Taking Stock / Caveat Vendor

Here is a perspective, with 10 years' hindsight, on the wave of 59 offerings on the Tel Aviv Stock Exchange in January and February 1994.

l 27 percent of the companies have collapsed, gone into liquidation or caused investors to lose more than 90 percent of the money they invested at the IPO.

l 32 percent generated negative real returns - an especially painful result considering the gains that could have been made elsewhere.

l 10 percent generated positive real returns, but still less than short-term Bank of Israel certificates. In other words, the investors accepted the high risk, but received less reward than they'd have received on the lowest-risk shekel assets.

l 17 percent of the companies were delisted. In most cases, the buy-back offer priced the shares below their IPO level. In some cases, the offer arrived moments before an upturn in the company's fortunes, which naturally brought the investors no joy.

l 14 percent of the companies exceeded the yield on short-term Bank of Israel makam certificates.

Do the institutionals that manage our money know these stats? They may not. Do they care? They may not. History teaches that institutional investors like to buy at IPOs. It is kickier, more exciting. It makes them feel powerful and influential, and sometimes can wind up generating quick profits.

Naturally, seasoned market players know the stats perfectly well - if not in particular, then in essence. There are exceptions, too - astonishing companies that grew and developed, aided by the investors' money. But they are the exception that enables the rest of the pack to draw in investors.

Koti Gavish, a wily stock market animal who was involved in a lot of offerings back in the early 1990s, doesn't deny the figures. Five years ago, in a seminar on IPOs, he concisely summed up his philosophy with the Latin phrase, Caveat emptor - Buyer beware.

My son, the seller

But we didn't mean to tire you, dear reader, with stories about the risks of public offerings, or to ponder on the losses that most of the institutionals hastening to muscle into every bond offering hitting the market these days can expect. No, for a change, we want to discuss something else - the sellers.

Given the miserable statistics regarding the buyers, we must conclude that selling at IPOs is a terrific business. Just look: History shows that the sellers usually get a really, really high price.

Of course, there are owners that managed to take their companies public at top dollar, withdraw enormous salaries, milk the publicly traded companies to the last drop and waddle home happier and richer. But that's only part of the story.

There is plenty of literature about the huge advantages of a public listing. Every investment banker or underwriter would be happy to list them - liquidity, rationalization in policy making, access to the financial markets, the ability to acquire other companies using shares, and so on. But they don't particularly like to aim the spotlight at the disadvantages:

Relentless exposure: Any number of managers could tell you the tremendous damage caused by the glaring spotlight on the companies' performance and financials, when times turn bad. Bankers have often found themselves forced to handle a company differently by virtue of its public listing; whereas if it had been privately held, and only they had known its true situation, they would have handled it otherwise.

Image control: If the way the press depicts the company is a problem, the management has to devote time to reassuring investors, analysts and bringing around the reporters too. Sometimes, this detracts from managing the company itself.

Policy: Not all managers deal well with the press. Some are tempted to make decisions based on the way the press will depict the firm, or its management. Public exposure can lead a company to allow short term considerations to supersede the long term. And sometimes, this leads management to cling to mistakes rather than admit them, cut losses and move on.

When a company is losing money, the glare of the exposure can exacerbate the situation, impairing its relations with the banks, customers and suppliers. And when a company is doing beautifully, the exposure can attract the attention of competitors.

Insider transactions: In many Israeli companies, the controlling shareholders retain major stakes - anywhere from 60-90 percent of the company's outstanding share capital. The corollary is that they still feel the company is their private fief. They treat it accordingly, and are surprised when attacked by the press or the minority shareholders.

Naturally, there are many examples of the opposite, when going public is an essential step in a company's development. In high-tech, for instance, to get anywhere, a company generally has to float on the Nasdaq, because that's the rules of that particular dynamic, high-speed game; and the offering engenders terrific advantages.

But most of the companies that went public in Tel Aviv over the last 20 years proved unsuitable, or their management was. They didn't need it, and reaped nothing but grief.

After three years of recession and shrinking credit resources, the temptation to tap the market is huge. But all involved should think twice about the merits and the potential downside not only to the buyer, but to the seller too.