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 Local lull in initial public offerings March 7, 1999 By Dan Fitzpatrick, Post-Gazette Staff Writer
The number of Pittsburgh companies offering new stock to the public slowed dramatically last year, marking the end of a boom in initial public offerings and raising questions about Pittsburgh’s ability to turn fledgling entrepreneurs into publicly traded titans. Only mutual fund company Federated Investors tested the IPO waters in 1998, according to a survey conducted for PG Benchmarks. Compare that to 1995, when six firms sold shares to the public for the first time. Or to 1996, when five companies made the plunge. Much of the blame for the slowdown falls far from Pittsburgh. For much of last year, economic uncertainty in Asia and Russia caused investors to abandon riskier stocks for safer ones. New IPOs from small, unproven companies did not stand a chance on Wall Street. As a result, several companies in Pittsburgh and across the country delayed plans to go public, blaming the weak demand for initial public offerings. But some of the blame for Pittsburgh’s lukewarm IPO market lies closer to home. Other PG Benchmarks cities suffered from 1998’s uncertainty, but few dropped as low as Pittsburgh did. Only Kansas City and Cincinnati matched Pittsburgh’s dearth of new initial public offerings with one. Miami, Denver and Atlanta stayed strong by comparison. "We are not as robust in that area, no question about it," said Bob Kanters, a senior vice president at Legg Mason, Downtown. Even during the boom, Pittsburgh trailed many of its counterparts. At the height of the IPO go-go days in 1995, nine of the PG Benchmarks cities had more companies go public than Pittsburgh did. What’s more, eight cities raised more money with those offerings, too. When a company participates in an IPO, it offers part ownership of the company to the public through the sale of stock. A firm owned privately by a few executives becomes a firm owned by thousands of shareholders. At the time of their offerings, companies issue a predetermined number of shares at a predetermined price per share. Multiply the number of shares by the price, and you have the total amount of money raised by the offering. Only six cities raised more from their local offerings than Pittsburgh did in 1998. But those numbers are deceiving. Pittsburgh’s proceeds, after all, came from one company — Federated Investors. One of the nation’s top 10 mutual fund companies, Federated raised $266.9 million, according to Securities Data Co., the New Jersey firm that compiled the IPO data for PG Benchmarks. Securities Data does not include money raised from shares offered outside the U.S. and Canada. It gets its information from registered documents at the Securities & Exchange Commission and from the investment banking firms that underwrite the offerings. Last year could turn out to be a temporary blip, but some observers are concerned about the region’s long-term ability to take entrepreneurs from embryo to IPO. "You can’t get six IPOs in 1995 and hope it will redefine your region," said Mark Frantz, former technology policy adviser for Gov. Ridge and now an investment banker with BT Alex Brown in Baltimore. "You have to have a constant stream." A consistent flow of local IPOs reflects a region’s level of innovation. Traditionally, companies that go public have to reach a certain threshold of sales and expertise. Their products should be hot, their management team solid and their executives able to show evidence of future growth. Companies that issue stock to the public use the money to further expand, adding employees and market share. "The market is looking for companies that are capable of getting quite big," said Larry Mock, president of Mellon Ventures Inc., a venture capital organization founded by Mellon Bank. In Pittsburgh, though, entrepreneurs still struggle to get out of the gate. Many of Pittsburgh’s mature companies went public two or three years ago, and many early-stage entrepreneurs are still stuck at the low end of the growth curve. "We don’t have enough of a critical mass of companies coming out of the womb," said Doug Goodall, a veteran high-technology executive who now serves as interim CEO of Innovation Works, an organization that wants to help early-stage companies grow. Age may be a part of it, too, said Monish Bahl, a technology analyst at Parker/Hunter Inc., a Downtown investment banking firm. Pittsburgh’s population is older than several PG Benchmarks cities, and "as you get older, you are less willing to take risks and go public," Bahl said. To be fair, Pittsburgh also caught some bad breaks in recent years. Several IPO candidates were acquired before they could issues shares to the public. One such candidate was Internet search firm WiseWire, purchased last year by Boston-based Lycos. Also, Galt Technologies was swallowed by California-based Intuit Inc. Still, Pittsburgh could make a comeback. Some analysts and venture capitalists expect the IPO market to heat up in 1999 and 2000. In fact, several technology outfits are said to be mulling initial public offerings. They include Oakmont-based ServiceWare, Robinson-based DXI Inc. and Downtown-based FreeMarkets OnLine. Sean Sebastian, managing principal of venture capital firm Birchmere Investments, predicts half a dozen companies will go public in the next two years. "The IPO market is very lumpy," he said. "It goes in batches."
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