How the Fourth Estate Fumbled the barnesandnoble.com IPO

Wall Street doesn't give out A's for effort. Media coverage of Wall Street is another thing, however. "Highflying" Internet companies gone public are "hot," as if the fortunes of the enterprise soar along with the first-day share price. But often nothing could be further from the truth: Hot too often means not.

It's in that context that recent offerings have been misunderstood: most notably, that of barnesandnoble.com (BNBN Quote). Some went so far as to call the IPO a failure. Even the most sober coverage of the May 25 offering went like this: "Shares of the online book retailer were offered at $18 and rose about 37%, a gain that paled compared with hot IPOs earlier this year."

The media seem to notice just the sizzle of the first-day trading while ignoring the meat of the issue. So here's a primer: The point of an IPO is to raise money for a company and provide that company a new currency: stock. A smart company with a formidable war chest is going to remain a player, regardless of the vicissitudes of the stock market. And barnesandnoble.com is certainly that.

For proof, one only need look at the glee expressed by its CEO, Jonathan Bulkeley. While his stock trades well below its offering price, Bulkeley still beams over his IPO. "This was a great offering," he says. "It was fantastic for everybody involved. The company ended up with $486 million, and we have no debt." Ever the smooth CEO, Bulkeley went on to offer the usual platitudes about not paying attention to today's share price, responsibility to shareholders ... wake me when it's over ... being focused on the long-term success, etc.

But his central point is salient -- barnesandnoble.com raised almost half a billion dollars selling 28.75 million shares. The underwriters, led by Goldman Sachs and Merrill Lynch, took 6%, or around $31 million, for their effort. Compare that with headline-grabbing IPOs like theglobe.com (TGLO Quote), in which Bear Stearns sold 3.1 million shares at $9 each and theglobe.com walked away with less than $27 million. Within 30 minutes of trading, the stock was at $91, but the guys at theglobe.com saw none of that.

"If we put the offering price at $11 a share, we would have left $200 million on the table," says Bulkeley. "We felt that the business was worth a lot of money and we wanted to have the capital going forward."

Companies have been coming to market selling just a portion of their companies on IPO day. theglobe.com offered less than a third of the company. eBay (EBAY Quote) offered less than 10%. Months ago, when the market was starved for Internet stocks, restricting supply helped to create demand, and these stocks took off. But the last three months have seen 50 new Net issues. "The market is awash in a glut of dot-com IPOs," says Gail Bronson, senior analyst for IPO Monitor. "It's totally supersaturated."

With Net stocks off more than a 30% in the last few weeks, the pressure is even greater to sell more stock during the IPO to raise more capital now. For the first three months of the year, the average Net offering was for 26% of the company, according to Richard Peterson of Thomson Financial Securities Data. But in May the average was 39%.

"The general rule of thumb is that the company can't offer more than a third of [the company] to the general market," says Chip Vetter, director of corporate finance for BancBoston Robertson Stephens. "But the market selloff on Internet stocks has affected the size of these offerings."

The trouble is, mainstream journalists have a hard time covering these IPOs. They miss the purpose of these offerings. They forget about the story after day one. They repeat one another's math without ever cracking a red herring. They calculate the net worth of the CEO on the first day and continue to report that number, even as the share price plummets.

Just because business news goes mainstream doesn't mean mainstream reporters can handle it. Books could be written on this subject. Problem is, that's another story they'll forget to cover on the second day.

Disclosure: Cory Johnson, a Time Warner (TWX Quote) veteran, is a former mainstream journalist.