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IPOs May Be Suffering From Image of Insiders as Greedy

Critics say buyout firms turn a quick profit by selling stakes to the public at lofty prices.

June 22, 2005|Josh Friedman | Times Staff Writer

When analyst David Menlow scans the market for initial public offerings of stock these days, a scene from the 1987 movie "Wall Street" springs to his mind.

"Why do you need to wreck this company?" Charlie Sheen's character, Bud Fox, asks investment banker Gordon Gekko, played by Michael Douglas. Comes the snap reply, "Because it's wreck-able, all right?"

Indeed, along with the backdrop of a discouraging overall stock market, analysts say one reason the IPO market has slumped this year is a perception that greedy, well-heeled buyout investors have run amok.

Menlow and other critics say these buyout, or "private equity," firms are snapping up companies and -- although not exactly wrecking them -- turning a quick profit by selling stakes to the public at lofty valuations, a trend that has sparked a backlash among IPO investors.

"Investors are saying, 'Tell me why I should be shouldering all the debt you guys put on the back of this company. You got your money, and now you want me to take the risk in the event things don't work out,' " said Menlow, president of IPOFinancial.com in Millburn, N.J. "Investors are saying, 'No.' "

Private equity firms provide "liquidity" -- typically, that means badly needed cash -- to the companies they invest in. They also offer the business acumen of their partners as they help their portfolio companies attempt turnarounds, often over a period of years.

But in "quick flip" deals such as Warner Music Group Corp., critics say the investors and other insiders have enriched themselves without necessarily taking the time to revitalize the enterprises.

Warner Music, for example, amassed more than $2 billion in debt over the last year as insiders including buyout firm Thomas H. Lee Partners and Chief Executive Edgar Bronfman Jr. reaped hefty bonuses and other payouts. Lee's firm led an investor group that bought the former Time Warner Inc. unit in March 2004.

As the first half of this year draws to a close, 66 companies have gone public, down from 73 at the same point in 2004 and a steeper drop from the pace of last year's fourth quarter, according to IPOHome.com, a research website run by Renaissance Capital Corp. in Greenwich, Conn.

Seventy-six companies went public in the fourth quarter, the busiest period in more than four years, raising hopes for a sustained IPO resurgence.

At $14 billion in total dollar volume, new public companies have raised 4% less than a year earlier.

IPO filings (including deals that have not priced, and may never) also have slowed: Year-to-date, 123 companies have registered with regulators to go public, a 38% drop from this time in 2004.

New offerings enable companies to fund their growth strategies by selling stakes on the open market, and they give stock investors fresh choices when it comes to placing their bets.

IPO "after-market" performance in the aggregate has been decent relative to this year's lackluster stock market, with the average new issue gaining 5% from its offering price through Tuesday's trading. But some of the largest deals have clunked.

Chemical maker Huntsman Corp., whose February IPO raised $1.7 billion, has seen its stock slide 18% from the $23-a-share offering price. Global investment bank Lazard Ltd., whose $855-million IPO last month bought out the firm's private owners, is off 4%. Warner Music, which raised $554 million in a May deal that was scaled back sharply to lure investors, has fallen 3%.

Lazard's IPO sparked an investor lawsuit last week alleging that the firm and its underwriter, Goldman Sachs Group Inc., misled purchasers by overpricing the shares.

Other hard-hit IPOs this year include payday lender Dollar Financial Corp., which has plunged 41%, and flower delivery service FTD Group Inc., which has drooped 17%. Among California companies, Santa Barbara-based online advertising firm Fastclick Inc. has sunk 30% and Brea-based metal producer Earle M. Jorgensen Co. has sagged 18%.

Citing a chilly climate, several firms have scrapped their IPO plans.

Last week, Newport Beach-based Jazz Semiconductor Inc. scotched its proposed deal, blaming "market conditions." Earlier this month, robotic massage chair maker Interactive Health Inc. of Long Beach and mattress maker Simmons Co. yanked their offerings.

In May, paper producer Boise Cascade Co. pulled its IPO in a move it chalked up to market conditions but analysts attributed to buyout backlash.

On the eve of the high-profile deal, Wall Street underwriters slashed the expected price range to $17-$19 a share from the original $24-$26 in a scramble to save it. Ultimately, the offering, which would have raised several hundred million dollars for Chicago buyout firm Madison Dearborn Partners, was withdrawn. The firm had bought Boise Cascade only seven months earlier.

IPOs have also struggled for more traditional reasons.

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