It seems that every new IPO market brings with it an army of inexperienced investors trying to find their way through what many believe is a closed door. Having been there myself at one point, I know how frustrating it can be to get a handle on how the IPO market works.
Last week I received a number of emails from readers who are just starting out buying IPOs. The questions they ask are very basic. This tells me that it's time again to write a primer on how the game works. Not aproblem -- that's what I'm here for. Let's go over what I think are theneed-to-know fundamentals. If I miss anything, you can
write me with more questions and I'll handle them in my next column.
A good place to start is with some common language. Some of the terms that I frequently use in my dispatches spawn little email floods asking what the heck I mean, so here are a few you should know.
IPO, of course, stands for initial public offering. This is thefirst round of stock offered by a private company to the publicmarkets. It is for this reason that companies doing an IPO are often said tobe "going public."
Syndicate, or equity syndicate, refers to thecommunity of underwriters and their personnel who put together andcoordinate the marketing of the stock offerings that are IPOs andsecondaries. For now, we'll limit our discussion to IPOs (if you'reinterested in knowing the basics on secondaries, email me and we'll cover them in another column).
IPOs are of two types,
. Anunderwritten deal is one in which a syndication of brokerage firms buys a specifiednumber of shares from the company going public, marks them up and then sellsthose shares to buyers at a fixed price. These buyers are the customers ofthe brokerage firms. A best efforts deal, on the other hand, occurs when one or more brokerages usetheir "best efforts" to try to sell as many shares as they can at aspecified price. There is usually a minimum number of shares required to besold in order for the deal to be done. Because of the iffy nature of bestefforts deals, I don't cover them and I recommend that you don't buy them.Stick to underwritten IPOs and you'll avoid some very serious risk issues.
OK, so how do you buy an IPO? I'll answer this one on a purely mechanical basis and leave the question of which ones you should buy for my future columns.
To purchase shares in an IPO you need to enter a type of order known as an
indication of interest
. This IOI is transmitted by yourbroker to his syndicate department and tells them that you are interested inbuying a specified number of shares of that deal. Your IOI is pooled withthe others entered at that firm, which are then communicated to the managingunderwriter of the deal.
The managing underwriter, often referred to as thelead underwriter, decides which accounts get stock and how much. Once enoughIOIs are collected to distribute the entire deal, and the IPO has clearancefrom the
Securities and Exchange Commission
to be sold, the deal is priced, shares are allocated andthe stock opens for trading. That's the basic framework. Chew on this for awhile, then send me any questions you have.
Friday, I promised you my opinion on the IPO of managed-care company
(proposed symbolAMGP:Nasdaq), out of Banc of America Securities. This deal is scheduled toprice tonight for tomorrow's trading. As I mentioned last week, this dealwas originally filed in May of 2000. After 535 days, this one is a bit "long inthe tooth" as far as registrations go. For comparison, the deals that priced inOctober of 2001 averaged 165 days in registration before they went tomarket. Normally, a fact like this would just kill my enthusiasm for a deal.Not so on Amerigroup.
The company has managed to improve its balance sheet and some key operating ratios in what has been a very tough economic period. The string of pricing postponements has amounted to what must be a very frustrating time for the company, but it's hung in there. My feeling is that the market is right for Amerigroup. I'm calling it up anywhere from 5% to 15% in the first session.
Ben Holmes is the founder of
ipoPros.com, a Boulder, Colo.-based research boutique (now a wholly-owned subsidiary of TheStreet.com) 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 and invites you to send it to