How to Get a Piece of the IPO Action

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Ever call up your broker after reading an article about some hot new initial public offering (like Kevin Kelleher's recent



Exodus Communications

) and try to get a piece of the action, only to be greeted with hysterical laughter on the other end of the phone?

Never mind that you haven't talked to your broker since you started doing most of your trades on the Net. And forget the fact that you spurned that steel foundry IPO,


, he tried to pawn off on you last year like the stray dog it was.

It just doesn't seem fair that somebody got Exodus at 15 when the first trade on the secondary market -- the major stock exchanges -- was north of 28 (a whopping 88% return in microseconds), right? I mean, if they're going to offer these things for sale, then everyone ought to have an equal crack at them.

Well, I've got news for you. It's a free market, not a welfare system. This isn't some kind of feel-good little-league game where every kid gets a turn at bat. You can't expect to set foot on the playing field, let alone hit a homer in "the show," if you don't know first base from third.

And no matter how much you try, you'll probably never make all-star status and get a swing at every IPO that crosses home plate. That said, it doesn't mean you can't bag the occasional double in a triple-A home game if you learn the rules, work hard and use a few inside secrets that I'll give you here today.

Understand the IPO Process

The investment-banking side of the brokerage biz brings deals public all the time -- some hot, most not. The problem is, like the whole

Beanie Baby

spectacle, it's hard to know in advance which items are going to spark a frenzy among the trendy stock-buying public and which ones are going to sit around getting rank.

Rather than get stuck with a bunch of dead inventory on the day of reckoning, the bankers "underprice" issues so they fly out the door. Unfortunately, corporations are notoriously difficult to value accurately, and since bankers like to err on the side of excess demand, some issues get WAY underpriced (to the tune of 11% to 50% on average, depending on which study you look at).

Consequently, underwriters are left sitting with a pile of money on the table -- chalked up as a transaction cost -- to dole out to their vassals with autocratic finality (i.e., they decide which loyal minions to bequeath shares to at the offer price).

Weeks before the issue date, firms start soliciting "indications of interest" from their clients based on a preliminary prospectus (also known as a "Red Herring") and tentative price range. As these IOIs either pour or trickle in, the bankers get a feel for demand and formulate their final pricing and allocation strategy.

On the issue date, after all the institutional clients have been granted their stake, any shares left over for retail distribution usually go to the handful of branches that make a habit of doing steady IPO business. Once the branches get their piece of the pie, it's up to the syndicate manager in each individual office (usually a senior broker or management type) to distribute the shares among the lucky clients who still want them.

Now, if there's one thing that an issuing syndicate can't stand it's a fair-weather fan. Everyone's willing to buy a ticket when your team's on a winning streak, but not every season is going to be a scorcher. For every


IPO, there's an

Image Max


Fresh Del Monte Produce

deal that has to get placed also. Individual clients that pitch in and find homes for these mangy mutts are more likely to get rewarded when the occasional champion pedigree comes up for auction.

If it all seems incredibly subjective, it is. In our office, the syndicate manager used a sort of pro-rata system to grant shares evenly among those who requested them. Special favors, however, were routinely proffered to certain clients as a completely legit practice. Big brokers threatening a violent eruption were usually appeased with an ample offering of the sacred virginal stock. Any new accounts landed using the bloody hock of the IPO as bait tend to get special dispensation, too.

It probably seems unfair if you're the one who takes a back seat to those with an inside track. Learn to work the system, however, and you might just get invited to the party on occasion.

Find the Right Firm

Of course, if the firm you work with isn't in on many IPOs, you can just about kiss off any chance to get shares of even the stodgiest offerings. Most of the majors get pretty good exposure as a rule, but don't overlook the regional firms that do some pretty hot niche offerings, especially in the tech sector.

Eyeball prospectuses for stocks that struck your interest in the past. Toward the bottom of the front cover is a listing of all the brokerages that took part in the offering. The larger the font, the bigger the role the firm played in the deal and the better chance you'd have had of getting a piece if you'd worked through them. You should also check IPO Maven at for all kinds of current and historical data on offerings over the last four years, including lists of issues sorted by underwriter.

Find the Right Broker

Brokers tend to specialize in certain areas of the investment business, so even if you find the right firm, getting hooked up with an rep that does mostly 401(k)s and mutual funds isn't going to help your odds of scoring a new issue one bit.

Ask your contacts for the names of people who do a lot of IPO business in the sectors you like, or call up some branch managers to get their recommendations (check the firm's Web site for a list of offices nationwide). Just make sure they understand clearly what you're looking for or you'll end up with the "broker of the day" (usually a rotating title among the first-year rookies).

Unless you have a desperate need to see your broker face to face, don't be too picky about geography, either. Get creative and try fishing in hot IPO spawning grounds like Palo Alto, the Seattle area or even Minneapolis.

Finally, interview a few prospective brokers on the phone explaining what you're trying to do. Ask him about some of the latest issues that he's placed and don't be coy about describing how big your account is and how often you intend to trade. If you're impressed with the broker but he's not interested in taking on new clients, get a referral for an up-and-comer in the same branch. Because of the way shares are allocated, sometimes just having a contact in the same office with a big IPO player can be enough to get in on some good deals.

Be a Good Client

Finally, take any and all IPOs that your broker brings you no matter how ugly they look. Obviously, not every issue you take out is going to be your prize pick. Just the same, buy as many shares as you can comfortably swing. Over time, the good should make up for the bad.

Also, realize that brokers sometimes get "charged back" the commission they made from your trade if you sell your shares (or "flip" them) within 30 days from the issue date. So be prepared to hang on for at least a month no matter how much your stock pops (or tanks) unless your broker explicitly gives you the go-ahead.

You can always ask "permission" to sell, just show some smarts and tell your broker that you're sensitive to the "charge back" issue and don't want to make trouble for him by selling early. He'll appreciate it, and it may not even be a factor on some issues.

Pay full price for other trades and don't ask for discounts. Remember that money, not schmoozing, will get you results. Put food on the broker's table, and he'll put food on yours.

Sound like a lot of work to overcome the inherent prejudices toward the retail investor? That's a free market for you. You've got to pay to play. But if you work the system and make a commitment to proving yourself worthy of favors as I've outlined here, you'll have a heck of a lot better chance of getting fixed up with a

Maria Bartiromo

by your brokerage-house matchmaker than if you simply cold-called her for a date.

Just remember that getting into the IPO game is largely an all-or-nothing affair. Be prepared to take some hits to your account from the Wicked Witch along your yellow brick road to IPO Oz. Just stay the course and maybe the next time an Exodus comes out, you'll be the one wearing the ruby slippers at 15.

Andrew Greta, an occasional contributor to, is a business student and onetime stockbroker who lives in West Lafayette, Ind.