Interesting piece on new ways to do IPO's. Explains Dutch Auction for those interested.
OpenIPO' Idea Faces First Big Test
By David Streitfeld
Washington Post Staff Writer
Tuesday, June 22, 1999; Page E01
WOODSIDE, Calif., June 21 –– Bill Hambrecht's latest
innovation has been getting trashed by participants in
stock-chat message groups, which pleases him.
The San Francisco investment banker's decision to set
prices for his initial public offerings by conducting
auctions open to ordinary investors will "remove all but
a very modest pop from any IPO . . . It won't be worth
playing," asserted one trader on the Silicon Investor chat
board. Complained another: "Completely strips IPOs of
their 'exclusiveness.' "
Exactly the point, says Hambrecht, whose "OpenIPO"
system will get its first significant test Tuesday with the
debut of Salon.com. The online magazine publisher,
which like many Internet firms is hemorrhaging cash,
will open at a price of $10.50 a share, Hambrecht's
firm, W.R. Hambrecht + Co., announced after the market
closed today.
Hambrecht had originally estimated the San
Francisco-based political and cultural journal, which
features such articles as "Chick Fight!: My First
Barroom Brawl" and "Liddy Does Oprah: On the
Not-Quite-Campaign Trail With Elizabeth Dole," would
be offered at a price ranging from $10.50 to $13.50, so
it's clear that the demand from bidders was relatively
lukewarm.
But the real question is what will happen once trading
begins. During the heady days of last winter, Internet
IPOs tended to soar on their first day, with demand
racing far ahead of supply.
Theglobe.com, for example, closed at $63.50 on its first
day of trading, a 600 percent leap for the online
community from its issue price of $9. Institutions that
were in on the deal made a bundle; individuals who
could only buy during the trading day generally did not
-- especially since Theglobe.com, like most Internet
issues, has since sagged precipitously.
With Hambrecht's OpenIPO, individual investors can
bid on a company before it goes public, deciding not
only how many shares they want but also the price they
are willing to pay.
A much-simplified explanation of how these auctions
are designed to work: Imagine a company is trying to
sell 30 shares to the public. Forty people bid for one
share each, with 10 willing to pay $13 a share, 10 to
pay $12 a share, 10 to pay $11 a share, and 10 to pay
$10 a share.
In an OpenIPO auction, the stock would go public at $11
a share -- the lowest price at which all 30 shares can be
sold. Those who offered the low-ball $10 would lose
out. Everyone else would get what they asked for, often
at a cheaper price than they had planned to pay.
An OpenIP0, which is similar to a method the
government uses to sell Treasury bonds, is often called
a Dutch auction. Hambrecht says he first saw the system
being used in Amsterdam about 15 years ago as a way to
quickly move perishable blooms.
The flower brokers "wanted people to bid aggressively,
but knew they couldn't and shouldn't make them look
foolish in front of the competition," says Hambrecht,
who was a principal in the investment firm Hambrecht
& Quist for 30 years before setting up his own shop last
winter.
"I remember it occurring to me that this is what an IPO
is all about: merchandise you have to move all at once,
with every buyer feeling he's been treated fairly."
Randall Roth, an analyst with the IPO Plus Aftermarket
Fund, calls OpenIPO "really a '90s empowerment
movement" and says, "Auctions like this let the small
guy in and give everyone an equal starting point."
The investment banks that have traditionally handled
IPOs "don't want to see this happen," he adds. "They get
a 7 percent underwriting fee, and part of it is for the
advisory services -- where to price the stock. If the
market's setting that price, what do you need to pay the
fee for?"
Gail Bronson, senior analyst for the Web site IPO
Monitor, is more dismissive. "It's a great marketing ploy
for [Hambrecht], and it may help some Joe
Six-Pack-types get some shares of stock, but as far as a
trend, I doubt it. The fact of the matter is one of the most
valuable partners a corporation has is their investment
banker, to help them finance themselves at each step in
their business cycle."
Even Roth says the OpenIPO is only "theoretically" a
very good idea. "One of these companies needs to make
a long run and score a touchdown -- in other words, to
have an impressive performance after the first day of
trading. Then the process will have more credibility."
That didn't quite happen with the first Hambrecht IPO.
Ravenswood Winery, a profitable producer of premium
reds, has barely budged from its $10.50 offering price in
April. Apparently there was no one left to buy the stock
after the stock started trading -- a risk with OpenIPOs.
"The wine industry isn't the hot industry," says
Hambrecht. "Still, we found investors who were
interested in holding the stock for the long term."
Part of the point of an OpenIPO is to provide more
stability for the company by encouraging a buy-and-hold
philosophy, which isn't exactly something that Internet
stocks have been famous for. For the day traders who
have been increasingly flooding the market, a long-term
investment is one that stretches past lunch time.
An OpenIPO "could trade up, and hopefully it will,"
says Hambrecht. "The difference is, it won't go crazy --
this wild thing of going from 18 to 80. My theory is
those kind of wild upside things generally trade down.
They can be very destructive to the individual investors
who are tempted to come in because it seems like a hot
deal."
Salon.com, however, has not seemed like even a tepid
deal to most analysts. In the year ended March 31, it
took in $2.9 million. But with editorial and marketing
expenses of $9.1 million, it lost more than $6 million.
"We will need to generate significant revenues to
achieve and maintain profitability, and may not be able
to do so," the company's prospectus warns. At $10.50 a
share, Salon.com will have a market value of $100
million -- a sum that would be unimaginable if it were
printed on paper instead of distributed over the Net.
The weakness in Internet stocks over the past two
months may also hinder Salon. "I don't think this is a
good environment," says analyst Roth. "I don't want to
say people are finding out the emperor has no clothes,
but at least they're getting suspicious."
Other analysts, speaking anonymously, are blunter about
the magazine's worth. "It's a joke," says one.
Yet unless Salon tanks disastrously, the OpenIPO
movement seems likely to spread. At the moment, either
investors or their brokers need to have an account with
Hambrecht or an affiliated firm to participate. That will
soon change. Fidelity Ventures, an arm of the massive
mutual fund company, last week bought a minority stake
in Hambrecht, joining a group that includes Rupert
Murdoch's News Corp.
By the end of the year, Hambrecht says, Fidelity's 2.3
million brokerage customers will be able to buy stock in
OpenIPOs through their online accounts. The next
offering is GreatFood.com, an Internet retailer of
gourmet items that is scheduled to go public next month
for a price between $10.50 and $13.50 a share.
Meanwhile, CMGI Inc. is also getting in on the
movement to broaden IPOs. The Internet venture-capital
company said last week it will give those who own 100
or more of its shares the opportunity to buy stakes in its
start-ups as they go public. The move was seen as a way
for CMGI to make its own stock more attractive.
As Case in Point
Here's how an IPO by Dutch auction might work. XYZ
Corp. wants to sell 1 million shares. The lowest bidders
among the highest 1 million bids determine the price --
in this hypothetical case, $10. Here is the breakout, from
highest to lowest bids.
Shares Bidding Pct. shares Amount
requested price allocated raised
100,000 $14.00 100% $1,000,000
175,000 13.00 100 1,750,000
225,000 12.00 100 2,250,000
275,000 11.00 100 2,750,000
750,000 10.00 30 2,250,000
1,525,000
After ranking the bids from highest to lowest, here is
where the number of bids exceeds 1 million (1,525,000
bids at $10 or more.)
Those bidding more than $10 (775,000 total bids) get
all shares requested. That leaves 225,000 shares. Those
who bid exactly $10 (750,000 total bids) get a portion
of shares they requested. In this case 225,000 divided
by 750,000 equals 30 percent of requested shares.
SOURCE: OpenIPO
© 1999 The Washington Post Company
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