The Roaring Eighties

The Roaring Eighties

The Roaring Eighties had its fair share of speculative excesses, and again unwary investors paid the price for building castles in the air. The decade started with another spectacular new-issue boom.

The Triumphant Return of New Issues

The high-technology new-issue boom of the first half of 1983 was an almost perfect replica of the 1960s episodes with the names altered slightly to include the new fields of biotechnology and microelectronics. The 1983 craze made the promoters of the sixties look like pikers. Fifteen billion dollars’ worth of new public offerings were floated, approximately four times the previous record established in 1981 and greater than the cumulative total of new issues for the entire preceding decade. For investors, initial public offerings were the hottest game in town. Just getting a piece of a new issue automatically made you a winner, or so it seemed, as prices often soared in the after market.

Typical of the period was a promising new technology stock, Diasonics, Inc. a manufacturer of medical imaging equipment located in the heartland of technological America, Silicon Valley, south of San Francisco. Diasonics’ shares were offered at $22 each. By the end of the first day of trading, Diasonics had spurted over 20 percent to 26 ¾. Nothing to get excited about there. After all, the market value of Diasonics stocks was “only” 10 times the company’s total sales for the previous year and 100 times the previous year’s earnings. In the feverish new-issue market of 1983, such multiples were commonplace. Arthur Rock, the chairman of Diasonics’ executive committee, thought the price was so reasonable that he sold 50,000 of his shares for a total of $3.3 million.

Aldershot Landscaping maintenance. Photo by Elena

Down the valley from Diasonics, another group was working hard to throw something on the table for investors. They thought a machine should do the dishing up – specifically a personal robot. Was the robt ready for the task? Well, not quite. The company, called Androbot, planned to manufacture a line of personal robots. The company’s major product, B.O.B. (an acronym for Brains on Board), was nearly ready for manufacture; there were just a few small problems. Apparently, product development was not yet complete, and it was not clear that the “significant technological obstacles” mentioned in the prospectus, could be overcome. Moreover, software applications had not been developed, and the prospectus suggested that early prototype models were not yet, in the computer vernacular, user friendly. Finally, it was not clear that any of Androbot’s products could be at the prices that would have to be charged. But the proposed market capitalization of Androbot was less than $100 million (for a company with no sales, earnings, or net assets), and that didn’t buy much in the heady new-issue market of 1983. Incidentally, the underwater for this proposed flotation was not one of the small schlock houses on the fringe of respectability, but the thundering herd itself, Merrill Lynch.

The flood of new issues contained such names as Fortune Systems, Spectravido, and Whirlyball International. As was true in the earlier new-issue booms, even companies in more mundane business were favored in the market. A chain of three restaurants in New Jersey called “Stuff Your Face, Inc.” was registered with the SEC. Indeed, the enthusiasm extended to “quality” issues such as Fine Art Acquisitions Ltd. This was not some Philistine outfit peddling discount clothing or making computer hardware. This was a truly aesthetic enterprise. Fine Art Acquisitions, the prospectus tells us, was in the business of acquiring and distributing fine prints and art deco sculpture replicas. One of the company’s major assets consisted of a group of nude photographs of Brooke Shields taken about midway between her time in the stroller and her entrance to Princeton. Apparently, there were some potential legal problems, such as a suit by Mo Shields, who had some objection to the exploitation of these pictures of the prepubescent eleven-year-old Brooke. But, after all, this was for “artistic”purposes and obviously this was a class company.

The bubble appears to have burst early in the second half of 1983, The market itself had peaked by mid-year had declined slightly, but the carnage in the small company and new-issue markets was truly catastrophic. It was probably the offering of Muhammed Ali Arcades International that started the debacle.

In a sense, the proposed Muhammed Ali Arcades offering was not particularly remarkable considering all the other garbage that was coming out at the time. But the offering was unique in that it showed that a penny could still buy a lot. The company propsed to offer units of one share, and two warrants for the modes price of one cent. Of course, this was 333 times what insiders had recently paid for their own shares. That wasn’t unusual either, but when it was discovered that the champ himself had resisted the temptation to buy any stock in his namesake company, investors began to take a good look at where they were. Most did not like what they saw. The result was a dramatic decline in small company stocks in general, and in the market prices of initial public offerings in particular. The following table describes how in the course of a year many investors lost as much as 80 or 90 percent of their money.

Company; Initial 1983 Offering Price; High Price; Price Mid-1984; Percentage Decline from High to Mid-1984

•     Activision 12; 12 3/4; 1 3/8; 80.
•     Diasonics 22; 27 1/2; 1 7/8; 93.
•     Fine Arts Acquisitions 2; 2 1/8; 14/4; 41.
•     Fortune Systems 22; 22; 3; 86.
•     Spectravideo 6 14; 16 3/4; 1/4; 99.
•     Teleram Communications 7 1/2; 31; 1 1/2; 95.
•     Victor Technologies 17 1/2; 22 1/8; 3/8; 98.
•     Wilcat Systems 18; 18 1/4; 1 7/8; 89.

Nor were these isolated examples or simply the worst of the new issues of the early 1980s. A study by the investment firm of Wertheim and Company looked at all initial public offerings from late 1982 through mid-1983 whose offering size was $5 million or more. They calculated that, by early March of 1984, the average price decline for these offerings was more than 50 percent from the most recent 52-week high. These stocks declined even further as the market weakened during the spring.

Source: Burton G. Malkiel. A Random Walk Down Wall Street, including a life-cycle guide to personal investing. First edition, 1973, by W.W. Norton and company, Inc.