Street Sense: The fundamentals of stock market investing
The IPO Market Gets a Boost
The market for initial public offerings dried up in 2001, but quality issues such as Alcon are attracting investors.

BY JERRY HELZNER

When technology stocks soared to dizzying heights in the late 1990s, the dizziest valuations could be found in the market for initial public offerings, commonly known as IPOs.

Simply stated, an IPO is any company whose shares are being offered to the public for the first time. Because shares in IPOs are allocated to investors by the investment banks that underwrite the stock offering, demand can be overwhelming for any new issue that investors deem to be "hot."

A couple of years ago, almost any fledgling technology company that wanted to offer its shares to the public could just about name a price for its stock and get it. But that was only for starters. Once a stock began to trade in the open market, it would often double or triple in a matter of minutes.

The new-issue market was great fun for a while, especially for those favored individuals and money managers who got in on the ground floor of the hot offerings. The problem was that the market was valuing startup dot-coms in the billions of dollars when these companies had never earned a penny of profit and had little prospect of ever doing so.

ILLUSTRATION: AARON MCCLELLAN

THE IPO MARKET COLLAPSES

When reality set in and investors glumly acknowledged that almost all of the former dot-com darlings had been grossly overpriced, things got very ugly in the IPO market. In fact, for more than a year, there was almost no interest in initial public offerings. Investors had been too badly burned to throw good money after bad.

In late 2000 and 2001, the only real activity in the IPO market was in "safe" investments such as Kraft Foods. It took the "one-two punch" of Alcon Laboratories and Travelers Insurance "going public" this March to snap the IPO market out of its lethargy.

ALCON OFFERING HAD APPEAL

Both Alcon and Travelers held real appeal for savvy investors. They were both big, profitable subsidiaries of huge parent companies. Alcon, the world's largest eyecare business in terms of revenue, was owned by mighty Nestle, the global food and consumer goods giant based in Switzerland. Travelers, one of the country's largest insurers, was folded neatly into the portfolio of Citigroup, a financial conglomerate consisting of New York-based Citibank, Diner's Club International and the investment firm of Salomon Smith Barney.

Nestle's strategy in offering Alcon shares to the public was a neat one. Nestle not only came away with $2.3 billion that it can now use for other corporate purposes, it also retains 75% ownership of Alcon. That's not to suggest that investors in the Alcon IPO got shortchanged in the transaction. Alcon is a quality company and an industry leader. With the baby-boom generation now middle-aged and rapidly approaching retirement, the demographics for eyecare demand over the next 30 years are superb. For investors who can display a little patience, Alcon should eventually be able to produce significant gains above its offering price of $33 a share.

MORE QUALITY IPOs ARE THE KEY

Both the Alcon and Travelers IPOs were offered to investors at prices that realistically reflected the value of the companies and thus were well-received. It will take more quality offerings such as Alcon and Travelers to bring the IPO market all the way back, though companies like these don't go public every day -- or even every month. 

Ophthalmology Management Associate Editor Jerry Helzner has written more than 50 articles on stock investing for Barron's. He has been a regular stock market columnist for other business publications and was a member of the equity research department of a major regional brokerage firm.