WSJ article about AT&T Wireless I.P.O.
June 26, 2000
Heard on the Street
AT&T Wireless Offering
Begs Question: IPO, or No?
By SUZANNE MCGEE
Staff Reporter of THE WALL STREET JOURNAL
When is an initial public offering not really an IPO?
That is a question at the heart of some controversial off-exchange trades made
before the official opening of the $10.6 billion offering of AT&T Wireless
Group tracking stock on the Big Board in April.
The trades -- at a price below the level at which exchange traders were hoping
to launch the new issue -- were executed in London by Salomon Smith Barney,
one of the lead underwriters on the AT&T Wireless deal. And they have
triggered grousing among traders, who blame the trades for hurting the issue's
high-profile debut by potentially preventing the stock from gaining more than
the 7.4% rise in its first trading day.
"The question to be asked is whether this kind of jumping of the gun is justified
because we're talking about a tracking stock -- even though it has all the
characteristics of an IPO," says Roy Smith, professor of finance at New York
University's Stern School of Business.
It is a significant point. Usually, investment banks are banned from any kind of
preopening trading in IPOs of stock, according to National Association of
Securities Dealers rules. So the issue is whether the AT&T Wireless issue was
an IPO.
If it wasn't, the trades would be
perfectly proper. Off-exchange trading
in follow-on issues by already-public
companies is commonplace, as
investors try to add to their holdings
by buying "when-issued" securities and
arbitragers try to profit from the
differences between the price of the
new issue and the pre-existing shares.
A spokesman for Salomon Smith
Barney -- along with those at Goldman
Sachs Group and Merrill Lynch, the
other two lead managers of the AT&T
Wireless issue -- declined to comment.
What is clear is how the AT&T Wireless was billed. The New York Stock
Exchange trumpeted the fact that the nation's largest IPO would be listed on
the Big Board. Parent company AT&T made references to the deal as "an initial
public offering of tracking stock" in several news releases.
At the same time, however, parent AT&T obviously has common stock
outstanding. From that point of view, then, it simply chose to issue a different
class of shares; that is, stock that would "track" the performance of the
company's cellular-phone unit.
The day AT&T Wireless reached the market began as a difficult one. Less than
two weeks earlier, the Nasdaq Composite Index had slumped 7.06% in a single
day, pounding investor confidence. And that morning began with a sell-off in
stock-index futures amid fears of future rate increases. Then there was the
sheer size of the deal: With 360 million shares issued -- a typical IPO has
between eight million to 20 million shares -- underwriters were flooded with
orders.
That morning, traders for the NYSE specialist firm handling AT&T Wireless's
stock, LaBranche & Co., along with Goldman, fielded orders and tried to
establish an opening level for the stock. Early indications were the stock might
make its debut at a minimum of $32, and maybe even as high as $35. But then,
people familiar with the matter say, news of the series of off-exchange trades
in the London market rippled first throughout the institutional investment
community and then down to the trading floor.
The trades shocked some investors. The off-exchange transactions were
executed at a maximum price of $30.50 a share, just above the $29.50 issue
price set the night before. Did that mean that institutions would be reluctant to
pay more than that for the stock?
At the Big Board, the AT&T Wireless underwriters were conservative. A few
minutes later, the stock opened on the NYSE at $30.125. Though the shares
ended the day at $31.6875, some traders muttered that the unusual trades had
helped to muddy the waters at the opening and could have depressed the stock
price that day.
This speculation can never be definitively determined, of course. Certainly, the
four million or so shares that changed hands off-exchange were dwarfed by
the 39.3 million shares that traded on the opening, and the first day's volume of
137.4 million shares. Other factors, including the overall market mood,
probably also affected the stock's performance that day. But that hasn't
stopped the criticism.
"I suspect that the laws as they stand have a loophole in them in the eyes of the
people who want to do this kind of trading," says Jay Ritter, professor of
finance at the University of Florida. From his point of view, "I would say this
unambiguously was an IPO, since there was no public market for the specific
class of stock before it opened" on the NYSE.
Investors have described the transaction as an unusual signal for an
underwriter to send to the market. They are used to this kind of trading in
follow-on issues, but no one could recall any such transaction surrounding an
IPO, or even an IPO of tracking stock.
"Trades like that sometimes happen around a secondary stock issue, but
secondary stock issues are very different animals because there's already a
market in existence for the stock," says Michael Eggly, co-manager of
Northern Trust's Northern Global Communications Fund.
The brouhaha is somewhat ironic. Citigroup's Salomon Smith Barney unit had
fought fiercely for a role in the AT&T Wireless underwriting syndicate, which
gave it prestige and fat fees. AT&T's selection of Salomon came after its star
analyst Jack Grubman late last year changed his tune on AT&T stock,
upgrading it to a buy from his long-held neutral.
Now, some Wall Street lawyers are urging that the loophole in NASD rules
surrounding pretrading of deals that look like IPOs should be closed. People
familiar with the events say lawyers for each of the three investment banks
have reviewed the transactions -- and concluded that there is little or no basis
for any formal action or investigation.
"It's crystal clear to me that, under the rules as they stand today, these trades
were legit, however strange they looked," said a New York-based securities
lawyer.
NASD officials couldn't be reached to comment.
Meanwhile, AT&T Wireless stock continues to trade below the issue price,
buffeted by turmoil in the markets, uncertainty about the U.S.
cellular-communications industry, and the company's own warnings, only days
after the IPO, that investors should reduce expectations.
Write to Suzanne McGee at suzanne.mcgee@wsj.com
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