among California companies in 1987.

But the San Francisco company sustained a loss of $22 million in the market's plunge, largely because one customer, a wealthy Hong Kong investor, could not meet margin calls--requirements that he put up additional cash to cover the declining value of his stock acquired through the brokerage firm. As word of those losses spread, Schwab's stock skidded, too, and closed Monday at $6.625, down 60% from its offering price.

Arco Chemical, the former chemical division of Atlantic Richfield, sold 13.5 million shares at $32 apiece on Sept. 28 to raise $432 million. Expected demand for the shares was so great that the offering price had been raised from the $26- to $29-a-share price that originally had been anticipated. But Arco stock fell along with the others, sinking to as low as $17 after the market's plunge.

Of the 13 companies that have gone public since the crash, five have been the sort of high-grade bond funds that attract investors because of the dividends they pay, and were thus resistant to the stock market rout. Most of the others are small concerns that each raised less than $5 million, said Gallant of Going Public.

She said that since the crash, there has been only one IPO of the kind that would attract institutional investors. This stock, a Boston waste management firm called Clean Harbors Inc., came public Nov. 24 at $9 a share, scaled back from an expected $13 to $15. The size of the offering also was reduced to 1 million shares from the initially planned 1.3 million.

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