An Unhittable Pitch

By Daniel Kadlec

It's no accident that Pixar, the computer-animation company, sold its first shares to the public in 1995 while its movie Toy Story was a runaway box-office hit. Or that hockey's Florida Panthers made the move a year later, fresh from their first appearance in the Stanley Cup finals. Nor is it a fluke that Wall Street powerhouse Goldman Sachs, with the market at a historic high, is now mulling an initial public offering of its own. In the business of making your money mine, which is what any IPO is about, timing is everything.

On that score, the Cleveland Indians stroked a monstrous home run last week. They are riding about as high as any team in baseball, having sold every seat for every game in a popular new stadium for three years running. They're in first place in the American League's Central Division this year and have become mainstays in post-season play. Cashing in on that success, the club's controlling shareholder, Cleveland investor Richard E. Jacobs, sold 4 million shares at $15 each to raise $60 million. One hopes his many new partners are rabid baseball fans with no economic need for the stock actually to rise. Because it won't.

Here's why. Things aren't just good for the Indians, which went to the World Series last year; they are about as good as they can get, and the club will tell you as much. That leaves but one direction to go: down. And what's really troublesome is that even in these halcyon days for the Indians, the team is only marginally profitable. Last year, the company as it is currently configured would have posted net income of only $6.9 million, and that includes a one-time shot of $9.3 million from league-expansion proceeds and income from 18 of a potential 19 postseason games. When the team eventually stops winning, it could easily lose $10 million a year.

This IPO, by the way, may be an early indicator of just such a turn. Look at the Boston Celtics, which went public in 1986. It was the very peak of a hoops dynasty that included NBA championships in 1981, '84 and '86. They made it to the finals in '85 and again in '87. But their great players started leaving soon after, and the team has been "rebuilding" for nearly a decade. Oh, yeah, Celtics stock has been anything but a slam-dunk, soaring from $18 1/2 to just over $20--in 12 years. Even if you count dividends, the return on Celtics stock has been as exciting as a brick clanking off the Fleet Center rim. Expect no more from the Indians' stock. (By week's end, investors had already pushed the stock below its IPO price--an ominous sign.)

All of which makes this IPO a strikeout for true investors and a smash for Jacobs. He keeps essentially all voting rights and pockets enough cash to go shopping finally for the pro football team he's wanted ever since the Cleveland Browns fled to Baltimore two years ago. What do the buyers get? A stock certificate that says all-stars Sandy Alomar and David Justice work for them now. But of course we know that athletes work for themselves. So all that the shareholders really get is a fancy sheet of paper that may or may not develop collectible value. There's little else to underpin the stock--no dividend, no earnings, no free tickets, no say. (If shareholders had a say--a vote, that is--would they change the team's politically incorrect name and logo?) The franchise value promises to keep rising, and that helps. But only Jacobs can realize that value, and only by selling the team.

The nature of investing in sports teams is that most folks don't really care if they make money at it. They're in it for the thrill. But the Indians illustrate a problem with all IPOs: they are timed for sale, not purchase. They come to market when everything is clicking, when the main risks are that the good times, which you are paying for, won't last. Companies, after all, can peak just like sports teams.

Fools' footprints have been left in plenty of onetime high-flying IPOs. Boston Chicken, the eatery, could do no wrong when it sold stock in 1993. Adjusted for splits, it initially traded at over $25, but today the stock is under $2 and worth less than a plate of meat loaf with a couple of sides. Netscape's IPO in 1995 was part of Round 1 of Internet mania. Adjusted for splits, the browser company initially traded near $36, but today is around $23.

Anyone who invested in the IPOs of companies making cigars, microbrews, bagels, theme restaurants or clothes in the past few years can recite similar tales of woe. He or she was buying when the smart money was selling. The basic rule of IPO investing is this: unless you have an inside edge, don't do it. If the Indians have made that any clearer, I'll root for them this year. Heck, why not? Their decline is just around the corner.