RETURN WITH US NOW TO those days of yesteryear when every new issue was hot and conversations between stockbrokers and hot deal artists went like this:
"Hello. Charlie Stockbroker speaking."
"Mr. Stockbroker, you don't know me. My name is Phil Prospect. Do you have a few minutes to chat with me?"
"Why, certainly, Mr. Prospect. What can I do for you?
"Well, I'm a pretty big investor, and I'm thinking about switching stockbrokers."
"That's very interesting, Mr. Prospect," Charlie says, salivating. "What can I do for you?"
"Well, I thought you might be the broker to handle my business."
"1 certainly appreciate your interest, Mr. Prospect. May I ask, what are your investment objectives?"
"Normally, of course, I'm interested in safety, income and growth, but right now I really have a specific investment in mind."
"Yes, I see. What investment is that?"
"I sure would like to get some Amalgamated Photonics on the offering."
"Are you there, Mr. Stockbroker?"
"Yes, I'm here. You know, of course, that Amalgamated Photonics is a red hot deal. Couldn't your broker get you any?
"No," Mr. Prospect admits sheepishIy, "he couldn't."
"Okay, I can let you have 25 shares, but only if you'll guarantee you'll do $2000 worth of commission business with me in the next year."
"It's a deal."
"What's your social security number?
So Amalgamated Photonics came public at $15 a share, and Mr. Prospect got his 25 shares. The first trade in the stock was at $25 a share, and by the end of the week it was selling above $30.
Some very strange companies went, public in those good old days. Any entrepreneur with the slightest inclination could find a friendly investment banker willing to raise capital for even the most far out idea. Millions of dollars came pouring into these ventures from private and public investors motivated by greed more than investment acumen.
Investors who wouldn't buy ten shares of American Telephone and Telegraph without the most exhaustive study of balance sheets, annual reports and statistical analysis would plunge many times more money into the most esoteric scheme if the broker would mention one of the several magic phrases: initial offering, first time public, hot deal. After all, what does one have to know about a company if he's sure the price is going to double in a week?
In a market where supply-demand relationships are often more important than fundamentals as an influence on stock prices, scarcity was the yeast in the recipe that made a new issue rise. Every investor knew that an initial public offering would be in great demand because it was going up immediately, and if he couldn't get all he wanted at the offering price, he'd just have to pay up for it after it started trading.
Brokers abetted the scheme by encouraging aftermarket purchases.
"Look, Mr. Customer," Charlie Stockbroker would say, "if I let you have 100 shares on the offering, you've got to agree to buy 900 more shares in the aftermarket. The stock's coming at 20, and we'll have to pay 30 in the aftermarket, but it will double from there."
And in many cases it worked just like that, and every time it did, the next new issue was assured of being hot, too.
Typical of the apogee of the new issue craze was the fast food franchise boom of 1968. Kentucky Fried Chicken had proved the worth of a business that could serve food quickly and conveniently to the rapidly growing number of relatively affluent Americans. If fried chicken worked, why not hamburgers, or roast beef, or pizza, or ice cream, or doughnuts, or that other traditionally American delicacy, fish and chips?
Prospectuses couldn't be printed fast enough. In fact, at least one publishing company that specialized in printing prospectuses decided to go public, too. Not only was Kentucky Fried Chicken successful, its success filtered down to those lucky few who had locked up the regional KFC franchises early in the game. These franchises went public, too, sometimes with more immediate success than that of the parent company. There was a rash of fast food franchise systems tied to celebrities' names. They were often little more than ideas for a chain of greasy spoon restaurants, yet investors clamored for the first stock offered to the public.
Where are they now? Kentucky Fried Chicken is no longer traded, having been absorbed by Heublein, a company that decided selling chicken might have more long-range reliability that selling franchises. Some, like Denny's and Dunkin' Donuts, survive as mere shadows of their former selves, unable to climb back up to their original offering prices even though they might be earning considerably more money than when they came public. Others, like Ram-Hart Systems and Broadway Joe's, are over the edge of bankruptcy.
Because of investors' experiences with this and other new issue groups in the late Sixties and early Seventies, the new issue game is largely over today. Even deserving companies have a hard time going public, and those that make it often find their share prices halved in a fairly short period of time after their initial exposure to aftermarket trading. In fact, there may be a bigger urge to go private than to go public these days.
What killed the hot deals? In a word, greed, greed on the part of issuers, brokers and investors.
It's an axiom that the only really huge fortunes made in the stock market are made by sellers, not buyers. A recent listing of the l00 richest men in America revealed that almost two-thirds had made the list within the last 20 years as result of a public offering of stock in a company they owned.
A private company worth one million dollars can sometimes generate $10 to $20 million through a sale of stock to public investors at a high multiple of earnings. In such a way are instant millionaires created, and the capital gains tax treatment on such windfalls makes the procedure