Only seven L.A. companies go public in '95.

Local IPOs hit low point as Wall Street booms

Although stocks are trading at record highs on Wall Street, the public investment mania doesn't seem to have found its way to Los Angeles County.

With 1995 nearly two-thirds over, only seven initial public offerings have been made by L.A. County companies this year, according to statistics from Newark, N.J.-based Securities Data Co. In 1994, there were 23 IPOs from L.A. County-based companies, with 13 by late August. The previous year saw 21 IPOs, with 10 by late August.

Even in 1990, when there were only 10 IPOs in L.A. County all year, there were nine by late August.

Although opinions vary on the reasons for the dearth of IPOs in L.A., most sources interviewed agreed that the decrease doesn't necessarily signify economic troubles for the county; in fact, investment and entrepreneurial activity in L.A. County are at their highest levels in several years, analysts said.

James Freedman, managing director of investment banking firm Barrington Associates in West L.A., said one possible explanation for the downturn is that so much private capital is now available that companies don't need to go public to finance their expansions. Over the past two years, more than $16 billion has been raised nationwide by private investment funds looking for mid-sized companies to acquire or invest in, Freedman said.

"There is too much money chasing not enough deals," he said. "We get contacted by 20 groups a day with hundreds of millions of dollars that are looking for mid-sized companies."

As merger-and-acquisition activity increases and the prices for solid mid-sized companies rise, there is less incentive for these companies to go public. Taking a company public is a difficult process that presents a number of new problems and situations that private companies don't have to face, Freedman pointed out.

Cyclical factors

Other dealmakers said the shortage of IPOs so far this year is simply a function of the cyclical nature of the investment market. Bruce Bauman, syndicate manager at L.A.-based securities brokerage Wedbush Morgan Securities, said the industries for which L.A. is known - apparel and entertainment - simply aren't considered hot right now by investors, who are looking for high-tech offerings.

Several investment bankers agreed that [TABULAR DATA OMITTED] Wall Street activity has been driven in recent months by high technology stocks, and the majority of California high-tech companies are in the northern part of the state.

Indeed, of the seven IPOs in L.A. County so far this year, three were from high-tech companies: Torrance-based Creative Computers Inc., Santa Monica-based Netvantage Inc., and El Segundo-based Inference Corp.

Performance for the seven 1995 offerings has varied widely so far, although there are more winners than losers. As of the Aug. 21 market closing, the three stocks that lost value were Netvantage, down 20 percent from its May 3 offering price of $5 a share, MiniMed Technologies Inc. based in Sylmar, which opened at $13 on July 24 and closed Aug. 21 at $12.50, and L.A.-based Tarrant Apparel Group, down 11.1 percent from its July 24 offering price of $9. The biggest winner so far is Creative Computers, which opened April 4 at $17 a share and closed at $26.50 a share Aug. 21 - an improvement of nearly 56 percent.

Bauman said L.A. County isn't unique in its shortage of IPOs this year. Nationwide, IPOs are running at lower levels than they did in 1993 and 1994, he said. On the other hand, those were unusually busy years for IPOs, so lower activity this year might be expected.

"This business tends to be fairly cyclical, and a lot of financial activity was taken care of during the previous two years," Bauman explained.

Furthermore, buyers are getting nervous about the high market prices that currently reign, fearing the market may have peaked, according to Bauman. This discourages management at mid-sized companies from turning to the stock market.

"They go to their institutional buyers and part of what they're hearing is, 'I just don't know if I want to participate in that industry at these prices,'" Bauman said.

Frank Kline, general partner of investment fund Kline Hawks California LP in West L.A., also pointed to the cyclical nature of the stock market for the explanation. He said the seeds of this year's downturn in public offerings were actually planted in the late 1980s.

The typical business expansion cycle takes approximately five to seven years for a successful company to go from the start-up stage to the point where it is ready to go public, he explained. In the late 1980s up to 1990, there was very little seed capital available for start-ups, resulting in a shortage of IPOs in 1995.

In addition, the disenfranchisement of the aerospace industry has dampened Southern California's investment environment, Kline said. His fund, with $105 million in venture capital coming mainly from the California Public Employees Retirement System, is highly interested in high-tech companies converting from defense to commercial applications, he said.