THE VIRGINIAN-PILOT
Copyright (c) 1997, Landmark Communications, Inc.
DATE: Sunday, February 9, 1997 TAG: 9702080594
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: By TOM SHEAN, STAFF WRITER
LENGTH: 152 lines
After spending months preparing for the company's first public offering of stock, executives at the real-estate investment trust took to the road.
At meetings with stock brokers and money managers, they made a case for buying shares in the REIT, which owned a portfolio of hotels.
But these executives hit a wall when interest rates suddenly began rising. Prospective investors grew uneasy with the company's earnings prospects and the price of its stock.
``The deal fell apart,'' said Jake Savage, an investment banker with Richmond-based Scott & Stringfellow Inc. familiar with the aborted offering. ``When interest rates went up, all bets were off.''
That was in 1994. Two years later, stable rates and a torrent of money flowing into the stock market fueled an explosion of initial public offerings.
Despite the cancellations of some speculative deals by Internet-related companies last summer, the amount raised in IPOs soared to a record $47.7 billion in 1996.
And IPO activity is off to a fast start this year. So far, $2.8 billion has been raised in 53 deals, according to Securities Data Co., a Newark, N.J., concern that monitors securities activity. That's up from $1.97 billion and 51 IPOs by this time in 1996.
In Virginia, a handful of companies have raised more than $600 million from IPOs - almost as much as the $644.8 million total that was raised by Virginia-based companies during all of 1996.
The roster of recent initial stock offerings by companies in the state includes:
Trigon Healthcare Inc., the Richmond-based parent of health insurer Trigon Blue Cross Blue Shield. As part of its conversion from a company owned by policyholders to an investor-owned company, Trigon raised almost $200 million with the sale of 15.5 million shares. It shares began trading on the New York Stock Exchange on Jan. 31.
Circuit City-CarMax Group. Circuit City Stores Inc., the Richmond-based electronics retailer, collected more than $400 million from an offering of 21.86 million shares for its CarMax auto-sales subsidiary. Circuit City-CarMax shares starting trading on the New York Stock Exchange on Feb. 4.
Metro Information Services Inc., a Virginia Beach-based software development and consulting company. Metro recently raised more than $45 million from the sale of 3.1 million shares. Metro's stock went public Jan. 30 and began trading in the Nasdaq Nations Market System.
For expansion-minded companies like these, an IPO provides access to fresh capital. Having a stock that trades publicly also enables a company's founders and early investors to recoup part of what they put into the firm without selling it.
For investment bankers and brokers shepherding companies into the public market, IPOs are especially lucrative. Bankers and brokers typically collect 5 percent to 7 percent of the amount that a client company raises through an IPO. Those involved in the Circuit City-CarMax and Trigon deals stand to collect several million dollars in fees.
But for buyers of IPO stocks, the results are checkered. Investors in IPO stocks benefit by not having to pay a commission on the shares they buy.
However, the returns on IPOs for three years or so typically lag what investors could have earned from stocks in companies that were already publicly traded, said Susan Chaplinsky, an associate professor at the University of Virginia's Darden Graduate School of Business Administration.
``These companies, as a pool, don't perform well,'' she said. ``It's pretty clear that over three years, you'd be much better off putting money into an established company. At five years, it gets harder to tell.''
Researchers have not yet determined why IPO stocks on average generate sub-par results, Chaplinsky said. One possibility is that offering prices were too high, given the companies' earnings prospects. Another is that companies using the capital from an IPO rapidly expand but often lack the infrastructure to do that and still increase their earnings significantly, she said.
Even in the best of times, the process of going public can be complicated and risky, especially for less seasoned companies. It requires months of preparation, along with input from financial analysts, auditors, securities lawyers and investment bankers. In addition, there has to be an appetite among investors.
``It's like the sun, the moon and the stars being properly aligned,'' said Savage, the Scott & Stringfellow investment banker. ``You have to have the right people, the right concept and the right company.''
For young, expanding companies in search of capital, there aren't a lot of alternatives. Investment bankers sometimes can arrange a private placement of a company's stock with a small group of sophisticated investors.
And venture capital firms may be willing to put money into a company with an especially promising product or the prospect of exceptional profitability. But in return for venture capital, a company's management often agrees to have an initial public offering by a certain date, usually in four years, Chaplinsky said.
``The public market remains the biggest source of funds for growing companies,'' she said.
With help from investment bankers, auditors and lawyers, a company compiles an encyclopedic report for the Securities Exchange Commission. This registration statement describes in detail the backgrounds of key managers, the company's products or services, its financial performance and potential risks for investors to consider.
Unlike the registration statements that very large publicly traded companies file for a secondary stock offering, the registration statements for IPOs are closely read by the SEC staff. It's not unusual for the commission to require a company to amend a statement several times before giving its permission to go forward.
``You can get back a 10-page letter with 60 comments on accounting issues, structural issues and other matters,'' Savage said.
While the company's executives and investment bankers wait for the SEC's comments, they prepare for a ``road show'' - a whirlwind of presentations to stock brokers and money managers in several cities.
Preparation for these meetings can be crucial to the offering because mutual-fund managers and analysts often grill executives at length about the intricacies of their companies. And if the CEO cannot readily provide that information, some prospective investors may pass up the offering.
During one presentation that he witnessed, a bank CEO failed to explain in detail what one money manager wanted to know, said Savage.
``The guy was a good banker but he didn't have a good grasp of the numbers,'' Savage said. That lapse later hurt the initial demand for bank's stock, he said.
During the road show, investment bankers develop an idea of the demand there might be for a company's stock. On the day before the offering, they monitor market conditions and then check with prospective buyers to negotiate a price for the shares.
If they set it too low, the company stands to collect less money than was available. But if the price is too high and the expected sales don't materialize, the brokerage firm underwriting the transaction may have to hold onto the shares, which ties up its capital.
Despite the risks that brokerage firms face when conducting IPOs, the competition for deals is heated. And it could get more intense.
The Glass-Steagall Act - the Depression-era law that has separated commercial banking from investment banking - has been eroding.
Some very large commercial banks already have limited powers to underwrite stock offerings and are lobbying for more. They contend they can provide additional service to their commercial customers by underwriting stocks as well making loans. More importantly, handling a company's IPO opens the way to several other profitable services, including work on mergers and acquisitions.
Several commercial banks probably will jump at the opportunity to underwrite initial public offerings, said the Darden School's Chaplinsky. However, only a few will prosper. That's because of the amounts of capital required and the sales culture that banks will have to develop, she said.
``The traditional banking business is you and me sitting down to negotiate a loan. There's no sales effort,'' she said.
Investment bankers, however, have had to sell their services aggressively to survive in a highly cyclical business. ``They have those huge Rolodexes of potential buyers to call. I think it's going to be a dogfight.'' ILLUSTRATION: Graphic by VP
Initial public offerings
Circuit City-Max Group
Trigon Heathcare Inc.
Metro Information Services Inc.
[For complete copy, see microfilm]
Graphics by VP
[amount raised from IPO by Va. companies]
[amount raised from IPO nationwide]
[For complete copy, see microfilm]
KEYWORDS: IPO STOCK