A HEADLINE IN SOME EDITIONS OF THE BUSINESS SECTION YESTERDAY INCORRECTLY IDENTIFIED INVESTMENT BANKER BILL HAMBRECHT, WHOSE FIRM IS HANDLING THE INITIAL PUBLIC STOCK OFFERING OF THE ONLINE MAGAZINE SALON.COM AS THE MAGAZINE'S PUBLISHER. (PUBLISHED 06/23/99)
Bill Hambrecht's latest innovation has been getting trashed by participants in stock-chat message groups, which pleases him.
The San Francisco investment banker's decision to set prices for his initial public offerings by conducting auctions open to ordinary investors will "remove all but a very modest pop from any IPO . . . It won't be worth playing," asserted one trader on the Silicon Investor chat board. Complained another: "Completely strips IPOs of their `exclusiveness.' "
Exactly the point, says Hambrecht, whose "OpenIPO" system will get its first significant test Tuesday with the debut of Salon.com. The online magazine publisher, which like many Internet firms is hemorrhaging cash, will open at a price of $10.50 a share, Hambrecht's firm, W.R. Hambrecht + Co., announced after the market closed today.
Hambrecht had originally estimated the San Francisco-based political and cultural journal, which features such articles as "Chick Fight!: My First Barroom Brawl" and "Liddy Does Oprah: On the Not-Quite-Campaign Trail With Elizabeth Dole," would be offered at a price ranging from $10.50 to $13.50, so it's clear that the demand from bidders was relatively lukewarm.
But the real question is what will happen once trading begins. During the heady days of last winter, Internet IPOs tended to soar on their first day, with demand racing far ahead of supply.
Theglobe.com, for example, closed at $63.50 on its first day of trading, a 600 percent leap for the online community from its issue price of $9. Institutions that were in on the deal made a bundle; individuals who could only buy during the trading day generally did not -- especially since Theglobe.com, like most Internet issues, has since sagged precipitously.
With Hambrecht's OpenIPO, individual investors can bid on a company before it goes public, deciding not only how many shares they want but also the price they are willing to pay.
A much-simplified explanation of how these auctions are designed to work: Imagine a company is trying to sell 30 shares to the public. Forty people bid for one share each, with 10 willing to pay $13 a share, 10 to pay $12 a share, 10 to pay $11 a share, and 10 to pay $10 a share.
In an OpenIPO auction, the stock would go public at $11 a share -- the lowest price at which all 30 shares can be sold. Those who offered the low-ball $10 would lose out. Everyone else would get what they asked for, often at a cheaper price than they had planned to pay.
An OpenIP0, which is similar to a method the government uses to sell Treasury bonds, is often called a Dutch auction. Hambrecht says he first saw the system being used in Amsterdam about 15 years ago as a way to quickly move perishable blooms.
The flower brokers "wanted people to bid aggressively, but knew they couldn't and shouldn't make them look foolish in front of the competition," says Hambrecht, who was a principal in the investment firm Hambrecht & Quist for 30 years before setting up his own shop last winter.
"I remember it occurring to me that this is what an IPO is all about: merchandise you have to move all at once, with every buyer feeling he's been treated fairly."
Randall Roth, an analyst with the IPO Plus Aftermarket Fund, calls OpenIPO "really a '90s empowerment movement" and says, "Auctions like this let the small guy in and give everyone an equal starting point."
The investment banks that have traditionally handled IPOs "don't want to see this happen," he adds. "They get a 7 percent underwriting fee, and part of it is for the advisory services -- where to price the stock. If the market's setting that price, what do you need to pay the fee for?"
Gail Bronson, senior analyst for the Web site IPO Monitor, is more dismissive. "It's a great marketing ploy for [Hambrecht], and it may help some Joe Six-Pack-types get some shares of stock, but as far as a trend, I doubt it. The fact of the matter is one of the most valuable partners a corporation has is their investment banker, to help them finance themselves at each step in their business cycle."
Even Roth says the OpenIPO is only "theoretically" a very good idea. "One of these companies needs to make a long run and score a touchdown -- in other words, to have an impressive performance after the first day of trading. Then the process will have more credibility."
That didn't quite happen with the first Hambrecht IPO. Ravenswood Winery, a profitable producer of premium reds, has barely budged from its $10.50 offering price in April. Apparently there was no one left to buy the stock after the stock started trading -- a risk with OpenIPOs.
"The wine industry isn't the hot industry," says Hambrecht. "Still, we found investors who were interested in holding the stock for the long term."
Part of the point of an OpenIPO is to provide more stability for the company by encouraging a buy-and-hold philosophy, which isn't exactly something that Internet stocks have been famous for. For the day traders who have been increasingly flooding the market, a long-term investment is one that stretches past lunch time.
An OpenIPO "could trade up, and hopefully it will," says Hambrecht. "The difference is, it won't go crazy -- this wild thing of going from 18 to 80. My theory is those kind of wild upside things generally trade down. They can be very destructive to the individual investors who are tempted to come in because it seems like a hot deal."
Salon.com, however, has not seemed like even a tepid deal to most analysts. In the year ended March 31, it took in $2.9 million. But with editorial and marketing expenses of $9.1 million, it lost more than $6 million.
"We will need to generate significant revenues to achieve and maintain profitability, and may not be able to do so," the company's prospectus warns. At $10.50 a share, Salon.com will have a market value of $100 million -- a sum that would be unimaginable if it were printed on paper instead of distributed over the Net.
The weakness in Internet stocks over the past two months may also hinder Salon. "I don't think this is a good environment," says analyst Roth. "I don't want to say people are finding out the emperor has no clothes, but at least they're getting suspicious."
Other analysts, speaking anonymously, are blunter about the magazine's worth. "It's a joke," says one.
Yet unless Salon tanks disastrously, the OpenIPO movement seems likely to spread. At the moment, either investors or their brokers need to have an account with Hambrecht or an affiliated firm to participate. That will soon change. Fidelity Ventures, an arm of the massive mutual fund company, last week bought a minority stake in Hambrecht, joining a group that includes Rupert Murdoch's News Corp.
By the end of the year, Hambrecht says, Fidelity's 2.3 million brokerage customers will be able to buy stock in OpenIPOs through their online accounts. The next offering is GreatFood.com, an Internet retailer of gourmet items that is scheduled to go public next month for a price between $10.50 and $13.50 a share.
Meanwhile, CMGI Inc. is also getting in on the movement to broaden IPOs. The Internet venture-capital company said last week it will give those who own 100 or more of its shares the opportunity to buy stakes in its start-ups as they go public. The move was seen as a way for CMGI to make its own stock more attractive.
As Case in Point
Here's how an IPO by Dutch auction might work. XYZ Corp. wants to sell 1 million shares. The lowest bidders among the highest 1 million bids determine the price -- in this hypothetical case, $10. Here is the breakout, from highest to lowest bids.
Shares Bidding Pct. shares Amount
requested price allocated raised
100,000 $14.00 100% $1,000,000
175,000 13.00 100 1,750,000
225,000 12.00 100 2,250,000
275,000 11.00 100 2,750,000
750,000 10.00 30 2,250,000
After ranking the bids from highest to lowest, here is where the number of bids exceeds 1 million (1,525,000 bids at $10 or more.)
Those bidding more than $10 (775,000 total bids) get all shares requested. That leaves 225,000 shares. Those who bid exactly $10 (750,000 total bids) get a portion of shares they requested. In this case 225,000 divided by 750,000 equals 30 percent of requested shares.
CAPTION: Hambrecht & Quist Chairman Bill Hambrecht, seated, with chief executive Dan Case in 1994. Last winter, Hambrecht left the firm to start his own company.