METEORIC YEAR FOR SECTOR’S IPOS: BUT SOME FINANCIAL SERVICES OFFERINGS COOLED OFF LATE IN ’97

The financial services industry produced some of 1997’s hottest IPOs, but a number of tepid deals that slipped in on the coattails of top performers have investors wondering if things are finally cooling off.

During a sweet year for the sector – buoyed by steady economic growth, low inflation and brisk merger and acquisition activity -financial companies made 29 initial public offerings, including the country’s two largest, as measured by money raised and by company size.

In all, financial services firms that went public raised $4.5 billion, accounting for more than 15% of the $29.5 billion raised by the 525 companies that went public in 1997, according to IPO Monitor in Calabasas, Calif.

Not surprisingly, financial services mutual funds fared best of all sector funds last year, posting a 12-month total return of 45.9% as of Dec. 31, compared with a total return of 33.4% for the S&P 500 index for the same period, according to CDA/Wiesenberger in Rockville, Md.

Despite the sector’s strong performance and a string of IPOs that had investors cheering, the quality of financial services going public slipped toward the last half of the year, dragging down the stock prices of newly public firms relative to other industries.

Last year, share prices for financial services companies that went public were up 25.36%, falling far short of the 50.17% gain for bank IPOs, says IPO Monitor. The 21 bank offerings raised $1.3 billion. Still, financial services IPOs beat the 20% average return for IPOs in general.

This year is also expected to yield a mixed bag of IPOs, contributing to more volatility in the market as many companies rush to go public before the economy slows significantly, analysts say. About 100 IPOs of all kinds are planned by March 31.

While there wasn’t exactly a glut of financial services IPOs last year – especially compared to other high-profile industries, like technology which saw a whopping 144 companies go public – many investors wouldn’t touch some of the new stocks because of conce
rns about proper asset valuation and fear of an economic downturn. This especially hurt companies with a high degree of exposure to car loan, home mortgage and credit card debt.

Consumer debt, experts say, is at record levels as a result of financial services companies that have stepped up their lending activities in an effort to expand market share. Indeed, National Auto Finance Co. Inc. of Boca Raton, Fla., which buys and securitizes installment auto loans, had the worst performance of all newly public financial services companies last year. The company, which has a market capitalization of $20 million, saw its stock price plunge 64.7% to $8.50 as of Dec. 31.

do it now

Many companies may be going public prematurely in an effort to tap into the large pools of money chasing deals, especially fat mutual funds, says Tom Taulli, a senior analyst for IPO Monitor. In a tamer market, they would have secured venture capital financing, he says.

One IPO that raised quite a few eyebrows, for instance, was Consolidated Capital Corp.’s offering in November, which raked in $600 million although executives at the Washington-based firm reportedly had no idea what business it might get into.

“Some of these companies might be skipping a couple of steps on the way to going public,” says Mr. Taulli. “You have high supply and high demand, which is when you tend to see lower-quality companies go public.”

Meanwhile, investors – especially mutual funds and institutional investors – responded enthusiastically to the handful of offerings with strong brands, steady growth and significant market share.

Two of the most popular offerings in the sector were CIT Group Holdings – a New York-based secured commercial and consumer finance lender that raised $850.5 million, the year’s highest-yielding IPO, – and Hartford Life Inc., the Simsbury, Conn.-based insurer, which was the largest company to go public in 1997.

Potential acquisition targets of banks and insurers also fared well. One likely target, Ameritra
de Holding Corp., a discount broker in Omaha, Neb., with a thriving on-line business, saw its share price swell 95% to $29.25 as of Dec. 31.

Not all mutual fund managers are gobbling up these deals. They say prices of takeover candidates are too rich for their blood. And many of the financial services companies going public are so small that managers can’t get enough stock to make a dent in their portfolios.

“Mostly you don’t get very big positions, and you have to scream and claw for whatever you do get,” says Carl Dorf, manager of the $461 million Pilgrim America Bank and Thrift Fund, which returned 64.2% in 1997.