Word: ipos
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Bender's euphoria is understandable; not all start-ups enjoy the same prospects. The IPO game can be perilous for less well-prepared entrepreneurs and for the investors who snap up their shares. For every highflyer like Netscape Communications or Pixar Animation that has enriched its owners almost beyond counting, there are dozens of losers that have dashed their founders' dreams. Smith Micro Software, for example, jumped from $12 a share to $14.50 a share amid the frenzy of the IPO market when the Aliso Viejo, California, maker of software for modems went public last Sept. 18. Since then...
Those setbacks were not isolated incidents in the supercharged stock market that has made IPOs the hottest way to raise money in the 1990s, just as junk bonds and cheap credit fueled the stock boom of a decade ago. The junk binge left the U.S. with a colossal hangover of corporate debt, and the IPO fever inspires some worries about the country's financial and economic health. Among other things, it raises the issue of whether a casino-like mentality tends to lure investors into high-risk and even dubious new issues, or tempt start-ups to race to market...
...IPO binges are hardly new. H. Ross Perot, lately a presidential aspirant, first sold stock in Electronic Data Systems, his data-processing company, in 1968 for $16.50 a share; it soared the same day to $38, which amounted to a previously unheard-of 271 times the company's annual earnings per share. (Companies traded on the New York Stock Exchange typically trade at about 16 times their earnings per share.) But never before have so many new issues rocketed to such high prices on the basis of hope rather than proven results. Take Netscape, for example. While the company managed...
Many Wall Street watchers are worried that the lofty prices of some IPO shares could soon plummet. "I think we've got a bubble here," says Daniel Miller, managing director of the $20 billion Putnam group of mutual funds, based in Boston. "The first things thrown out in a bad market are the newer ipos." The risks only grow when mutual-fund managers--the institutional investors who are driving much of the stock boom--find themselves with little time to evaluate new issues. Nearly 40 new companies went public the week of Dec. 10 alone, as many as might have...
...that such faddishness has a broader effect: it can soak up scarce investment funds that other businesses could sorely use and thereby reduce employment prospects. Established businesses can also be hurt when their talent walks out the door to join a start-up in the hopes of hitting the IPO jackpot. And some defectors may harm their old employers by cashing in on ideas conceived on company time...