Where the Individual Is Equal to the Institution

The Andover.Net 'Open IPO' left a lot of money on the table, as individual investors proved as adept as institutional ones at sandbagging investment banks.
Publish date:

So much for not leaving money on the table.

Maverick investment banker

W.R. Hambrecht

was going to

revolutionize the business of initial public offerings. By deploying a so-called Dutch auction process that selects the lowest price a sufficient number of investors are willing to pay, Hambrecht's "Open IPO" is supposed to level the playing field for individual investors. Traditional investment banks -- the ones doing nearly all the deals -- survey institutional clients to determine the price. But when the shares shoot up far over the offering price, companies that are selling the stock presumably are missing out on what they could have received. Hence the "money on the table" Hambrecht was supposed to collect for clients.




, a group of Web sites in Acton, Mass., based on the Linux software operating system, offered shares at 18 only to see them quickly rise over 40 and close the first day at 63 3/8. The shares soared another 22% Thursday to 77 1/2. Money left on the table in the 4 million-share, Hambrecht-led offering: $238 million.

Join the discussion on


message boards, or go to our

IPO Board


The odd thing is that Hambrecht officials say they could have offered shares at 24. But that would have required fresh filings with the

Securities and Exchange Commission


Despite Hambrecht's good intentions, it turns out that individual investors -- who accounted for about half the shares purchased -- are just as good at sandbagging an investment bank as institutional ones are. Faced with the real risk of buying shares in an IPO, investors working through Hambrecht didn't have quite the same enthusiasm as point-and-clickers in the open market over the next two days.

Amazingly, in the middle of all this is SEC Chairman

Arthur Levitt

tut-tutting this whole IPO thing. On Thursday he

told individual investors that purchasing newly public companies is "risky business. I don't think anybody is smart enough to know when to get out." On the one hand, you have every retail-oriented brokerage figuring out how to get more IPO shares for its small-fry clients. And on the other you have the head of SEC pooh-poohing the whole sordid situation.

Who's right? Beats me. IPOs


risky. One or two come to mind, but that's not worth going into. But one thing's for sure: If a high-quality company is going to accept a price for its shares that's lower than what the after-market will bear, they at least ought to have a full-fledged investment bank behind it when the dust clears. Hambrecht, with a skeleton staff and three deals under its belt in a huge year for IPOs, wouldn't meet that qualification. Ditto






, the other lead underwriters.

But here's a surprise. Leading the way in what perversely could be viewed as a reform move is

Goldman Sachs

(GS) - Get Report


Morgan Stanley Dean Witter


, two of the most establishment banks that exist. By pricing


initial public offering at 48 Thursday evening -- three times the previous high end of its range -- the investment banking giants will give the Pittsburgh business-to-business auction site far more capital than it would have otherwise received.

And all indications are that FreeMarkets will warrant the hype when it starts trading this morning. Billed as the direct counterpart to indirect materials procurement software provider



, FreeMarkets already wowed investors in its roadshow. Hence the $48 price tag. But it had better stay above 48 for a good long while -- like forever. Anything less would be a failure for Goldman and Morgan, which make the implicit promise not to offer shares at an unsustainable level.

An interesting point for Pittsburghers to figure out is how many FreeMarkets employees and their relatives opted out of their directed shares (otherwise known as "friends and family" shares) once the price tag tripled. In many cases, the average employee has to come up with real cash for those shares and must agree to have the money tied up for a six-month waiting period.

Incidentally, one real happy camper already is new FreeMarkets board member Thomas Meredith, CFO of

Dell Computer

(DELL) - Get Report

. Dell, remember, inexplicably pulled out several weeks ago as a FreeMarkets investor. Those in the know suspect the SEC looked askance at a Dell investment so close to the IPO because the FreeMarkets IPO was beginning to look like a sure thing. Regulators apparently didn't have a problem, however, with the 50,000 options to purchase shares director Meredith received on Nov. 17 -- three weeks ago, according to FreeMarkets' filing with the regulators. Meredith already exercised those options -- at 14 4/5 per share -- though he must hold the shares during his three-year term as director and remain a director, or risk having the company repurchase them at their original price.

Any way you slice it, that's a whale of a deal for Meredith. Institutional buyers of FreeMarkets' stock will find out this morning if their deal is nearly as good.

Adam Lashinsky's column appears Mondays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at


Edie Yates assisted with the reporting of this column.