New Money Again

Besides hammering share prices down, the recession almost destroyed the original and highly essential function of the stock market: that of enabling companies to raise capital. As the Dow Jones industrial average tumbled to a twelve-year low of 578 last December, investors' confidence was so shaken that hardly any companies could hope to raise money by selling newly issued stock. Now, with the Dow back to 855 (up 31 last week) and investor enthusiasm rising, American companies in search of funds are once more finding a market for new shares.

Indeed, in this year's first four months, companies raised $2.3 billion by selling new issues of common stock, nearly as much as the $2.6 billion such sales yielded during all of last year. Though the 1975 rate is still far from 1972's record $13 billion pace, the strengthening of the equity market is an encouraging development that could add momentum to the economic recovery. Companies no longer need rely solely on bank borrowing and bond sales as the sources for expansion capital. This development in turn could help relieve the danger of a capital shortage.

Unhealthy Debt. The change could not come too soon for many U.S. companies that have become overburdened with debt. A typical example is Baker Oil Tools, Inc., a Los Angeles-based manufacturer of oil-drilling equipment, whose debt last year rose to an unhealthily high 70% of the firm's entire capital. By selling $24 million in stock in April, Baker reduced its debt-to-equity ratio to a more comfortable fifty-fifty. So far, energy-related companies have been most successful in selling new stock. Buyers, however, remain cautious and highly selective. Two weeks ago, when an underwriting syndicate headed by Merrill Lynch brought out a $31 million stock offering for a small Massachusetts minicomputer maker named Data General, response was so poor that Merrill Lynch had to cut the price on the issue after one day, causing losses for many of the underwriters involved.

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