|
IPOs for everybody?
|
 |
June 30, 1999: 10:05 p.m. ET
As market sizzles for public offerings, ordinary investors seek a way in
|
NEW YORK (CNNfn) - It's the gold rush of the 1990s, investors clamoring for the initial public offerings of companies selling stock in the marketplace for the first time.
The buying demand is driving IPO prices sky-high and making instant multi-millionaires of 20-somethings like Stephan Paternot and Todd Krizelman, whose online community business, theglobe.com, rocketed from an initial offering price of $9 per share last November to more than $63 on its first day -- up more than 600 percent in one of the most successful IPO debuts ever.
In fact, as of Monday, the average opening day gain for internet IPOs this year is 93 percent, despite a cooler market in recent weeks. No wonder IPOs have become the holy grail for a growing number of investors.
"It's just amazing, the type of initial gain that you get the first day in an IPO, and that's really the attraction," said Matt Harris, who runs an Internet company from his home in Orange County, Calif. Harris is a savvy investor who knows a good bet when he sees one. Now he wants in on those big first-day gains: "I want to be able to get in on one of these hot IPOs that comes out at $12 and is instantly 70."
But for individual investors like Harris, getting an IPO at the initial offering price is as likely as finding the Holy Grail.
"Since these online brokerages on the Net started advertising that you can get IPOs through the brokerages," he said, "I've tried … but I can't place an offer."
Missing the gold rush
That's because in this gold rush, the big guys usually strike it rich, big institutions that take companies public, like Goldman Sachs (GS) and Morgan Stanley (MWD) and their favored few customers with big accounts.
"You have to know somebody or be somebody. Friends and family of the issuer, significant customers of the retail investment banking firms get the lion's share of retail distribution," said Ron Readmond, co-CEO of Wit Capital (WIT) in New York, one of several brokerages trying to change all that by selling IPOs over the Internet.
"The significance of the Internet in reshaping both the U.S. and international economy cannot be overstated," Readmond said. "It has changed the distribution of books or airline tickets. It will inevitably change the distribution of financial service products."
Access to IPOs has become part of the sales pitch for online brokerages like Wit Capital, E*Trade (EGRP) and DLJ Direct (DIR). But it's still not easy, not yet.
"The first time that I tried that with Wit, the little button that says 'place conditional offer,' you get a server error when you click that," Harris said, recalling his frustration in attempting to get Wit Capital IPOs. "I kept trying, about four or five hours later, I came back online and I got in, but I got a note a few days later when the IPO came out saying I wasn't soon enough on the list."
For any given IPO, three out of four would-be buyers do not get shares. Even hot online brokerages don't have the leverage to pry a big number of IPO shares out of the hands of traditional underwriters.
A new approach?
"It's extremely frustrating. We're delighted with the long-term commitment and support of our customer base in understanding the difficulties, and being patient as we attempt to increase the shares available," said San Francisco investment banker Bill Hambrecht, who wants to revolutionize the way individual investors get IPOs. "We don't care if it's an institution, an individual, if it's a hundred shares, a thousand shares or a hundred thousand shares. Anybody can place a bid."
A bid -- as in auction. Hambrecht got the idea from a century-old flower market near Amsterdam. It's the world's biggest auction, selling more than 4 billion flowers a year. At this flower market -- and Hambrecht's IPO auction -- the highest bid isn't necessarily the final price. The price is based on getting enough bids to sell all the flowers, or all the IPO shares.
For example, let's say Hambrecht is offering 10 shares. He gets bids for two shares at $10 each, eight shares at $9 each and three shares at $7 each. Under Hambrecht's system, the price would be set at $9, because that's the level at which all the shares can be sold. So the top two bidders would get shares at $9 each.
"You don't want any buyer to feel like he's been foolish or cheated. So they all get the same price," Hambrecht said, arguing that his online auction will give individual investors a better shot at IPOs.
"In the Internet stocks, there's a lot of proof that says right now that individual investors are willing to pay more than institutions. In that case, the individuals would get the stock. It really depends on who wants it most and who's willing to bid for it," he said.
Critics say top quality companies would have little incentive to go with Hambrecht's plan, but he's already tried his online auction with the Ravenswood Vineyard in Sonoma County, Calif., selling $10 million worth of stock over the Internet.
"I almost know no reason why you wouldn't want at least part of the offering online. I mean, it's such an efficient way to get a broad group of people that generally are very supportive and long-term shareholders," Hambrecht said.
Ironically, Matt Harris said he probably wouldn't buy an IPO through a Dutch auction because it might remove the opening day trading frenzy, so there would be no big run-up in the stock price: "You're not going to see the 400 and 500 percent gains on the first day."
Indeed, Ravenswood shares rose just 3/8 of a point, about 3-1/2 percent, on their opening day and have gained very little since then.
Not always hot
In fact, it turns out IPOs aren't always a great investment. True, they've been hot this year, soaring an average 43 percent from their opening price, compared to 8-1/2 percent for the Standard & Poor's 500 index.
But look at 1997-- a more typical year. IPOs rose an average of less than 9 percent from their opening prices while the S&P rose 31 percent.
And remember theglobe.com's spectacular start?
The day after its debut, the stock fell back below its first day closing price, and has mostly stayed lower ever since, a phenomenon so common among Internet IPOs that market experts call it "theglobe.com syndrome."
"IPOs as a whole will generally underperform the market," warned David Menlow of IPO Financial Network, which analyzes initial public offerings. "There are too many people sticking their hands in the same pot, they chase the stocks in the after market, and they do this indiscriminately without any regard for price. They pay treetop tall prices and at that point, when the stock starts to settle down, naturally, it trades lower. When it trades lower, they panic. They say, 'Get me out. I've got a huge loss,' and there go the horror stories of owning IPOs."
But many investors, like Matt Harris, see IPOs not as a long-term strategy, but rather, a rare chance at a quick windfall.
"I would almost rather get in on one or two great IPOs that do happen to just have awesome first day or two gains and then take the money and run, and not care if I ever get in on an IPO in that account again, to be honest with you," he said with a smile.
|
|
|
|
|
 |
|
