Riding Wall Street's bull market like rodeo cowboys, Washington businesses have raised nearly $3 billion in new capital in the past year through an unprecedented string of securities sales.
Since last September, when Family Entertainment Centers of Rockville sold $5 million worth of stock to build new pizza parlors, D.C., Maryland and Virginia firms have tapped the financial market more than 50 times in a series of transactions capped by a $1 billion issue of notes and warrants by MCI Communications Corp.
Capital-hungry MCI alone has raised $1.65 billion in three debt issues since last September to finance its burgeoning telecommunications business. Already the biggest competitor to the biggest company in America--AT&T--MCI probably would be able to garner nearly as much capital, regardless of the investment climate.
But the year-long stock market boom has spurred unparalleled interest in initial public offerings and secondary stock sales by smaller public companies.
As result, Wall Street has welcomed with cash in hand companies far less familiar than MCI, investing more than $1 billion in the shares of little-known firms like PC Telemart of Fairfax, which uses computerized kiosks to sell computer software; Finalco Group, a McLean equipment-leasing company; Psych Systems Inc., a Baltimore maker of computer systems for psychiatrists; Farm Fresh, a Norfolk supermarket chain specializing in produce, and a couple of dozen other new local firms.
Start-up ventures and emerging entrepreneurial empires are not the only groups finding a ready market for their first stock issue. Among the established Washington firms that have announced sales of additional securities recently are Atlantic Research Corp., Peoples Drug Stores, Hechinger, Manor Care Inc., Penril, Evaluation Research Corp. and Washington Real Estate Investment Trust.
In the last week alone, the Student Loan Marketing Association of Washington announced an initial public offering of 6 million shares for at least $107 million; Bethesda Research Labs of Gaithersburg disclosed plans to go public with a $25 million offering after merging with Life Technologies Inc., and W. Bell & Co. and Greater Washington Investors announced secondary offerings.
Initial public offerings dominate the capital-markets monsoon, and the success of local companies in selling new stock mirrors an unprecedented national trend that shows little sign of abating.
After only eight months, 1983 is already the biggest year in history for initial public offerings, said Norman G. Fosback, editor of New Issues, a Fort Lauderdale, Fla., newsletter specializing in first-time stock sales to the public.
"Total 1983 new issues volume will easily exceed $10 billion, or more than three times the highest previous annual total" of $3.32 billion last year, he said.
In the month of August, more new companies went public than in any other month since 1969. Fosback said 106 companies sold shares for the first time during the month, raising $1.36 billion in equity capital.
In dollar volume, August was the third biggest month on record for new issues and only the fifth time ever that more than $1 billion worth of new shares were sold in a single month. All five of the billion-dollar months were this year and June was the biggest ever with $1.61 billion in new issues.
Fosback's figures are only for initial public offerings of common stock. When sales of shares by companies already in the market are counted and offerings of bonds, notes, debentures and the like are included, the total soars astronomically.
Moreover, the $3 billion total for companies in the broadly defined Washington region excludes the massive financing accomplishments of the District of Columbia's biggest financial institution, the Federal National Mortgage Association. annie Mae has raised some $19 billion in the past year, most of it through sales of mortgage-backed securities. As the heart of the secondary market in federally insured mortgages, Fannie Mae's operations are more analogous to a bank selling certificates of deposit than a manufacturer raising new capital.
For Fannie Mae, going to the market is a routine transaction, but for other companies, it can be a once-in-a-lifetime opportunity--a chance to get the extra capital needed to make the jump from mom-and-pop business to big-league professional enterprise, a way to cash in a career's investment in building an organization.
During the stock market's dog days of the '70s, it was difficult even for the most promising private companies to go public, but in the last four years all that has changed.
Since 1980, the volume of new issues has increased year by year, said Donald Hebb, head of corporate finance for Alex. Brown & Co. of Baltimore. Alex. Brown has been one of the three or four most active underwriters of new issues, bringing 27 companies to market so far this year.
"The market today is one in which good companies can come to market and do really well," said Hebb. "The demand for high-quality growth companies is very good."
Hebb and Eliot Benson, director of research for Ferris & Co. of Washington, agree that the new issues market has cooled off a little in the last couple of months, and neither considers that a negative development. It's not that new issues are more difficult to sell, but that investors are no longer willing to snap up every issue that comes along and pay a premium for stock in companies with no track record.
"The sharply rising interest in the market and in the potential of these new issues has long since tapered off," said Benson. "The price of a lot of these stocks have gone back down to more realistic levels. A lot of these stocks were bid up to excessive price levels."
The market for stocks in new companies and secondary offerings by established firms has been strong because "the stock market itself was soaring," explained Benson. "As prices rise, it always attracts investors. Brokers find it easier to sell stocks when prices are rising. We've had the window open for financing because it was so easy to sell stock." espite the record number of new offerings in August and the deluge in local issues in the last few days, both Benson and Hebb say the market is changing. "The froth is gone, the window is closing," said Benson. "I think its tapering off right now. Without any question we will see a sharp decrease in new issues, certainly in the size of the issues."
While investor interest is waning in "relatively new, start-up situations, those companies with well-established business will be able to raise money," Benson said.
Hebb said the new issues market "is different than five months ago" when new stocks often jumped several dollars a share the day they went on sale, but also "different from the '70's," when new ventures died for lack of investor interest.
"Investor interest in growth companies is not going to disappear," he predicted. "The investment community has seen these kinds of companies can perform well, even in a tough economic environment."
The prospect of a continuing strong market for new growth companies has important implications not only for investors seeking opportunities to earn capital gains but also for the health of the nation's economy. A shortage of capital--or a resulting increase in capital cost--can strangle the emerging companies that are one of the most important sources of new jobs.
The recent strength of the new issues market, on the other hand, has funneled badly needed cash into such key growth industries as computers, telecommunications and biotechnology that could potentially bolster the nation's economic base.
The fastest climbing local new issue this year has been a tiny start-up company called Toxic Waste Containment, said Wendy Wachtel of Wachtel & Co., a Washington brokerage firm that specializes in venture capital situations and long-term growth stocks.
Toxic Waste raised $250,000 last February by selling 1 million units of stock and warrants for 25 cents apiece. Last week, the units were quoted at $8--32 times what investors paid for them. On the other hand, Liquidation Control Inc., a sister company of Toxic Waste Containment, put out 1 million units at 25 cents each last fall, and they are still selling for a quarter.
The cooling of the new issues market shows clearly in the prices of many of the shares issued by local firms in the past year, which have dropped well below their initial offering level. Analysts suggest that in most cases, the declines are as much due to the market as the performance of the companies themselves.
Among the other shares that have gone south since their offering are Farm Fresh, down from $25 1/2 to $19 1/8; Legg Mason, down from $18 1/2 to $13 3/8; Family Entertainment Centers, down from $10 1/2 to $4 3/4; USAir, from $32 1/8 to $28 3/8; VSE Corp. from $17 1/2 to $12 1/2 and Cerberonics, off from $20 1/2 to $15 3/4.
When Dart Drug spun off its Trak Auto subsidiary last spring, the shares came out at $22 and soared to $33 by the end of the first day's trading. But the speculators quickly cashed in their profits and the stock last week was trading at $23 1/4.
That's better than the performance of Trak's sister company, Crown Books, which came out at $25 a month ago and has slid to the $20 range despite a very healthy earnings report last week.
Brokers like Wachtel, Benson and Hebb stress that short-term profits should not be the goal of investors purchasing new issues. Though speculative interest can occasionally produce paper profits of 50 percent in a single day on a new issue like Trak Auto, such situations are rare.
Long-term growth prospects have little to do with what happens to a stock in its first week or month on the market. Crown Books hasn't even had a chance to invest the $62.5 million raised by its offer and many of the new local companies are start-up ventures that warned investors they did not expect to make money for some time.