FBR's Stock Surges, but Its IPO Clients Fall Flat

Friedman Billings Ramsey's online subsidiary, fbr.com, has reinvigorated FBR's stock, despite recent unsuccessful IPOs.
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With two IPO underwriting efforts under its belt,

Friedman Billings Ramsey

(FBG)

online unit

fbr.com

has been a boon to its parent -- but not necessarily to the companies it helped take public.

FBR's formerly lagging stock more than tripled to a high of 21 1/4 in the weeks after the creation of the online IPO network in mid-April. Although the stock has since given back much of that gain, especially as financial stocks have taken a hit in recent weeks, it still is about 65% above its levels before the creation of fbr.com. The stock closed unchanged Friday at 10 7/16.

But the two IPOs in which fbr.com recently was co-manager,

CareerBuilder

(CBDR)

and

CAIS Internet

(CAIS)

, haven't fared as well.

CareerBuilder, an online job search service based in Reston, Va., was priced at 13 per share on May 12, but just four days later, its shares dropped below their initial price. The stock closed Friday at 11 3/4, down 3/8.

CAIS Internet, a Washington, D.C., provider of Internet access, was priced May 20 at 19 per share, then hit a high of 26 5/8 on its first day of trading. But within days, it was also below its initial price. CAIS closed Friday at 13, up 3/8.

FBR says outside factors contributed to the stocks' decline. "I think the fall in the IPOs

of CareerBuilder and CAIS has to do with the market for Internet stocks, and does not have anything to do with the online portion of FBR," says Suzanne Richardson, managing director in FBR's corporate finance department and project manager for fbr.com.

FBR's Dot-com Recovery
After FBR's announcement in mid-April that it was creating an
online brokerage service called fbr.com, the stock soared.

At CAIS, Gary Rabin, vice president of corporate finance, says the underwriting went well, but he was unsure how much of a role FBR played. "I have a high opinion of FBR," Rabin says. "But I really don't know fbr.com."

Bear Stearns

(BSC)

was the lead underwriter on the deal. A member of Bear's underwriting team declined to comment on fbr.com's role.

James Tholen, CareerBuilder's chief financial officer, says the underwriters did an "exceedingly good job" on his company's IPO.

Credit Suisse First Boston

, the lead underwriter, didn't return a phone call.

The lackluster performance of both IPOs didn't stop FBR from crowing about them in a press release sent out the day after CAIS was priced. "This is our second IPO to be offered online," Russell Ramsey, president and co-founder of FBR, said in the release. "On the heels of the successful online distribution of CareerBuilder last week, we are experiencing real momentum as new online investors continue to register at our Web site. Clearly, investors want product and that is what we are providing."

For FBR, the creation of an Internet underwriting arm has become a sort of rebirth. But if the IPO market continues to lose steam, or particularly if the IPOs that fbr.com gets its investors into fail to perform, the "real momentum" Ramsey spoke of could evaporate. The Washington, D.C.-based investment boutique -- which has led just one IPO underwriting since last July -- already has two more co-management slots lined up, for

DVD Express

and

Nichols TXEN

, both of which are to be priced this month. Like CAIS and CareerBuilder, both of these pending IPOs were in registration before fbr.com was created, though the firm plans on using its new online connection with both.

FBR was one of Wall Street's rising stars until about a year ago. The firm, which sought to leverage its Wall Street outsider image, caught national attention when it cracked Wall Street's coveted cadre of top 10 IPO underwriters in 1997 and early 1998. But its focus on small-cap companies and financial institutions proved its undoing as new issues in both dried up last year. More than half of the IPOs FBR has lead managed, including its own, were trading below the initial offering price when the firm announced fbr.com. (

TheStreet.com

took a look at

FBR's IPO record in a story last August.)

Ramsey announced the firm's online initiative on

CNBC

April 15 -- a move that sent FBR's shares soaring almost 50% that day. The idea was to offer about 20% of its allocation of shares in IPOs through fbr.com. In the days after the online initiative was announced, FBR received applications from customers at the rate of about 1,000 per day.

The massive response has already forced FBR to change the way it sells shares to customers, says Richardson, the FBR investment banker. FBR opened up a window about a week before the CareerBuilder pricing that allowed potential customers to express interest, Richardson explains. That window closed in about four minutes because of massive demand, and customers -- once qualified -- were sold shares on a first-come-first-served basis, 100 shares at a time, until the allotment was finished. Richardson declined to specify how many investors got shares, but says the average number of shares received was "in the hundreds."

However, the large amount of interest made FBR realize that the first-come method may not be the fairest way to determine who gets shares. So, in the CAIS IPO, FBR used a lottery system. FBR opened the window for expressions of interest -- this time for 14 hours -- and picked among those investors via a lottery. Richardson says the lottery system worked well and will continue to be used in future IPO underwritings.

But demand could cease to be a concern if more IPOs fail to perform.