Will Success Breed Excess?

By Julie Connelly

A heady market for soaring new technology and energy stocks

New issues are an illustration of capitalism at its best, or worst, depending on how you look at it," says A. Robert Towbin of L.F. Rothschild, Unterberg, Towbin, an investment banking firm that specializes in fledgling companies selling their first stock to the general public. The money these businesses raise helps them to expand, but the stock can be a high-risk game since these young companies are frequently dealing with promising but untested technologies in untried markets. Despite the uncertainties involved, investors are now rushing to buy the sudden surge of new stock issues as they dream of discovering the next IBM or Xerox. Says Peter Rawlings of Wall Street's Blyth Eastman Paine Webber: "We really have not seen a stock market like this since the early '70s."

Enzo Biochem, a little-known genetic-engineering firm, went public at $6.25 a share in June, and is now selling at $14.75 after a November stock split. Applicon, a manufacturer of computers and software for industrial design, opened at $22 in July, and has risen 78% to $39.25. Genentech, the San Francisco gene-splicing company, went on sale in mid-October at $35 a share and was immediately driven up to $89 on the first day. It has since dropped back to nearly $46. Wall Street meanwhile is anxiously awaiting the public offering of Apple Computer, the go-go maker of personal computers. Later this month it is expected to hit the market somewhere between $14 and $17 a share.

The newsletter Going Public, which is published by a Philadelphia financial consultant, Howard & Co., estimates that by the end of this year some 250 companies will have raised about $1.1 billion through initial stock offerings. In the first 11 months of the year, 202 of them came to the market for $997.8 million. During all of last year 81 firms collected $506 million. In 1972, the biggest year ever for new offerings in dollar volume, 568 businesses pocketed $2.7 billion.

The strong stock market, up more than 20% since April, has put most of the fizz in the new issues. Last week the jump in the prime rate to 19% helped cause a 37-point decline in the Dow Jones industrial average to 956.23. Even so, says Robert Blakely of Wall Street's Morgan Stanley: "People can again participate in a stock issue and see a reasonable appreciation quickly."

The new issues market also received a boost from the lowering of the capital gains tax two years ago from a maximum of 49% to 28%. Investors are more willing to take the risk of buying new stocks if they see that they will not lose a substantial part of their profits to taxes.

The new stocks that get the best reception are usually high-technology concerns like Apple. ISC Systems is now quoted at $44.25, an increase of 127% since it went public in September, and Magnuson Computer is up 115% from its original price of $20. Oil and gas issues are also popular. Cheyenne Resources is up 738% since its February offering at $1 a share, and Saxon Oil has jumped to $35.75, an increase of 43%, just since Thanksgiving. Other winners are medical technology companies such as Genentech or Gamma Biologicals, which makes a serum for determining blood type. It closed last week at $15.12, up 163% from the offering price.

But firms with goods as diverse as pipeline-corrosion monitors, coin-operated electronic games, nutritional foods and hair care products have all been able to sell their shares. In the largest offering yet this year, Nike Inc., maker of the popular running shoes, sold 2.3 million shares last week at $22 each. John Muir & Co., an investment banking firm in New York City, even succeeded in launching a public offering to get the backing for a Broadway show called The Little Prince.

Both the general public and big Institutional Investors have been active in the market, but large pension funds, insurance companies and mutual funds have been major buyers of the bigger issues. It is harder for the small investor to get ahold of the most exciting stocks because brokers usually give the first shot to their larger clients who will buy 5,000 to 10,000 shares at a time. Federal regulations in 1979 encouraged pension funds to invest part of their huge assets in riskier ventures like new issues, antiques and diamonds; and institutions have soaked up about 70% of the larger initial public offerings this year. For example, Chemical Bank's $90 million Aggressive Equity Fund bought stock in Applicon, Cado Systems, Boston Digital and BancTec, all high-technology companies, as well as 5,000 shares of Genentech at its initial price of $35.

In the past, a speculative boom in new issues has always been followed by a crash. In the late 1960s investors rushed to buy electronics stocks, and in the early 1970s new computer firms were the rage. Both markets ultimately collapsed. Recalls Stanley Pratt of Venture Capital Journal: "Then two guys in a phone booth could raise several million dollars just by coming up with an idea, putting the suffix 'onics' on the end of it and making it public."

The Securities and Exchange Commission is now looking for signs that the fast-money crowd is moving in again. Some signals of rampant speculation are already present. The SEC has under way a number of inquiries about irregularities in the new issues market. It asked a federal court in Denver to order American

Leisure Corp., a hotel and casino company, to return about $22 million to investors because the firm and its broker had, among other things, made fraudulent claims about the stock's potential.

Nonetheless, professional stock analysts say that the young businesses that are coming to the market today tend to be much sounder investments than the new issues of the '60s. Says Frank Bryant of Los Angeles' Bateman Eichler, Hill Richards: "The companies going public now are more mature. They generally have at least five years of earnings, and the price-earnings ratios aren't in the in finite numbers of the '60s." More stock underwriting is also now being done by old-line, well-capitalized investment banking firms. This psychological imprimatur tends to make the stocks seem like some what safer investments.

New issues, though, remain an investment for the lucky and adventurous. Warns Joel S. Lawson of Howard & Co.: "The initial public offering marketplace is like a window while it is open. But it closes like a guillotine: no warning, a rush of air and silence. "

-- By Julie Connely. Reported by Frederick Ungeheuer and Denise Worrell/New York

With reporting by Frederick Ungeheuer; Denise Worrell

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