How You, Too, Can Buy Into Those Hot IPOs: Part 2

Getting your share of IPO allocations isn't free, but it can be done.
Publish date:

I admit it. I teased you. I purposely took you right to the edge with last week's column on how to get your share of initial public offerings. Then I left you high and dry with only the promise that I would return to tell you what you really want to know: What is it that your broker wants in exchange for those hot IPO shares? Well, you've waited long enough, so here goes.

To understand what I am about to say, you may need to put aside some of your preconceived notions about the reality of being a broker. The truth is that it's a hard, painful vocation. Calling people you don't know and asking them to buy securities is a tough way to make a living, which is probably why those who are good at it get paid so darn much.

Thus it should be no secret that every broker dreams of finding that all-powerful lure that will attract clients who do lots of business -- so that he or she will never have to cold-call again. One survey of some 2,000 brokers reported that more than 90% said they had this fantasy at least once during each workday. What these daydreamers have not yet discovered is the drawing power of the IPO.

Smart brokers have known for years that hot IPO shares can be used as a sort of currency to encourage regular commission business from their clients. What exactly is regular business? Consider any nonsyndicate (i.e., non-IPO, or secondary share offering) transaction that results in a commission to the broker as good barter. The more, the better.

Where most investors go wrong when trying to get into the IPO game is that they spread themselves too thin, over too many brokers. The most effective way to build up a relationship that produces meaningful allocations of IPO shares is to concentrate as much business as you can on a single broker. Take a quick inventory of how much business you do with your current brokers. Do you buy stocks? Mutual funds? Bonds? Do you have an IRA? A college savings account for your kids? If so, these are all valuable trade goods you can use to get IPO shares. And you can do this without impacting your long-term plans for saving and investing.

I Scratch Your Back ...

Last week, we went through the steps of identifying a firm whose IPOs are the most attractive to you (just the ones that go up, right?) and making an introduction with a broker who has access to IPOs. Now it's time to make the call. Armed with a list of your investments, a summary of your transactions for the past few months and a bit of hubris (not too much, mind you), call the prospective broker and pitch him on the idea of consolidating all of your investments and trading under his firm's roof, with him as the account representative. Be very clear that you are looking to build a relationship and that you expect to participate in the firm's deals.

This is the moment of truth: Either you have what he considers to be a substantial amount of assets and he is willing to accommodate your needs, or the amount of business you are able to bring to bear is unimpressive when compared with his other clients. If it's the former, you are in like Flynn and I suggest you proceed. If it's the latter, think of it more as a reflection of where that broker is in his career than of where you stand as a potential customer of the firm. My suggestion at this point is to continue shopping for a broker for whom you will be a meaningful account.

Finally, you have to be realistic about your expectations. What brokers are looking for when doling out potentially profitable IPO shares is a value-for-value exchange. If you have commission business to do and you have a desire to buy IPOs, then get on the phone. Time's a'wasting.

Even Web Geeks Have to Eat

What tickled me most about last week's deals was a couple of non-Internet IPOs that looked promising and actually received a decent amount of investor attention. One thing I have learned in this business is that just because I like a deal doesn't mean the market will. Often IPOs that look to be obvious winners to me will elicit barely a yawn from buyers. This was certainly not the case with



, which made its debut Wednesday. Shares in the restaurant chain, which operate the

Buca di Beppo

pasta parlors, priced at 12 and quickly confirmed our favorable rating when they opened up better than 3 points at 15 3/16. Buca closed Friday at 18 1/8.

The second deal, retailer

Tuesday Morning

(TUES) - Get Report

, priced its IPO Thursday at 15 and finished the week at 17 1/4.

These are encouraging for two reasons. First, it shows that investors are finally willing to look at quality underwritings outside the Internet and technology sectors. Second, Buca's strong opening allowed me to win a bet with one of my more opinionated clients who hated the deal.

This first point is important because it shows an improving measure of breadth in what has been an all-too-narrow IPO market. In recent months, a number of high-quality deals were all but ignored by the market because they were not Internet-related. This trend, should it continue, is a healthy sign for this IPO market cycle.

This week looks busy with 22 deals scheduled to price (13 IPOs, 9 follow-ons). Let's look at some deals:

Ben Holmes is the founder of, a Boulder, Colo.-based research boutique specializing in the analysis of equity syndicate offerings. This column is not meant as investment advice; it is instead meant to provide insight into the methods of new and secondary offerings. Neither Holmes nor his firm has entered indications of interest in any of the companies discussed in this column. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Holmes appreciates your feedback at