THE ART OF THE DEAL

AFTER BARELY TWO YEARS OF EXIStence, NetEdge Systems is ready to cash in big. The fast-growing North Carolina company, which makes devices called edge routers that connect computers to high-speed voice and data networks over telephone lines, plans to launch an initial public offering (ipo) of its stock to raise some $40 million in the second half of this year. NetEdge already has more than 100 employees and revenues of about $25 million and expects to show a profit by the end of 1996. The public offering will finance the firm's expansion; it will also boost the value of the shares held by NetEdge executives and employees and thereby enable them to reap--or at least contemplate--the benefits of their 80-hour weeks. "Pinch me," says NetEdge founder Albert Bender, "so I can be sure that this is real."

Bender's euphoria is understandable; not all start-ups enjoy the same prospects. The IPO game can be perilous for less well-prepared entrepreneurs and for the investors who snap up their shares. For every highflyer like Netscape Communications or Pixar Animation that has enriched its owners almost beyond counting, there are dozens of losers that have dashed their founders' dreams. Smith Micro Software, for example, jumped from $12 a share to $14.50 a share amid the frenzy of the IPO market when the Aliso Viejo, California, maker of software for modems went public last Sept. 18. Since then the stock has cooled to about $7.25 a share, leaving founders William and Rhonda Smith to face the wrath of shareholders who sued the company in December over the slump in price. Investors who initially paid $7 a share in 1993 for Golden Systems, a Simi Valley, California, maker of electric-current converters for personal computers, fared even worse when Compaq Computer, the firm's biggest customer, twice rejected shipments last year because of quality-control problems. The stock virtually ceased trading in January, at 37 1/2¢ a share.

Those setbacks were not isolated incidents in the supercharged stock market that has made IPOs the hottest way to raise money in the 1990s, just as junk bonds and cheap credit fueled the stock boom of a decade ago. The junk binge left the U.S. with a colossal hangover of corporate debt, and the IPO fever inspires some worries about the country's financial and economic health. Among other things, it raises the issue of whether a casino-like mentality tends to lure investors into high-risk and even dubious new issues, or tempt start-ups to race to market before they are ready in hopes of cashing in quick.

IPO binges are hardly new. H. Ross Perot, lately a presidential aspirant, first sold stock in Electronic Data Systems, his data-processing company, in 1968 for $16.50 a share; it soared the same day to $38, which amounted to a previously unheard-of 271 times the company's annual earnings per share. (Companies traded on the New York Stock Exchange typically trade at about 16 times their earnings per share.) But never before have so many new issues rocketed to such high prices on the basis of hope rather than proven results. Take Netscape, for example. While the company managed to earn $2.4 million on sales of $40.6 million in the final quarter of 1995, it still lost $3.4 million for the year. Yet the $5 billion market value of the two-year-old company already exceeds that of Delta Airlines, General Dynamics or Bethlehem Steel.