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 even more attractive.
Many brokerage firms boast that their greatest asset is the ability of their retail system to sell large blocks of stock to investors quickly and efficiently. That asset is particularly valuable on an initial public offering. The brokerage firm buys the stock from the issuer at one price and sells it to the public at a higher price. The difference or spread is used to pay expenses and selling commissions, and to produce a profit. But what a profit! The spread is often three or four times a normal New York Stock Exchange commission.
The individual stockbroker also let greed get the better of him during the heyday of new issues. Many brokers advised customers to buy new issues when all the broker knew about the company was its name, the price of the stock, and what he was going to make personally out of the transaction.
And individual investors succumbed to greed, as well. “Don’t tell me what the company does,” they’d say. “Just tell me if it’s hot.”
This concert of greed kept the new issue market alive and heated for a long time, but at this writing it’s as cold as the proverbial wedge. Recent new issues like Electronic Arrays and Signetics have gone to half their offering prices shortly after they were sold.
The result for Wall Street has been a rather startling displacement. Underwriting departments, long the stars of profitability at brokerage firms, have declined in importance. No longer do the investment bankers in a Wall Street firm get the prettiest secretaries. They’re over working for the institutional sales department. Individual stockbrokers who produced huge sums of gross commissions each year for themselves and their firms by specializing in new issues have been forced to switch to more mundane trading in listed stocks and bonds. And customers have found it more difficult to make money in a market that no longer provides an occasional easy dollar.
What was the last red hot deal? Hughes Tool came public in 1972 at $30 a share. Recently the stock sold as high as 86 3/4 and has never been back to the offering price. Howard Hughes sold his interest in that oil field service company to the public just in time for the stock to get a real energy crisis play. It probably was a good deal for Mr. Hughes, who apparently needed the money. It was surely a good deal for the brokers who earned the commissions on the sale. And certainly customers who bought the stock at $30 and held on see it as a wise investment.
Perhaps there are some other companies like Hughes Tool out there that need to go public, companies whose future growth will be enhanced by the infusion of public money to finance that growth. Raising capital for American industry is one of Wall Street’s more noble efforts since that’s the way capitalism is supposed to work. Perhaps someday the climate of the market will be altered enough to allow such offerings again.
But if the abuses of the “hot deal” era return, American capitalists may find it virtually impossible to raise public money for worthwhile ventures. And Wall Street will have lost another reason for being.