IPO Stars Lifting Mediocre Brethren

Once word spreads -- as it is with deals like China Digital TV and VMWare -- that well-run, profitable and promising companies are going public and seeing their stocks surge madly, IPO mania comes back.

And once it does, second- and third-rate companies come crowding into the pipeline. Supply of shares surge because the demand to meet it has also surged. So underwriters start pushing out crappier companies to a market overcome by nervous excitement and agitation.

And the underwriting fees on those deals will pile up.

It's not clear yet that this trend of IPOs with first-day price pops will blossom into a full-fledged mania. The stage has been carefully set, and now all we need is for the investors and pundits to start reciting the lines like, "It really is different this time," and, "Buy the stock today because profits will be huge in three years."

But judging from what we're seeing so far in the reaction among investors to these recent IPOs, it sure seems like it's all proceeding according to that old script.

I suppose it's time to insert the obligatory note here that the underwriting system is hurting the little guy. So yes: Small investors are the ones being shut out. They can watch a video feed of the roadshow, but they can't easily get a sense of demand for a deal.