IPO's
Here's a column that appears weekly in the Street.com. This fellow does a nice job evaluating upcoming IPO's and this column touches on the practice of "flipping." I don't particularly feel right pasting this column, but as a stockholder in TCSM, I am doing it as an iducement to get you guys and gals (where's Shelia??) to subscribe. It's only $6.95 per month, and IMO, well worth that. They also have a free trial period.
"Taking a Hard Look at 'No-Flipping' Policies
By Ben Holmes
Special to TheStreet.com
6/20/99 6:00 AM ET
Probably the most controversial subject in IPO land is the forced holding periods mandated by many of the underwriters. By this I am referring to the firms' policies that state that a customer buying shares in an IPO must refrain from selling those shares within a specific period of time -- or risk being shut out of future deals. While these policies have long been a part of the traditional syndicate landscape, they are an almost-universal feature when dealing with the online firms that offer IPOs.
Each week, there are dozens of messages in the ipoPros.com mailbag from investors who have bought an IPO from an online firm, watched the stock trade up to a huge premium, then sit befuddled over whether or not to sell. The conflict they wrestle with is whether or not to risk being blacklisted by the firm for violating a "no-flipping" policy. Usually the person has sat with the position for a couple of days or even weeks, while the stock he owns has slowly given back much of the gain it achieved in the first session of trading. This is the "rock and a hard place" your dad always talked about.
The question then, which begs to be answered, and the one for which no logical answer exists, is this: When an IPO is trading at a significant premium to its issue price, why would a firm punish an investor for taking a profit? The objective, after all, is to make a profit. To try to understand the reasons behind these antiflipping rules we must consider the position of an underwriting firm.
From an underwriter's perspective, there are two possible outcomes for an IPO that is opening for trading: (1) The stock will be in demand and there will be hordes of buyers grabbing for shares and the stock will go up. (2) There will be a greater number of sellers than buyers and the stock will tend toward zero.
All underwriters wish for scenario No. 1, as those issues that open to roaring crowds of buyers tend to take care of themselves. However, when an underwriter is faced with scenario No. 2 and a large number of shares in a deal are immediately coming in for sale, the underwriter must move quickly to support the shares' price by bidding for stock. When buying back stock, an underwriter assumes risk. Underwriters hate risk. Risk costs money. Why then wouldn't an underwriter just walk away and let the shares fall?
One of the most profitable businesses for brokerage firms is that of underwriting the equity securities of corporations -- IPOs and follow-ons/secondaries. A firm must compete with hundreds of other firms for that business, and it does so in no small part by its reputation. An underwriting firm that has the reputation of walking away from its IPOs is not long for the syndicate world. This poses a conflict for the underwriter who must be willing to stand up and buy back the shares of the deals it underwrites -- and in doing so assume potentially costly risk, or risk losing future underwriting business if it appears to be the type of firm that does not support its deals. This is where you fit in.
The underwriters long ago came up with a scheme where they would limit their risk to weak deals by imposing penalties on those brokers who sell to customers who flip. This is known in syndicate-speak as the penalty bid. When the penalty bid feature is applied to an IPO, any sellers of the stock within a certain time period are identified and the commission paid to the broker for those shares is yanked back. Having a commission taken away is a painful proposition for the broker, and the firms know all too well the influence this will have over that broker's behavior. This has the effect of turning the brokers into the syndicate cops, their job being to only place shares with those accounts they believe to be likely to hold a deal. These accounts are referred to as strong hands by the syndicate departments, and are highly sought after as customers. Unfortunately, these strong-hand accounts are the very souls who email me asking if they should risk future allocations in IPOs by selling shares in a weak deal they are holding. These strong hands are usually the ones left holding the bag.
So, what's my point? Only this: There seems to be a clear conflict in the policies imposed on IPO buyers that they hold stock in the deals no matter what the outcome -- up or down. The policies, as they stand today, have placed the burden of supporting bad deals on the investors, while taking the offsetting profits of any good deals out of the reach of these same buyers.
My advice is when you are looking at a profit in an IPO, take the money off the table. The firms can't shut everyone out for flipping, or else who will buy the deals?
Let's look at the week ahead.
3DShopping.com
2nd: (PGRX:Nasdaq) Markets a Web-based marketing and display system that incorporates graphics and other visual features.
Deal size: 2 million
Filed price: March 18 - 15 1/4
Led by: Paulson Investments
My take: This stock has lost over 40% of its value since the deal was filed. I'd like to see some rebound before suggesting anyone get involved.
Able Energy
IPO: (ABLE:Nasdaq SmallCap) Does retail distribution and provides services relating to fuel oil, propane gas and natural gas.
Deal size: 1 million
Price range: 7-7 1/2
Led by: Kashner Davidson
My take: Oil and gas, low stock price and a small regional underwriter. In this market, who's got that much courage?
AEP Industries
2nd: (AEPI:Nasdaq) Makes plastic packaging films.
Deal size: 2.41 million
Filed price: June 1 - 36 5/8
Led by: J.P. Morgan
My take: This stock looks a bit weak based on price performance since the filing.
Ariba
IPO: (ARBA:Nasdaq) Provides intranet- and Internet-based business-to-business electronic commerce solutions for operating resources.
Deal size: 4 million
Price range: 16-18
Led by: Morgan Stanley Dean Witter
My take: There is a lot of buzz about this IPO. Heavyset underwriters and strong revenue growth make this deal one to watch.
Checkfree Holdings
2nd: (CKFR:Nasdaq) Provides electronic billing and payment services.
Deal size: 3.8 million
Filed price: May 28 - 47 1/16
Led by: Merrill Lynch
My take: The shares of this deal have had about 17% carved out of them since it was filed. That's not enough to worry me, but they're not exactly beating buyers away with a stick either.
Citadel Communications
2nd: (CITC:Nasdaq) The largest radio broadcaster in the U.S., in terms of broadcasting revenue, that focuses primarily on midsized markets.
Deal size: 10 million
Filed price: May 28 - 30 3/8
Led by: Credit Suisse First Boston
My take: This stock is basically flat from its filed price. I say pass.
Coinstar
2nd: (CSTR:Nasdaq) Owns and operates a national network of self-service coin-counting machines in the U.S.
Deal size: 4 million
Filed price: May 20 - 20 1/8
Led by: Goldman Sachs
My take: I take my son down to the local grocer who has one of these, and we dump our coins in and it counts them. Neat-o, and the market seems to like the stock lately. Ka-chiiing!
Cybersource
IPO: (CYBS:Nasdaq) Develops and provides real-time e-commerce transaction processing services.
Deal size: 4 million
Price range: 8-10
Led by: Merrill Lynch
My take: Strong revenue growth and mounting losses -- nothing new there, but Merrill has been a tough call lately. I want to like this offering, but the market will have to decide how many more of these it will take.
DVD Express
IPO: (DVDS:Nasdaq) Sells movies and videos in the digital versatile disc format, commonly known as DVD, over the Web.
Deal size: 4.5 million
Price range: 10-12
Led by: ING Barings Furman
My take: DVD, while gaining traction, is still far from being a standard. This deal is garnering some buzz, but it has second- and third-tier underwriters and mounting losses, so be reasonable about your expectations.
Financial Institutions
IPO: (FISI:Nasdaq) A bank holding company based in Warsaw, N.Y.
Deal size: 1.33 million shares
Price range: 14-16
Led by: CIBC World Markets
My take: Sorry, but the fact remains that regional banks make for boring IPOs.
Gerald Stevens
2nd: (GIFT:Nasdaq) Sells and markets flowers, plants and complementary gifts and decorative accessories.
Deal size: 5 million
Filed price: May 14 - 16
Led by: Merrill Lynch
My take: This stock has slipped a bit since the deal was filed. Nothing exciting here.
Globespan Semiconductor
IPO: (GSPN:Nasdaq) Develops advanced digital subscriber line (DSL) integrated circuits (chipsets).
Deal size: 3.25 million
Price range: 9-11
Led by: BancBoston Robertson Stephens
My take: This is a play on DSL that may just work. Consider that capacity and infrastructure are essentially built. Now, we just need users...
Greater Atlantic Financial
IPO: (GAFC:Nasdaq) A savings and loan holding company originally organized in June 1997.
Deal size: 2 million
Price range: 9-11
Led by: Legg Mason
My take: Banks, banks and more banks -- ughh!
GreenMountain.com
IPO: (GMTN:Nasdaq) Uses the Internet and other media to market green consumer products.
Deal size: 25 million
Price range: 11-13
Led by: Prudential Securities
My take: I've read and reread this one and I don't get it. Is it really an Internet company? Large number of shares for a Nasdaq IPO, and Pru as lead manager turns me off.
Internet.com
IPO: (INTM:Nasdaq) Network of integrated business-to-business vertical content Web sites and related Internet media properties.
Deal size: 3.4 million
Price range: 10-12
Led by: US Bancorp Piper Jaffray
My take: This one feels a lot like VerticalNet, which was a darling in its day. I recently heard a very smart venture capitalist say that he is no longer buying "community" deals. This gave me a bit of pause, but I can't help myself, I like the deal.
Juniper Networks
IPO: (JNPR:Nasdaq) Provides Internet infrastructure solutions.
Deal size: 4.8 million
Price range: 21-23
Led by: Goldman Sachs
My take: A lot of the buyers I talk to like this one. Solid underwriters and a bucket of buzz.
Netivation
IPO: (NTVN:Nasdaq) Develops and operates topic-specific Internet communities.
Deal size: 2.5 million
Price range: 9-11
Led by: EBI Securities
My take: Another community. Mom and pop underwriters and tiny revenues make me less than hopeful for this one.
Pacific Softworks
IPO: (PASW:Nasdaq) Develops and licenses Internet- and Web-related software and software development tools.
Deal size: 950,000 shares
Price range: 5-5 1/2
Led by: Spencer Edwards
My take: Boy, do I dislike small, low-priced IPOs. Please do your homework before getting involved.
Persistence Software
IPO: (PRSW:Nasdaq) Makes software products that serve as the Internet software infrastructure for high-volume, high-performance electronic commerce applications.
Deal size: 3 million
Price range: 9-11
Led by: BancBoston Robertson Stephens
My take: Solid underwriters, strong revenue growth and a good buzz going -- I like it.
Quepasa.com
IPO: (PASA:Nasdaq) A Spanish-language Internet portal and search engine.
Deal size: 4 million
Price range: 10-12
Led by: Cruttenden Roth
My take: I'm a bit cooler on this one since last week. The deal was slated to price last week and something held it up -- that something, whatever it was, makes me stop and re-evaluate. The deal has my interest, but I'm not expecting a monster premium.
Ramp Networks
IPO: (RAMP:Nasdaq) Provides shared Internet access solutions for the small-office market.
Deal size: 4 million
Price range: 10-12
Led by: BancBoston Robertson Stephens
My take: Nothing that will make the front page, but a reasonable business model and proof that it can grow revenues.
Seminis
IPO: (SMNS:Nasdaq) Develops, produces and markets fruit and vegetable seeds.
Deal size: 13.75 million
Price range: 17 1/2-21 1/2
Led by: Goldman Sachs
My take: This is a large deal -- big number of shares and a high price range. Goldman as lead quashes my concerns about the size, and the company has booming revenues and is profitable to boot. I can safely say that growing food is not a fad.
Software.com
IPO: (SWCM:Nasdaq) Develops and provides scalable, high-performance messaging software applications for providers of Internet communications and services.
Deal size: 6 million
Price range: 10-12
Led by: Credit Suisse First Boston
My take: I'm hearing a lot of talk on this one -- almost all of it good. CS has the experience to do these back-end tech deals very well.
Stamps.com
IPO: (STMP:Nasdaq) Offers a service for purchasing and printing postage over the Internet.
Deal size: 5 million
Price range: 9-11
Led by: BancBoston Robertson Stephens
My take: Not the only player in the space and not a lot of operating history, but what a great idea. The general perception is that the deal will work.
Strategic Timber Trust
IPO: (STTR:Nasdaq) Acquires, owns and manages timberlands and sells timber.
Deal size: 16.6 million
Price range: 19-21
Led by: Salomon Smith Barney
My take: At one time -- long ago -- these timber trusts were quite popular. Unfortunately for these people, that time has long since passed.
Sun Community Bancorp Ltd.
IPO: (SCBL:Nasdaq) A bank holding company.
Deal size: 1.875 million
Price range: 15-17
Led by: Everen Securities
My take: Yawn.
TD Waterhouse Group
IPO: (TWE:NYSE) TD Waterhouse is one of the largest discount brokers in the world.
Deal size: 32 million
Price range: 20-24
Led by: Credit Suisse First Boston
My take: My grandfather always said, "Be the best or be the biggest." TD Waterhouse may be both. People I talk to who use it, love it. Huge revenues and huge profits. What? Profits? You betcha!
Team Financial
IPO: (TFIN:Nasdaq) A multibank holding company that offers full-service community banking through 15 banking locations.
Deal size: 1 million
Price range: 11-13
Led by: Howe Barnes
My take: What is it with all these banks this week? A nice, safe, boring business, but small underwriter.
Travelscape.com
IPO: (RSVN:Nasdaq) A consumer-direct online travel wholesaler serving markets across the U.S.
Deal size: 5 million
Price range: 10-12
Led by: US Bancorp Piper Jaffray
My take: A very crowded space and nothing really compelling to set this one above the others. Underwriters are decent folks, but lack curb appeal. Strong revenue growth -- and you know what's coming next -- mounting losses.
US Search Corp.com
IPO: (SRCH:Nasdaq) Provides clients with a single, comprehensive access point to a broad range of public record information about individuals.
Deal size: 6 million
Price range: 9-11
Led by: Bear Stearns
My take: Strong brand name and a compelling business model. Bear Stearns was a good choice as lead underwriter, and could surprise everyone on this one.
Viatel
2nd: (VYTL:Nasdaq) Provides long-distance communication and data services to end users, carriers and resellers.
Deal size: 4.7 million
Filed price: May 19 - 52 1/8
Led by: Morgan Stanley Dean Witter
My take: Stock is flattish from its filing price. Nothing here that screams out for consideration.
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Ben Holmes is the founder of ipoPros.com, a Boulder, Colo.-based research boutique specializing in the analysis of equity syndicate offerings. This column is not meant as investment advice; it is instead meant to provide insight into the methods of new and secondary offerings. Neither Holmes nor his firm has entered indications of interest in any of the companies discussed in this column. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Holmes appreciates your feedback at bholmes@ipopros.com.
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