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Then comes the crucial job of figuring out the price to put on the stock. To give the new company a blue-chip image, investment bankers initially try to keep the range between $10 and $25 per share. If the price is set too high, the stock will be shunned. If it is fixed too low, the shares will be sold out immediately, but the company and its backers will raise less money.
The next stage is to draw up a preliminary prospectus, a comprehensive definition of a company, which will be shown to investors and the Securities and Exchange Commission. Often running to 40 or more pages of closely spaced lines, the prospectus is drafted by battalions of underwriters, accountants and lawyers who battle over clarity and nuance, spending hours quibbling over key phrases. By law, the prospectus must disclose information about competition and potential risk. It must also show the anticipated financial gain of the early backers. Sample from the Compaq prospectus: "The personal-computer industry is highly competitive and has been characterized by rapid technological advances. Products are vulnerable to early obsolescence."
Weeks before the issue of stock, company officials usually embark on exhausting road shows, making presentations and explaining the virtues of their firms to investors in both the U.S. and Europe. The SEC, though, bars them from making any earnings projections.
When a hot new company finally goes public, ordinary investors typically have little chance to buy the initial shares. Enthusiasm for the company is usually so intense that the underwriter can dispose of all the stock by parceling it out to longtime friends and favored customers. The public is normally able to participate only when the stock is resold on the open market.
The public may be lucky not to be in on the early sale. Stock strategists often recommend that investors wait several weeks before buying a new issue. That gives time for the euphoria surrounding the offering to wear off and for the price to stabilize. Ronald Smolin, president of Philadelphia's American Investor Information Services, warns investors to watch out for new stock offerings that are touted too highly. Says he: "A sense of accomplishment and success has always driven mankind forward, but so too has greed."
The prices of young, unproven companies can be driven up wildly by enthusiastic investors. Apple Computer zoomed from $22 to $29.25 during its first day of trading, while Genentech went on a heart-stopping ride from $35 to $88. But stock prices can plunge just as fast, eroding the paper profits of founders and frightening ordinary investors. Genentech subsequently fell back and is now selling for $38.75. Shares in Victor Technologies, a California-based desktop computer maker, are today worth less than one-fifth of the price at which they were offered in March. The paper fortune of Founder Charles Peddle, once worth $24.3 million, has shrunk to $4.7 million.
The founders of some companies can even find themselves out in the cold. Fortune Systems Chairman Gary Friedman was suddenly worth $26.2 million when his firm, which makes office computers, went public last