Jimbo: Some interesting comments from the new columnist at TSC, Adam Lashinsky (he's from the SJ Mercury News). A couple of excerpts from his columns about IPO coverage initiation - think NETP.
K
Honesty outbreak: You know the tenor of the tech-stock market is changing when sell-side analysts (the kind that "sell" research, as opposed to "buy-side" analysts who help make investment decisions) find themselves being candid about the stocks their investment-banking colleagues back.
Consider Credit Suisse First Boston Internet analyst Lise Buyer, who downgraded CSFB client Intuit (INTU:Nasdaq) April 9 for having committed no greater sin than having reached her price target of 110. Shares of the Mountain View, Calif., maker of tax and personal finance software are down more than 37 since then, closing Tuesday at 72 3/4. She made -- or saved -- her clients a bundle.
Enter Morgan Stanley Dean Witter analysts George Kelly and Chris DePuy, who on Tuesday issued a neutral rating on Extreme Networks (EXTR:Nasdaq), the Santa Clara, Calif., networking products company with about $70 million in annual sales and a market capitalization of more than $2 billion.
In a sane world it would come as no surprise that Morgan would be neutral on Extreme at 53, Monday's closing price, considering the bankers thought the stock was worth 17 when they priced the IPO on April 9. But the norm for the last year has been for analysts to issue buys as soon as they're allowed to initiate coverage 26 days after the IPO.
Not the Morgan networking analysts.
"We believe the stock, trading at 11.6 times [estimated calendar-year-2000] revenue, fully reflects a very strong growth outlook already," Kelly and DePuy told clients. The result: Extreme's shares dropped 7 3/8, or 14%, to 45 3/4.
The bottom line is that investors have come to expect the initiation of coverage by the underwriting analysts to be yet another buying opportunity no matter the post-IPO performance. Perhaps that game has run its course.
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Why 26 days? Commenting on the item here Wednesday about Morgan Stanley Dean Witter initiating coverage 26 days after the IPO of Extreme Networks (EXTR:Nasdaq), a reader wondered if the correct time period was, in fact, 18 days. Nope, 26 is right. But that begs another question: Why?
Basically, the 26-day post-pricing quiet period (offerings typically are the day after pricing) coincides with the month-long period in which underwriters may act to stabilize a new issue by using their own capital to buy shares in the open market. It's a service that big investment banks use as a selling point when pitching business.
But the quiet period has become something of a crock. Institutional investors know from the IPO roadshow exactly what analysts' estimates will be for the young company. Besides, with the huge bucks being thrown at IPOs these days, stabilization -- market manipulation under other circumstances -- isn't as necessary anymore.
"This is one of those prehistoric rules that has lost its meaning as markets have become more and more liquid," says Ivo I. Welch, a finance professor and IPO specialist at the UCLA's John E. Anderson Graduate School of Management. "If a stock wants to go from 100 to 25, the underwriter isn't going to be able to do much anyway," adds Welch, who runs a nifty IPO-oriented Web site -
linux.agsm.ucla.edu
Incidentally, after Morgan Stanley Dean Witter analysts set the tone with a relatively surprising neutral rating, shares of Extreme Networks (EXTR:Nasdaq) have continued their slide, falling Wednesday from 45 3/4 to 41 3/4, and closing Thursday at 40 11/16. This despite new recommendations by BancBoston Robertson Stephens and Dain Rauscher of buy and strong buy, respectively. Shares of the networking products company remain far above their April 9 offering price of 17. |
