IPO MARKET MAY BE COOLING DOWN FOR HIGH-TECH FIRMS

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NEW YORK-If the conventional wisdom holds true that a rising tide lifts all boats, then wireless companies seeking to go public this year can take comfort in the results of the 1997 Super Bowl.

For 27 of the 30 previous years, a win by a National Football Conference team like the Green Bay Packers has portended that the Dow Jones Industrial Average would close out the year up overall. A win by an American Conference team has spelled a Dow slump.

Nevertheless, a number of factors are converging to make this year tricky for publicly traded companies and those looking to raise public equity capital for the first time.

“For high-technology companies looking to go public, I would go public earlier in the year rather than later,” said David Schulman, chief equity strategist for Salomon Brothers Inc., New York, at a recent Wall Street Forum meeting for institutional investors.

In one key way, high-technology companies may become a victim of their own success at having grown as a group from a market niche into a dominant sector in the U.S. economy, Schulman said. Now accounting for more than half of total spending in durable equipment, high-technology companies have become part of the industrial sector typically associated with traditional manufacturing companies. As such, their stocks are becoming more like industrials, which are cyclical and less growth-oriented in nature. Therefore, investors who expect continued high-growth in high-technology stock prices are bound to be disappointed, he said.

Part of the conservative, if not pessimistic, outlook is attributable to a “once bitten, twice shy” response by the investment community. By year-end 1996, almost a third of the new equity issues sold in 1996 traded below their initial offering price, nearly double the number that did so in 1995, said William Smith, president of Renaissance Capital, Greenwich, Conn.

“The quality of some of the underwritings wasn’t good,” Schulman said. “There were junk capital companies, third-stage (venture capital) companies, going to market March through May.”

Customarily, there is at least one additional venture capitalization stage between third-stage venture capital financing and the bridge or mezzanine venture capital financing provided to companies that are expected to go public within six months to a year, according to the National Venture Capital Association, Washington, D.C.

Whether or not they were newly public in 1996, the stocks of wireless companies “continued to under perform the overall market for the second year in a row,” according to Donaldson, Lufkin & Jenrette Securities Corp., New York.

While the S&P 500, a benchmark indicator index, rose 20 percent for the year, “cellular stocks were down 18 percent while paging stocks were down 71 percent-both due to fears over (varying degrees) of competition and cannibalization. [Personal communications services] stocks have clearly pulled back from their peak trading levels and the mobile satellite stocks were down on average as well.”

Then, there are general market trends that portend an overall stock market correction, which Schulman pegged from 10 percent to 15 percent during the second quarter of 1997, “after which there will be a meaningful rally.” Energy and wage costs are rising, while companies are unable to pass along price increases to consumers. This situation puts a squeeze on profit margins.

“Historically, the market rarely trades at a price-to-earnings ratio of over 18 percent, except when earnings have been depressed by a recession,” Schulman also noted. He predicted price-to-earnings ratios of 20 percent both this year and next.

Company valuations relative to cash flow also look high, “and people who do leveraged buyouts see cash flows unsustainable over the longer term,” he said. Buyouts provide funds to permit the management of either public or privately held companies to buy additional product lines or businesses. In such an environment, “it would be difficult to say that investments made today will earn 10 percent per year for the next five years,” Schulman said.

Those are the kinds of considerations that go into the pricing of an initial public offering. Last month, for example, Transcrypt International Inc., a Lincoln, Neb., provider of fraud and churn reduction software for wireless and wireline carriers, was compelled to reduce dramatically the size and price of its IPO before it could sell the deal. As originally filed with the Securities and Exchange Commission, the Transcrypt IPO envisioned the sale of 3.75 million shares of common stock priced between $12 and $14 apiece. When the IPO sold Jan. 22, some 2.5 million shares were sold at $8 each.

Apparently due at least in part to unfavorable market conditions, a number of wireless companies have postponed planned IPOs originally scheduled for sale in 1996. Coral Systems Inc., a Longmont, Colo., developer of fraud and churn reduction software, filed with the SEC in October for an IPO. In December, the offering was listed as scheduled for immediate sale, but the company postponed it indefinitely.

NextWave Telecom Inc., a San Diego personal communications services provider, filed last June to go public. The carrier said it would file a new registration with the SEC by mid-February in hopes of getting its long-stalled IPO sold.

On the plus side, there still is a lot of capital seeking places to invest. However, a goodly portion of that money is being diverted into stock index funds rather than into individual companies, Schulman said.

Another good sign: Last year, 869 companies issued stock for the first time nationwide, raising $50 billion-a sum that broke the last record, set in 1993, by nearly 50 percent, according to Securities Data Corp., New York. However, George Needham, a principal of Needham & Co., a New York investment bank, said he expects a 30 percent decline in IPOs this year. Even so, that aggregate amount would place this year near the top of the charts in terms of IPO issuance.

There is one other cautionary note to consider. Reforms to trading on Nasdaq went into effect Jan. 20. The new SEC regulations are designed to reduce the spread market makers earn on the difference between the prices they offer to buy and sell stocks. Wide spreads hurt small investors most, critics said, because institutional traders could tap into private trading systems like Reuters’ Instinet to get better prices.

It is inherently risky to maintain an inventory of lesser-known stocks as market makers do in order to create liquidity in secondary trading markets. Wider spreads helped compensate market makers for these risks, said Buzzy Geduld, president of Herzone Heine Geduld, Jersey City, N.J., one of the largest market makers for Nasdaq.

Therefore, the new rules could take some of the shine off the market for public offerings, which have been a major source of revenues for Wall Street over the past two years. With diminished profits in secondary-market trading due to the new Nasdaq measures, investment banks are likely to take fewer risks on smaller companies’ IPOs, said Arthur Pacheco, former director of the Security Traders Association, New York.

Nevertheless, high-technology companies, including those in the telecommunications sector, continue their status as a predicted leader in the IPO market this year, according to Renaissance Capital.

Other personal communications services carriers registered to go public include Chase Telecommunications Inc., Houston, General Wireless Inc. PCS, Dallas, and Pocket Communications Inc., Washington, D.C.

According to Price Waterhouse Technology Industry Group, Dallas, a significant number of wireless companies received in 1996 the mezzanine venture capital financing that is a prelude to going public:

Cell Call, a Lexington, Ky., wireless communications networks provider.

CommQuest Technologies
, an Encinitas, Calif., manufacturer of digital wireless communications products.

Communications Systems T
echnology Inc., a Columbia, Md., telecommunications equipment and software manufacturer.

Mercury PCS L.L.C., a Jackson, Miss., personal communications services carrier.

Multipoint Networks, a Belmont, Calif., wireless data products manufacturer.

Pacific Monolithics Inc., a Sunnyvale, Calif., maker of microwave components and subsystems.

Pathnet Inc., a Riverdale, Md., microwave incumbent relocation services company.

Peninsula Wireless Communications Inc., a Sunnyvale, Calif., microwave and cellular equipment manufacturer.

Positive Communication, a Pleasanton, Calif., wireless products and services distributor.

Verticom Inc., a Santa Rosa, Calif., manufacturer of commercial radio subsystems for wireless communications.

Windata Inc., a Littleton, Mass., wireless network information systems supplier.

Wireless Access, a Santa Clara, Calif., manufacturer of two-way paging products.

Phoenix Wireless Inc., a Maitland, Fla., provider of wireless local loop products and services.

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