News Article: 1993-03-29: Wall Street; Going Gaga Over High-Tech I.P.O.'s From The New York Times

March 29, 1993

Wall Street; Going Gaga Over High-Tech I.P.O.'s

UTTER the words "information sciences" within earshot of an institutional investor and you can set off a chain reaction of drooling, tics and pulling out of checkbooks.

The big players can't get enough of the stocks of small companies in the software and computer businesses, and proof of their insatiable appetites is in the levitating initial public offering market.

Witness a 94 percent move in shares of Platinum Software, which went public on Oct. 22 at $17 and closed Friday at $33. Or a 68 percent spike in shares of Fourth Dimension Software Inc., introduced at $13.25 on Oct. 6, and trading at $22.25 a share by Friday's close.

Sitting back and cashing in on all the soft-tech goofiness is Richard A. Shaffer, the newsletter writer who manages to woo hundreds of Wall Street professionals at $800 a pop to buy his Venture Finance -- a publication that tracks small private companies. Last week, Mr. Shaffer released his annual list of this year's likely I.P.O.'s. Sixty-four now-private companies were on the list, down a bit from the 68 information science companies that went public in 1992, but still "unusually high" in Mr. Shaffer's view.

"It's unprecedented bullishness over small companies," Mr. Shaffer said. "The institutions are getting into these little stocks, and when institutions get into these, they just splash the water out of the pool."

Mr. Shaffer doesn't think the frenzy over software and other tech stocks has gone over the edge just yet, but he does think some caution is deserved.

"I think you're starting to feel fluffy," he said. "All these companies are jamming through the door to go public. The bankers can't even return all their phone calls."

It was last year's spectacular showing in the stock market that caused this year's continued rush to go public, Mr. Shaffer explained. The investor who purchased each of last year's 68 information science I.P.O.'s -- all companies that met his minimum market capitalization requirement of $50 million -- would be ahead 48 percent on his money by now, Mr. Shaffer said. Those gains came despite disasters that included Computervision, down 52 percent, and Stac Electronics, down 54 percent.

But not all the buying is justified, Mr. Shaffer said. "Major I.P.O. investors are getting involved in digital technology that they can't possibly understand or appreciate," he said. "They're making the only choice that's possible, because you can't buy I.B.M. or Digital Equipment anymore. But it certainly could blow up on them."

Over the past five years, institutional holdings of I.B.M. have dropped by a third, Mr. Shaffer said, and holdings of Digital have fallen 50 percent. Holdings by institutions of Microsoft, A.T.& T. and Intel, meanwhile, are soaring, he said.

Nobody gets too edgy about such changes in institutional investors' tastes so long as the I.P.O.'s coming out in newly popular industries are of companies with a nice track record of revenues and earnings. It's the emergence of the "concept stock" -- the company with little more than a management and a dream -- that makes people like Mr. Shaffer a little nervous.

One such example right now is the proposed I.P.O. of 3DO, the ultimate bells-and-whistles company in the home entertainment market. 3DO, whose financial summary includes no revenues, 15 months of losses and a prototype "black box" home entertainment product, is considered such a hot property that "we had to stand in line to get registration statements from the S.E.C.," Mr. Shaffer said. Imagine the lines that must form for a company that actually makes a little money.

In 3DO's case, prospective investors are banking on the fact that the company's chief executive, Trip Hawkins, whose press reviews include adjectives like "messianic" and "visionary," carries the magic that will lead investors to part with $700 for indisputably snazzy home entertainment.

Indeed, Mr. Hawkins and his gee-whiz product may represent the ultimate in entertainment for the video game and television junkie. But at $13.2 million and counting in losses, it isn't yet clear whether 3DO has the ultimate for institutional investors -- whose attention spans frequently rival that of a Nintendo freak.

Small investors needn't worry much about all the fuss over 3DO and others that Mr. Shaffer follows, because, frankly, they can't buy them anyway. Institutional investors get first dibs on hot stocks, Mr. Shaffer explained, effectively barring small players from taking part at all in the I.P.O.

But opportunities frequently arise several weeks after the stock goes public, Mr. Shaffer added, and that might be a better time to buy in any event. "The bad news is you can't get the hot ones on the day of the offering," he said. "But the good news is they almost all come down after a while."

Sometimes, the fall is swift. Institutional investors couldn't get enough of Networth shares when that software company went public on Nov. 25 at $28.50 a share. They happily rode the stock to $38.50 by Dec. 11. But earnings news didn't come in as everyone had hoped, and the stock fell off a cliff March 17 as fickle institutional investors bailed out. A share of Networth was $12 cheaper -- at $20 a share -- by the close that day. By Friday, it was down to $18.50.

Geniuses are quickly created in the tech stock game, but so too are goats. In 1992, "all you had to do to make money in information science stocks was to buy one," Mr. Shaffer said. But there was the little trick of knowing which one it should have been.

A correction was made on April 4, 1993: The Wall Street column last Sunday about initial public offerings made by computer and software companies misstated the experience of Networth Inc. The company went public on Nov. 25 at $16 a share; the first trade of that day took place at $28.50.

• 

  Article