Initial Offerings Take a Turn to the Traditional
By NORM ALSTER
May 19, 2002
nvestors who rue the day in early 2000 when they bought shares of Pets.com may be interested to learn that Petco Animal Supplies, which sells its kibble mainly through storefronts, not cyberspace, is one of the successful initial stock offerings of this year.
Labor experts who have warned for years about a shortage of computer programmers may be surprised at the success of three recent issues — Cross Country, AMN Healthcare Services and Medical Staffing Network Holdings. They do nothing to ease the shortage of programmers, and focus instead on a prosaic but more persistent labor problem: a shortage of nurses.
These are examples of a fundamental shift in the types of businesses raising capital in the stock market. They form almost a reverse image of the overheated technology market of 1999 and 2000.
Technology companies, which accounted for 70 percent of public offerings then, comprised less than one-third in the first quarter of 2002. Venture capitalists, the source of most new stock offerings a few years ago, now have trouble finding companies in their portfolios that will attract public investor interest.
Today, leveraged-buyout firms and large companies spinning off subsidiaries are the major sources of new stock offerings.
In 1999, the median age of companies in new stock offerings was four years; now it is more than 15, said Jay R. Ritter, the Cordell Professor of Finance at the University of Florida, who maintains a database on new offerings back to 1975.
Though the market for new offerings is not quite booming again, more than 70 companies are now lined up to go public. That number is much smaller than the 366 in the pipeline two years ago, but more than at the same time a year ago, when 56 companies were waiting. Government inquiries and shareholder lawsuits against Wall Street underwriters over new stock offerings still await resolution, but some investors seem willing to let bygones be tax write-offs and to focus on the future.
That does not mean that technology stock offerings are likely to bounce back anytime soon. "You will not see anything of substance," said Mark Hantho, co-head of equity capital markets for North America at Morgan Stanley Dean Witter.
Investors have turned elsewhere, most notably to military-related, health care and energy stock offerings. And some of the most prominent new issues resonate to no discernible theme other than individual performance. JetBlue Airways, the discount airline, for example, surged 67 percent in its stock debut on April 12, to $45 a share from its initial $27 because of strong earnings and revenue. It now trades at $45.56.
Professor Ritter said 58 percent of the companies that completed new stock offerings this year were profitable, compared with 18.8 percent in 2000.
Jeffrey H. Bunzel, co-head of equity capital markets for the Americas at Credit Suisse First Boston, said: "What investors are focused on are more traditional companies, mature businesses, very identifiable business models, cash flows and traditional valuation metrics." Some investment bankers attribute the shifts in new offerings to a lack of confidence in Wall Street, caused in part by the Enron and Arthur Andersen debacles and fears of new accounting irregularities.
Among the best-performing new issues are spinoffs of company subsidiaries with long operating histories, like Travelers Property Casualty, broken out of Citigroup, and Alcon, the eye care products unit of Nestlé. Such deals let corporate parents raise cash and establish market value for voguish subsidiaries. Because these spinoffs have long established records, "they're perceived as less risky than the younger I.P.O.'s that were formed in the 1999-2000 period," said Larry Wieseneck, chief of United States equity capital markets at Lehman Brothers.
The new stock offerings coming from leveraged-buyout firms may best illustrate the contrast. Many sellers are cashing in on investment bets they made against the tide when the stock market, infatuated with new technology, scorned so many other businesses.
In the late 1990's, for example, while military budgets were still shrinking, Robert B. McKeon, president of Veritas Capital, a leveraged-buyout firm in New York, began buying small to midsize military businesses. In 1998-99, it spent about $44 million for several small such operations, and in February of this year packaged them in a stock offering, Integrated Defense Technologies. Including the cash it raised selling shares and the market value of its remaining 60 percent stake, that $44 million investment is now worth $350 million to Veritas.
"We were buying at four to five times cash flow at a time that the Internet companies were going for 100 times cash flow," Mr. McKeon said. "And yet these were tech companies. But they were considered dogs."
Also attracted to dogs, Leonard Green & Partners, a leveraged-buyout firm in Los Angeles, began looking at Petco, a publicly traded pet supply retailer, two years ago. At the time, five online pet supply operations had raised more than $100 million each, but their businesses were hemorrhaging cash. The online rival Pets.com, for example, lost more than $60 million on revenue of $5.8 million from its inception in February 1999 to the end of that year; the company went public in February 2000 and shut down nine months later. Petco had roughly $1 billion in store sales in 1999 but investors accorded Pets.com more than twice the market value of Petco in early 2000. "All the attention seemed to be going to big-kill investments," said James M. Myers, Petco's chief financial officer.
Leonard Green and the Texas Pacific Group, another buyout firm, bought Petco and took it private in October 2000.
"It was an underappreciated and undervalued public company in our judgment," said John M. Baumer, a partner at Leonard Green. The firm put up $95 million for its 40 percent stake.
Less than two years later, Petco was taken public again. Including the shares it still owns and the money raised in the stock offering, Leonard Green has an investment worth $250 million. Petco now has 565 retail outlets around the country.
The success of the three public offerings of nurse-staffing companies reflects growing recognition of a nursing shortage that has hamstrung many hospitals. Of 126,000 unfilled hospital jobs, 75 percent are in nursing, according to the American Hospital Association. By 2010, the nurse shortfall is expected to reach 400,000.
Medical Staffing, for example, provides temporary nurses to 7,000 health care operations in 43 states. Its shares, sold for $19 on April 17, are now worth $25.24.
Health care and military businesses, of course, are not without risk. DOV Pharmaceutical, a drug development company working on products for anxiety and insomnia, was priced at $13 on April 24 but has since lost 38.5 percent of its value and been hit with several class-action suits in connection with restated earnings just before its stock offering. And United Defense Industries, which surged to a high of $29.85 during trading on April 2 after its initial price of $19 last Dec. 13, has fallen to $22 since the Defense Department canceled its Crusader artillery project on May 8.
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