| BUSINESSWEEK ONLINE : SEPTEMBER 6, 1999 ISSUE | ||||||||
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| COVER STORY
More IPO Access for Individuals? Not Yet Even the Internet hasn't really made a difference in who gets in on the action Even in the midst of the summer doldrums, initial public offerings can still make some investors a lot of money. Facing a choppy IPO market, Bamboo.com (BAMB), which creates virtual home tours that are used in selling real estate, recently had to delay its offering, cut back on the number of shares it planned to sell, and lower its IPO price to $7. But when it opened for trading on Aug. 26, its shares quickly doubled, and the stock closed at 17 9/16. "We're pretty excited," says Kevin McCurdy, the company's founder and executive vice-president. Like the founders of E-Loan (EELN), even the elated McCurdy summed up the process as "very fatiguing." But he won't get much sympathy from the many individual investors he admits tried, and likely failed, to buy Bamboo.com shares at the low offering price. Despite all the talk about the Internet helping to democratize the IPO market and open it up to ordinary investors, the vast majority of shares in hot new stocks still go to institutional investors. That's because these professional money managers are the best clients of the traditional investment firms that still control the IPO process. AN ILLUSION. To be sure, a handful of new online investment banks and a slew of high-profile alliances between discount brokers and bankers have given a few lucky individual investors a chance at IPO shares. But mostly, they've just created the illusion that the little guy has a chance. According to analysts who track initial offerings, an average investor's odds of getting in on an IPO remain something like the odds of winning the lottery -- so low you really have little chance at all. "There is still way too much demand as opposed to supply," says Dan Burke, senior Internet brokerage analyst for Gomez Advisors. "It really hasn't gotten any easier." In fact, it seems that all the new opportunities for individuals to sign up for IPOs have fueled demand, making it even less likely that anyone will get a chance at the small percentage of shares allocated for retail investors. "They have opened it up some, but only compared to really nothing," says Tom Taulli, an Internet stock analyst at Internet.com. "They've also raised a lot of awareness about the IPO market among individuals." The main problem is that traditional investment banks still act as lead manager on the vast majority of deals -- doing the bulk of the work, collecting most of the fees, and ultimately controlling the distribution of a majority of the shares. The new online investment banks are usually only one of several co-managers on the deals. According to Burke, a co-manager can expect to receive roughly 1% of an offering. PALTRY NUMBERS. Wit Capital, which pioneered the online distribution of IPO stocks, declines to comment on how much of the demand for shares it has been able to meet. But simple math provides some insight. By the end of June, Wit had close to 70,000 customers. It sold nearly 6 million shares of stock in 42 deals that quarter. That amounts to an average of less than 150,000 shares of stock per deal -- which means Wit could theoretically hand out 100 shares to 1,500 clients. Who are the lucky few to get the shares? Once the deal is posted on Wit's site, customers have only about five hours to sign up for the offering. Then, if the deal is oversubscribed, Wit resorts to a lottery system to dispense shares. More than 40 discount brokers also have alliances with investment banks that allow them to distribute IPO shares to clients as part of the "selling group" on deals. But they often get less than 0.5% of the shares, Burke figures. Essentially, the firm's participation in the deal is often so small that it shouldn't have even bothered alerting clients, he believes. "From the standpoint of managing clients' expectations, it is something that often isn't done as well as it should be," he says. Another factor restricting access to new issues: As the IPO market has cooled in recent months, a number of deals have been withdrawn or postponed (a total of 113 this year, most of them recently, according to CommScann, a New York research firm). Wit Capital currently lists only three offerings, all of which have been postponed. E*Offering, a Wit competitor that distributes shares to E*Trade customers, lists five current offerings slated for September. And W.R. Hambrecht's OpenIPO, which uses an auction process to sell shares to the highest bidders (a largely unproven process with a lot of potential to level the playing field, says Brad Sinrod, CEO of IPO.com), isn't listing any new deals, although some are in the works, according to a spokesman. FOREGO ONLINE? Of the online brokers, Charles Schwab probably does the best job of meeting demand for IPOs, says Burke. "It has the longest relationships with investment banks, but it's still difficult for them," he says. Fidelity, which forged an IPO agreement with Lehman Brothers in June, may not be far behind. But both firms restrict IPO allocations to large accounts or active traders. For high-net-worth investors, the best chance at getting in on IPOs may be to forego the online channel altogether, says Burke. Find a full-service broker who has a relationship with the firm's investment banking division and who can get you a piece of deals. Barring that, an individual investor's only other options for getting access to IPOs, says Taulli, are knowing someone at a company going public and trying to get on the "friends and family" list, or going to work for a startup and negotiating stock options. Of course, you could wait and buy the shares once they start trading on the open market. "But that is not usually a good idea within a few days of the offering," says Taulli. "There's a lot of hype, and they often come back down to where they started -- especially lately." There's one other considereation, which admittedly may be of small consolation to investors who are still trying to get in on their first IPO: "Just because you got it at the offering price," notes Taulli, "doesn't mean it's your ticket to riches." By Amey Stone in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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