Initial stock issues set record pace - initial public stock offerings

Although the bleak economy is hurting many small businesses, some are taking the downturn in stride. Initial public offerings of stock from small, growing companies soared to a five-year high in 1991, signaling investors' eagerness to bet on up-and-coming firms.

Barring a year-end stock-market collapse, the IPO--initial public offering--market was on track to launch 403 small companies in 1991, raising an estimated $18.2 billion from first-time stock sales, according to Securities Data Co. in New York. That would set a record, topping the $18.1 billion raised in 1986, when IPOs numbered 701. The fact that 1991 was a recession year makes the tally even more impressive.

There are two main forces behind the current success of the IPO market, and both stoked investors' seemingly insatiable appetite for stock in young companies that hold the potential for explosive growth.

First, many other investments have lost much of their attractiveness. Real estate can no longer be counted on for steady and strong appreciation--let alone the double-digit annual growth rate that many homeowners grew accustomed to in the 1980s.

Yields on certificates of deposit have fallen to eight-year lows, and rates on bonds don't look much better.

In the stock market, the outlook for large blue-chip companies is not nearly as optimistic as the scenario many analysts see for smaller companies.

In a recession, small, publicly traded companies tend to be hurt more than larger, more established companies, but they also enjoy much more rapid sales and earnings growth when the economy finally recovers.

Second, the speculative appeal of small companies is a force driving the IPO market. Investors want to get in early on companies they hope will be the next Microsoft or Amgen--once-unknown companies that have generated billions in stock profits for shareholders.

The speculative fever pervading the IPO market has created some huge price gains, particularly in biotechnology stocks. Stocks such as Alteon and Immune Response skyrocketed the day of their IPOs and kept right on going. Although the mid-November stock-market shock took away some of the appeal of biotech stocks, it certainly didn't sour investors' pursuit of IPOs.

The big question is how long the IPO boom can continue. Early in an IPO boom, underwriters tend to offer higher-quality companies that they know investors will be willing to buy. But as the IPO market heats up and investors get less selective, underwriters know they can also bring lower-quality companies public and still find willing investors.

When an IPO market finally cracks, many investors who bought the more speculative, lower-quality offerings may find themselves holding worthless paper. Raymond F. DeVoe, a stock analyst in the New York office of Legg Mason Wood Walker Inc., did a study of the wave of electronics companies that went public in 1968--what he calls the "Great Garbage Market"--and says nearly 95 percent of those companies weren't around 20 years later.

For now, though, small companies willing to go public have a ready source of capital in IPOs. As long as investors don't get burned again soon, they probably will be willing to invest their money and take a shot at sharing in the fortunes of small, high-growth companies.

David Craig writes for the Money section of USA Today.

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