Because of inaccurate information obtained from Bloomberg, the performance of stocks of Washington area companies that sold stock in secondary offerings was better than shown in last Monday's Washington Investing column and an accompanying chart. A corrected chart appears today on Page 7 of Washington Business. (Published 11/22/99) Following a script written by Bloomberg News, which failed to account for stock splits, I underrated the performance of that stock two weeks ago. Adjusted for a 2-for-1 split, the stock is up from an offering of $11.25 a share in November 1996, but down from a stock offering of $21.50 a share in March. U.S. Foodservice's stock closed Friday at $18.18 3/4 a share. U.S. Foodservice, the nation's largest supplier of food and equipment to restaurants, has launched on online division that also will take orders from consumers who don't order by the truckload. Its Web site is www.nextdaygourmet.com. (Published 11/29/1999)
When AppNet Inc. of Bethesda went public at $12 a share last June, founder Ken S. Bajaj was immediately anointed an Internet Millionaire.
Bajaj didn't actually make a million on the initial public offering because he didn't sell any of his stock. But his nearly 3 million shares gave Bajaj a paper profit of $36 million that quickly grew as AppNet's stock soared during the Nasdaq Stock Market's record-setting fall rally.
The real payday for Bajaj came last Thursday, when AppNet returned to Wall Street with a secondary offering and the chief executive sold about 10 percent of his holdings for $50 a share, pocketing more than $14 million in cold cash.
The Chicago investment banking firm Golder Tomer Canfield Rauner, which backed Bajaj's plan to roll up a batch of little companies to create AppNet, also cashed in. A trio of Golder Tomer partnerships sold 2.2 million shares that yielded more than $100 million after underwriting expenses.
Taking that second bite of the Big Apple's capital market that turns their paper wealth into real money is the dream scenario for many of today's entrepreneurs. The sequence starts with a hot IPO that produces instant profits for investors, creating demand for more shares that drives up the stock. Capitalizing on the market opportunity, investment bankers quickly put together a secondary offering to raise more capital for the company and let the insiders turn their stock to cash.
Secondary offerings are no dream for ordinary investors, however.
Nightmare would be more like it. Far more often than not, the market chokes on that second bite of the apple.
After the offering, the stock begins to slide. The new shares that were sold sink below their offering price. The investors who had lined up to buy them get burned. And the investors who bought the stock while it still was climbing see much of their winnings evaporate.
At least that's what has happened to the stocks of the vast majority of companies in the District, Maryland and Virginia that had secondary offerings this year and last.
A review of those deals shows that out of 39 follow-on offerings, 26 stocks now are trading below their offering price, while 13 have gone up. Shares of one company, TeleBanc Financial, have gone in both directions: The stock is up from the price of the first secondary offering, but down since its second secondary.
As the chart on this page shows, the region's secondaries have pro duced a paltry 33 percent success rate, even in the midst of the greatest bull market in the history of Wall Street. Proclaiming every stock that is up since its secondary offering as a "success" is grading generously, because some of the gains are trivial. Only MicroStrategy Inc., America Online Inc., AES Corp., American Capital Strategies Ltd., Primus Telecommunications Group Inc. and CoStar Group Inc. have maintained much momentum since their most recent stock sale.
The ratio of winners to losers in the region's secondary offerings since the beginning of 1998 is worse than the track record of local IPOs during the same period. About 50 percent of the IPOs have been flops -- as of Friday, 19 of the last 36 IPOs are "underwater," trading below their original offering price.
Most investors understand that IPOs are risky, despite the aura of instant wealth created by Internet IPOs over the last four years.
The odds against an IPO becoming "the next America Online" or "another Microsoft" are even greater than most investors realize. In a recent publication Barton Biggs, stock market strategist for Morgan Stanley Dean Witter, tossed out this statistic:
Of more than 1,200 technology IPOs since 1980, a mere 5 percent -- just 60 companies -- produced 86 percent of the stock market value.
Biggs, who has long warned that stock prices are inflated, also cited some telling data about Internet IPOs, several of which are among those 60 big wealth-generators. Morgan Stanley research found the 241 publicly traded Internet companies had a combined market value of $550 billion. Those companies, however, had only $24 billion in revenue last year and together produced a net loss of $7 billion.
Few numbers show better the disconnect between the bottom line and success in the stock market or what long odds confront IPOs.
But it is not the IPOs with underwhelming records that whack investors with secondary offerings. These are, by definition, stocks that were early winners, issued by companies that sprinted through their first few months, generating such enthusiasm that investors were eager to buy more shares.
Nor are all the investors who buy into secondary offerings a bunch of bozos. Like IPOs, secondaries are purchased largely by institutional investors. They are professionals who not only can analyze the internal performance of companies but also can understand the external factors that affect stock performance.
But clearly those stock market externalities are not understood by many individual investors who buy shares in companies that are preparing secondary offerings.
The old law of supply and demand suggests that when the supply of a stock is increased overnight by a secondary offering, the price is likely to fall.
You could see that law at work when AppNet announced its plans to sell more shares on Oct. 26. AppNet stock went from $56 before the announcement to $43.56 1/4 four days later.
But then, contrary to all logic, the stock bounced right back up, hitting a new high of $58 on Nov. 4. Nobody with any appreciation for market dynamics would bid up a stock in advance of a secondary offering. Yet it happened not only to AppNet but also to Radio One Inc. of Lanham, the nation's largest radio chain catering to African Americans.
AppNet's stock turned down again as the offering neared. Priced at $50 after the close of Thursday's trading, the stock maintained that level on Friday.
Radio One stock was $45.25 a share -- up from the $24 IPO in May -- when the additional offering was announced Oct. 25. It climbed to $59.25 Thursday when the price of the new issue was set and kept climbing Friday to $64.25.
Neither founder Cathy Hughes nor Alfred Liggins III, her son, sold any of their stock, but three outside investors cashed in 700,000 shares in the 4.7 million-share offering that raised $278 million before expenses.
Selling by insiders in a secondary offering used to be considered a big negative. If they were selling, why would you buy? But in recent years investors have accepted the rationalization that insiders should not be expected to keep their wealth tied up in their own company's stock.
The chart on Page 7 shows that selling by insiders was more prevalent in secondary offerings that have fallen below their offering price than ones that have gone up.
So that old rule hasn't been repealed after all. Nor does it appear from the regional sample that the law of supply and demand has been overturned. When companies sell more stock, three times out of four, the price goes down. Remember that the next time you read about a company announcing a secondary offering.
Jerry Knight's e-mail address is firstname.lastname@example.org
Second Time Around
Recent secondary offerings and how they've performed.
COMPANY OFFERING DATE OFFERING PRICE PERFORMANCE
MicroStrategy Inc.* 2/9/99 $27+206%
TeleBanc Financial Corp.* 7/22/98 $14.50+154%
America Online Inc. 6/29/98 $103+45%
AES Corp.8/4/98$44.62 A+31%
American Capital Strategies LTD8/5/99$17+24%
Primus Telecommunications Inc.10/11/99$22.50+35%
CoStar Group* 5/4/99$34.50+11%
Advanced Communications 4/20/98$12.37 A+10%
Roanoke Gas Co.1/21/98$20+7%
E.Spire Communications Inc.* 3/30/98$18.50+1
Carey International Inc.* 5/7/98$22-4%
Municipal Mortgage & Equity1/26/98$20.62 A-7%
Municipal Mortgage & Equity7/22/98$21.12 A-9%
Freddie Mac11/16/98$58.62 A-8%
United Payors & United Providers*4/22/99$19-20%
American Mobile Satellite7/28/99$17.75-14%
Network Solutions Inc.2/8/99$170-12%
Dollar Tree Stores Inc.* 3/17/98$48.50-19%
Maximus Inc.* 12/10/99$32.50-20%
Hanger Orthopedic Group Inc.* 7/29/98$17-32%
Legg Mason Inc.* 6/16/98$55.75-30%
Humphrey Hospitality Trust4/20/98$10.50-30%
Software AG Systems Inc.* 5/21/98$24.12 A-32%
Global Telesystems Group Inc.*7/2/98 $45.50-43%
U.S. Foodservice* 3/25/99$43-55%
Global Telesystems Group Inc.*4/19/99$57.50-55%
Softworks Inc.* 6/3/99$10.50-51%
Snyder Communications Inc.* 5/20/98 $42-68%
Orbital Sciences Corp.4/14/98$45.81 D-61%
Telebanc Financial Corp.* 4/12/99$105-65%
Infodata Systems Inc.2/17/98$5-77%
Sinclair Broadcast Group Inc.* 4/7/98$58.25-82%
Dunn Computer Corp.4/27/98$8.50-88%
Criimi Mae Inc.3/19/98$15.31 D-93%
Lawyers Title Corp.2/24/98$40.12 A-96%
Guaranty Financial Corpfiled 10/1/99
Proxicom Inc.filed 9/23/99
* Indicates offerings in which insiders sold stock.
SOURCE: BLOOMBERG NEWS