IPOS: LOOK OUT BELOW!

By John Greenwald

Like Buzz Lightyear, the gung-ho plastic spaceman in Toy Story who thought he was real, investors in Pixar Animation Studios have learned that reality bites. Pulled down by the collapsing, technology-driven NASDAQ market, Pixar stock fell 5.7% last week, to close at $16.50, light-years from its November high of $49.50, signaling that the almost cartoonish rush of IPO investing is finished.

Pixar, creator of the computerized movie hit, caused a sensation when its $22 opening price doubled and then some in its first hours of trading as an initial public offering last November, making chairman Steve Jobs, the millionaire co-founder of Apple Computer, into a paper billionaire. Indeed, for the past two years it has seemed that every twentysomething computer entrepreneur who could wear a suit long enough could get Wall Street bankers to sell stock to the public.

Once on the open market, these stocks have caught on like a virus, propelled by "can't miss" contagiousness. Over the past 19 months investors have bid up such issues, spectacularly and speculatively, by spending a record $60 billion on the stock of start-up companies. That many of these outfits lacked the fundamental attributes--oh, minor things, such as profits--that sane folks use as the basis for plunking down their money didn't matter. Any company linked to computers or the World Wide Web may as well have been linked to a mint.

The ride looks as though it's over. Instead of coining money, companies that have come to market lately have discovered that the easy pickings are gone. An increasing number of new issues have fallen at the opening bell, and the market won't let them get up. With high-tech powerhouses such as Motorola and Hewlett-Packard reporting earnings problems, smaller companies of all sorts have had to delay long-planned sales. "This is no market for people with ulcers," says Steven Samblis, who heads an investment firm in Longwood, Florida.

Even the loftiest highflyers have been losing altitude fast. Shares of Netscape, maker of the Navigator Web browser, which opened at $14 last August (after adjusting for a two-for-one split) and peaked in December at $87, closed last week at $48.50. Yahoo!, a vaunted search-engine-software company, jumped from $13 per share to $32.25 when it began trading in April and soon hit a high of $43. Last Friday, however, Yahoo! was searching for the bottom, at $17.50. "The IPOs that came with the most sizzle, like the Internet search engines, have gone on a roller-coaster ride," notes Rodney Goldstein, managing partner of Frontenac, a Chicago-based venture-capital firm.

Fashion-design house Donna Karan International, considered the pick of the recent litter, dropped a stitch or two since its IPO rose from $24 to $28 at its June debut. The stock ended last week at $23.63.

The IPO market was never as good as it looked for small investors, who invariably got locked out of the initial trading and were left to buy shares after prices jumped. Typically, Wall Street underwriters dole out new shares at the offering price only to big customers (unless you're a U.S. Senator). According to a recent study of 125 companies that went public in 1990, investors who bought in at the original price would have gained 77% on average if they held the stock for up to five years. By contrast, the University of Chicago business-school survey also found that second-day buyers could expect returns of 58%--a less than stellar performance since the S&P index of 500 stocks rose 78.5% over the same period. Warns William Benedetto, who heads the New York City investment banking firm Benedetto Gartland & Greene, which helps raise money for start-ups: "The individual investor should not be in the high-tech IPO market, period." If they want a piece of the action, he adds, they should buy IPO mutual funds.

There have been exceptions to the downdraft, including corporate spin-offs such as Lucent Technology, AT&T's renamed manufacturing division, launched in April for a record $2.7 billion, or $27 per share. Investors pushed the price to $30.63 the first day of trading and have remained bullish on it ever since. It closed last Friday at $35.88.

But experts see signs of exhaustion. Companies have been launching IPOs at the rate of nearly 70 a month in 1996, a total that would have filled an entire year's calendar a decade ago. According to Securities Data Corp., new issues have raised more than $26 billion so far this year, nearly equaling the $29.7 billion that IPOs brought in during all of 1995. "We are entering a transition in the IPO market," says Benedetto. "This is partially due to fatigue, because people are just plumb tired out. I think there will be fewer and fewer deals done in coming months."

Like the boom in the stock market, the surge in IPOs has been fueled by the astonishing torrent of cash pouring into mutual funds--cash that has to be invested. The net assets of stock funds have jumped nearly 75%, to $1.53 trillion, since January 1995 alone. Fresh cash has been arriving this year at the rate of more than $20 billion a month. All told, some 2,800 companies have gone public since 1990, raising about $150 billion to build new factories and help create more than 10 million new jobs.

The amount of money flowing into funds has recently begun to slow, however. While investors put a record $29 billion into stock funds in January, they have invested an average of about $22 billion a month in the second quarter. In June they purchased just $15.5 billion. That leaves fewer dollars for the purchase of IPOs.

Last week's disaster on the NASDAQ is a clear indication that many investors have begun to turn cautious as well. The NASDAQ index of over-the-counter stocks, where most IPOs are traded, fell nearly 5% last week and has plunged 11% since June 1.

Just ask disappointed executives of American Pad & Paper, a $275 million maker of office supplies in Dallas that went public earlier this month at an initial price of $15 per share. Investors hoped to make a quick buck on this well-established company. But instead of taking off, the stock sputtered 13 cents higher during its first day of trading before settling back to its opening price. It closed last week at $14 per share.

Recent high-tech start-ups have fared even worse. A Houston, Pennsylvania, software maker called ANSYS opened at $13 per share on June 20, only to finish the day at $12 per share. ANSYS closed Friday at $12.37. New medical companies have been hit just as hard. CollaGenex Pharmaceuticals, a California dental-research firm, tried to lure investors last month by lowering the price of its IPO to $10 per share, well below the high of $15 originally projected. It didn't work: CollaGenex stumbled on its first day of trading, to $8.63 per share.

For others, the shake-out in IPO prices could signal a return to sanity that will strengthen the market over the long run. "There was rampant speculation this spring that needed to be dampened," says Robert Natale, who directs research on new issues at Standard & Poor's. Perhaps IPO investors will learn, as Buzz Lightyear did, that there is life even after the bubble bursts. --Reported by Bernard Baumohl/New York

With reporting by Bernard Baumohl/New York