Brocade's underwriters are playing typical investment banker games..In order to make an IPO successful, you need several key ingredients for marketing to both Institutions and Retail aftermarket.First you pitch the deal during the roadshow to fund managers based on conservative/cheap valuation..this entices funds to submit orders/indications of interest for their maximum initial allotment. If the offering is 3.25 million shares, with 3 underwriters with the "juice" of Morgan Stanley Dean Witter, BT Alex Brown and Dain Reuscher Wessels, they will likely generate orders coming out of roadshow of at least 10-15 million shares. However, there are only 3.25 million. Solution? Jack up the share count by the "overallotment" portion ( usually no more than 500,000 shares ), limit the size of everybody's orders ( Fund A wants 50,000 shares, they are only allowed to buy 20,000 at IPO price ) and RAISE the pricing range 1-2 weeks before the projected IPO date ( Look at recent IPO's WEBT, VIGN, TUTS to see how the initial IPO pricing ranges were jacked up before the IPO which gave the IPO's the aura of being "HOT" IPO's ) . When I recently got in on WEBT IPO, the pricing range was $9-11 on the IPO prospectus..2 days before the IPO, the price range shot up to $12-14 and the final IPO price was $13. Day 1 WEBT debuted at $38, closed at $24, and is now $55 ( high is close to $80 ).
Therefore, unless BRCD Mgmt really screws up the roadshow and unless the IPO market dies, I envision that BRCD will be priced somewhere between $11-15. Why? Because BRCD only has $10 million cash as of Jan 31/99 and their quarterly operating expenses are very high relative to sales. Raising only $26 million ( 3.25 million shares x $8 low end )only gives them 2 quarters of cash. They really want to raise $40+ million as indicated in original S-1. Remember that the company only gets the IPO price and they want the IPO price as high as possible. On the other hand, investment bankers ( underwriters ) want as low an IPO price as possible to make the IPO look good and make them heroes with their other clients, the institutions. BRCD really wants the offering price to be at least $13 which yields them the full $42 million they need as a cushion to keep the doors open.
Realistic BRCD IPO scenerio: Price BRCD at $13..double on first day = $26 price x 25 million shares = $650 million market valuation for BRCD. |
