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December 1, 2001

An IPO Regulatory Break

By Colleen Marie O'Connor

Securities regulators, hoping to help stimulate the IPO market, have relaxed one of the filing requirements in a public offering.

The effect of the temporary SEC measure is a reduction, from several weeks to several days, in the time allowed for companies to submit a share-price estimate before a deal is sold.

(Those price estimates are contained in a company's S1 documents filed with the Securities and Exchange Commission.)

"Current market conditions are putting pressure on the issuer and the investor," said SEC spokesman John Nester.

"This benefits both sides of that equation and it provides better information," he said. The waiver, he added, is viewed as a "change in administrative process."

More importantly, it reduces the chances that an IPO price will be driven down, as was the case recently with a deal for Universal Hospital Services, observers say.

Underwriters for Universal Hospital Services Inc. deeply discounted the price range of the deal just before it priced.

It spotlighted the reality of today's harsh market climate.

Healthcare Sector

Despite being positioned in the healthcare sector, one of the few sectors completing deals these days, Universal Hospital Services (Nasdaq:UHOS) dropped its price range to $14 to $15 on the day before it sold shares to the public.

UBS Warburg-led underwriters apparently encountered market jitters and skepticism trying to fill the books for the deal, originally slated for $17 to $19.

"I don't think what we saw was necessarily a case of bargain hunting," said one managing director involved in the deal.

"It underscored the feeling that's been out there for quite sometime. Even before Sept. 11, the market was sluggish. Now, in the aftermath, it seems that to try and get an IPO done takes not just courage but an inordinate ability to handle the risk, financially," added the managing director, who didn't want to be quoted by name.

Bloomington, Minn.-based Universal Hospital Services eventually priced at $15 on Oct. 18.

In all, the company raised $75 million by selling five million shares.

(Universal Hospital Services outsources moveable medical equipment.)

"Building a valuation model is very difficult in this atmosphere. It's very different from what we've seen in a long time," said Ken Koch, a New York-based partner with Mintz Levin Cohn Ferris Glovsky and Popeo.

"The market is so uncertain right now," he added.

Koch, who works on IPO filings, said there's "the psychology of a hot deal, which creates a certain tension that surrounds an IPO price."

That kind of tension means that investors tend to overlook the more tangible reasons for a price cut when it occurs - volatile market conditions.

"Sure, underwriters can explain that it's due to the market conditions...but there's still this stigma that you couldn't get it done," Koch said. "Why didn't the investors think it was a good deal?'"

Early Days

The SEC initially instituted price range estimates in preliminary prospectuses in the early 1990s, stipulating that the range can be no wider than $2, or 10 percent of the higher price in the range, such as $12 to $14.

Under the temporary rule change, that range can be widened to 20 percent of the higher price, such as $12 to $16.

Koch, like many other attorneys in his field, approves of the swift action by the SEC.

Waiting until a later date to set the price of an offering can more accurately reflect true market conditions, which is the biggest burden.

Still, he said, "someone's got to fix the [market] content."

"The main issue isn't the SEC's to address," Koch added. "It's how to create an atmosphere of investor confidence. What will it take to get investors interested in IPOs again? How do you do that?"

Colleen Marie O'Connor is an associate editor at The IPO Reporter, published by Venture Economics, a Thomson Financial Company.