http://www.latimes.com/business/la-fi-ipo22jun22,0,5405996.story?coll=la-home-business

IPOs May Be Suffering From Image of Insiders as Greedy
Critics say buyout firms turn a quick profit by selling stakes to the public at lofty prices.
By Josh Friedman
Times Staff Writer

June 22, 2005

When analyst David Menlow scans the market for initial public offerings of stock these days, a scene from the 1987 movie "Wall Street" springs to his mind.

"Why do you need to wreck this company?" Charlie Sheen's character, Bud Fox, asks investment banker Gordon Gekko, played by Michael Douglas. Comes the snap reply, "Because it's wreck-able, all right?"

Indeed, along with the backdrop of a discouraging overall stock market, analysts say one reason the IPO market has slumped this year is a perception that greedy, well-heeled buyout investors have run amok.

Menlow and other critics say these buyout, or "private equity," firms are snapping up companies and — although not exactly wrecking them — turning a quick profit by selling stakes to the public at lofty valuations, a trend that has sparked a backlash among IPO investors.

"Investors are saying, 'Tell me why I should be shouldering all the debt you guys put on the back of this company. You got your money, and now you want me to take the risk in the event things don't work out,' " said Menlow, president of IPOFinancial.com in Millburn, N.J. "Investors are saying, 'No.' "

Private equity firms provide "liquidity" — typically, that means badly needed cash — to the companies they invest in. They also offer the business acumen of their partners as they help their portfolio companies attempt turnarounds, often over a period of years.

But in "quick flip" deals such as Warner Music Group Corp., critics say the investors and other insiders have enriched themselves without necessarily taking the time to revitalize the enterprises.

Warner Music, for example, amassed more than $2 billion in debt over the last year as insiders including buyout firm Thomas H. Lee Partners and Chief Executive Edgar Bronfman Jr. reaped hefty bonuses and other payouts. Lee's firm led an investor group that bought the former Time Warner Inc. unit in March 2004.

As the first half of this year draws to a close, 66 companies have gone public, down from 73 at the same point in 2004 and a steeper drop from the pace of last year's fourth quarter, according to IPOHome.com, a research website run by Renaissance Capital Corp. in Greenwich, Conn.

Seventy-six companies went public in the fourth quarter, the busiest period in more than four years, raising hopes for a sustained IPO resurgence.

At $14 billion in total dollar volume, new public companies have raised 4% less than a year earlier.

IPO filings (including deals that have not priced, and may never) also have slowed: Year-to-date, 123 companies have registered with regulators to go public, a 38% drop from this time in 2004.

New offerings enable companies to fund their growth strategies by selling stakes on the open market, and they give stock investors fresh choices when it comes to placing their bets.

IPO "after-market" performance in the aggregate has been decent relative to this year's lackluster stock market, with the average new issue gaining 5% from its offering price through Tuesday's trading. But some of the largest deals have clunked.

Chemical maker Huntsman Corp., whose February IPO raised $1.7 billion, has seen its stock slide 18% from the $23-a-share offering price. Global investment bank Lazard Ltd., whose $855-million IPO last month bought out the firm's private owners, is off 4%. Warner Music, which raised $554 million in a May deal that was scaled back sharply to lure investors, has fallen 3%.

Lazard's IPO sparked an investor lawsuit last week alleging that the firm and its underwriter, Goldman Sachs Group Inc., misled purchasers by overpricing the shares.

Other hard-hit IPOs this year include payday lender Dollar Financial Corp., which has plunged 41%, and flower delivery service FTD Group Inc., which has drooped 17%. Among California companies, Santa Barbara-based online advertising firm Fastclick Inc. has sunk 30% and Brea-based metal producer Earle M. Jorgensen Co. has sagged 18%.

Citing a chilly climate, several firms have scrapped their IPO plans.

Last week, Newport Beach-based Jazz Semiconductor Inc. scotched its proposed deal, blaming "market conditions." Earlier this month, robotic massage chair maker Interactive Health Inc. of Long Beach and mattress maker Simmons Co. yanked their offerings.

In May, paper producer Boise Cascade Co. pulled its IPO in a move it chalked up to market conditions but analysts attributed to buyout backlash.

On the eve of the high-profile deal, Wall Street underwriters slashed the expected price range to $17-$19 a share from the original $24-$26 in a scramble to save it. Ultimately, the offering, which would have raised several hundred million dollars for Chicago buyout firm Madison Dearborn Partners, was withdrawn. The firm had bought Boise Cascade only seven months earlier.

IPOs have also struggled for more traditional reasons.

When the stock market is climbing, investors are more inclined to gamble on new issues. But as rallies have fizzled this year amid an uncertain U.S. economic outlook and a tepid stock market, IPO investors have exercised caution.

"People have been disappointed by the sideways stock market," said Kathy Smith, principal at Renaissance Capital, which also runs an IPO-themed mutual fund. "Those investors chasing the latest trend are more interested in real estate."

Even so, some new issues, including those backed by buyout sponsors, have thrived in market trading.

An April IPO for electronic payment systems maker VeriFone Holdings Inc., which enabled GTCR Golden Rauner to cash out part of its majority stake, was scaled back by underwriters in a sign of tepid initial demand. But since coming out, the stock has rocketed 60%.

IPOs from specialty clothiers have been hot. "Action sports" garb seller Zumiez Inc. has zoomed 66%, and low-price "urban" fashion retailer Citi Trends Inc. has risen 21%.

Analysts said those results bode well for Costa Mesa's Volcom Inc., which designs edgy wear for surfers, skateboarders and snowboarders. Volcom estimated last week that its upcoming IPO would include 4.7 million shares at a range of $15 to $17 apiece.

"They're timing this just right — there's not a lot of IPOs to choose from, especially for growth investors," said Tom Taulli, co-founder of CurrentOfferings.com in Newport Beach. "This company probably has three or four years of good growth before it tops out."

The rarely used IPO process known as the "Dutch auction," in which shares are sold online in a process seen as friendly to smaller investors, has yielded some strong performers. Investment research firm Morningstar Inc., which went public early last month through an auction led by underwriter W.R. Hambrecht & Co., has been a hit on Nasdaq, just like search engine Google Inc. was after its auction last year. Morningstar has climbed 50%.

Other upcoming IPOs that will be closely watched include a deal that could be priced next week for KKR Financial Corp., the real estate investment unit of buyout firm Kohlberg, Kravis, Roberts & Co.

KKR hopes to raise as much as $839 million. Although investors have been frosty to several deals brought forth by buyout firms, Smith said KKR Financial could do well because folks are clamoring for steady income in sectors such as real estate and energy.

The IPO market might slow further over the next couple months if Wall Street's typical summer doldrums set in, analysts cautioned, but they said it's likely to pick up later in the year if the economy holds together despite high energy costs.

That would be welcome news for companies looking to tap the public markets.

For patient investors, however, an IPO market that stays soft might not be a problem, analysts said. After all, the idea is to buy low and sell high.

"The time to buy these things is when the market falls apart," Taulli said.

Time Warner IPO is a total rip-off! This is a typical case of parasites runing away with the cash register leaving the employees, customers and other investors bit the dust!

No worse than the politici er a i mean elected grifters in my town are doing to we tax payer's!!!! TO the tune of 1.7 billion, "yes it's tijuana norte" !!!10/4 flbgbt, and then there's our congresscritter randle"duke"unbeatable cunningham !!!google this guy if you want a good laugh !!!think i'll go cry !!! and i did drop time warner for satellite, wonder why they keep courting me???

Forgive me for being a little uneducated in this area, but didn't this exact same investment phenomenon boom and bust in the 1980's? And weren't there huge government S&L bailouts to the corporations that had overextended themselves by investing in other failing corporations? And didn't we then have a recession it took 4-8 years to fully recover from?

And I guess my main questions are: Didn't we learn this lesson already? and Whatever happened to fiscal conservatism?

In response to the -heathen.

What happened to fiscal conservatism? I'll tell you what happened. People are not taking the trouble to investigate where their mutual fund money is being invested. And individual investors are not always so savvy either. Professional management of your money is not a bad thing in theory, but most mutual fund managers cannot beat buy-and-hold the S&P500.

The tech bubble of the late 1990s was another example of foolish investors and their money soon being parted. Over 50% of households are now invested in the stock market, but how many of them have ever read an annual report of a publicly traded corporation? We've got people who are candidates for Jay Leno's Jaywalking competition investing in the stock market!

Now the bubble is real estate. Everyone with an ounce of sense recognizes it is a bubble. They just hope they can "flip" their properties for a quick profit before the bubble bursts.

There's a difference between the S&L crisis and problems with overpriced stocks. The S&L crisis was a result of government stupidity (and corruption), and bubbles like the stock market and real estate are due to individual stupidity (people trustingly investing in companies that have been loaded with debt by greedy folks like Bronfman). But nobody puts a gun to your head to make you buy overpriced stocks or property. So who is really to blame?

I agree government subsidizes and bails out too many people. Smaller government, anyone? Smaller government and lower taxes = less money available for "elected grifters" (as Treat called them) to dole out to special moneyed interests, in subsidies or bailouts. (We've bailed out the dairy farmers TWICE now, BTW.) But I don't hear many people calling for smaller government these days. (Except Newt Gingrich. And I'm not sure he really means it, or if it is just rhetoric.) You can vote libertarian, but what good is that really gonna do?

"bubbles like the stock market and real estate are due to individual stupidity"

And that's where we're supposed to put our Social Security funds.

I agree with you, z-man. Now is probably not the time to load up on stock for retirement funds, whether they are part of Social Security or not. On the other hand, I agree with the principle that individuals should own their retirement, even their Social Security accounts. Why should everyone suffer for the sake of people who are too stupid to manage their retirement money? I don't have a good answer, really. The main problem is that if you give Social Security funds all to the government, they will spend it. Your return is basically zero, and it is a Ponzi scheme that depends on the next generation to support you in your feebleness and dotage. If Social Security money is invested properly, it will get a return. The second option is obviously preferable, but the key words there are "invested properly."

The stock market has averaged a 7% return on investment in its history, including ALL crashes. Since I can't get 3% at a bank for my savings, it doesn't sound all that bad.