You don't have to be Google to challenge the way Wall Street manages initial public offerings. A little southwest Virginia biotechnology company has just gone public using the same innovative "open IPO" process as Google.
Like Google, New River Pharmaceuticals Inc. learned it's not easy to mount a revolution against Wall Street royalty and the oligarchy of investment firms that skim the cream off most IPOs. Neither Google nor New River Pharmaceuticals raised as much money as they wanted in their IPOs and neither was able to completely wrest control of the IPO process from the Wall Street bankers and institutional investors who pull the strings in the new-issues market.
But they did pull off their offerings at a time when tech stocks were tanking and other companies were canceling plans to go public.
And in doing so they demonstrated that the IPO process can be changed in ways that ultimately benefit small investors and companies that need to raise capital.
In that context, New River Pharmaceuticals of Radford, which went public the first week of August, may prove as important a precedent as Google.
Google gets all the ink and air time because it was such a big deal -- a $1.8 billion stock sale, one of the biggest high-tech IPOs ever. With its name already a synonym for "searching the Internet," Google was guaranteed an IPO under almost any circumstances.
New River, on the other hand, is an early-stage biotech company that is trying to develop safer versions of three often-abused drugs: the pain relievers oxycodone and hydrocodone and the kind of amphetamine used to treat attention deficit hyperactivity disorder (ADHD) in children. The ADHD drug is ready for clinical trials; the others are being studied by scientists at New River's research lab in Blacksburg.
Founded by lawyer-turned-investor Randal Kirk, who used profits from previous pharmaceutical ventures to launch the company, New River originally filed for a conventional IPO underwritten by a Wall Street investment bank. Not satisfied with the reaction from bankers and their clients, New River switched to an auction-style offering several weeks before Google announced its plans.
Wall Street bankers were bitter when Google decided to bypass the usual process and do a "Dutch auction" offering introduced by William Hambrecht, a founder of Hambrecht & Quist, the investment firm known for so many Silicon Valley IPOs. After selling that firm, Hambrecht started W.H. Hambrecht and Co. and set about reinventing the capital-raising process so the benefits flowed to companies and their stockholders, not Wall Street.
The process originated at flower markets in Holland, where a grower with 1,000 dozen roses for sale gives an asking price, such as $3 a dozen. Buyers then bid for part of the batch: "I'll take 100 dozen at $2.90 . . . 300 dozen at $2.85." The bids keep dropping until there are offers for the entire lot. That low bid becomes the selling price for all the blooms.
In the flower market, the process takes seconds. The bond market, which uses a similar system to sell new Treasury bonds, moves hundreds of millions of bonds in a matter of minutes. Google's IPO took much longer because the company wanted to open the bidding to individual investors who rarely get in on hot IPOs because investment bankers allocate many of the shares to their favored clients.
Creating a computer system to handle tens of thousands of bids for as few as five shares proved far more difficult than organizing flower and bond auctions where a few bidders buy big lots.
Almost immediately, Wall Street whispered that the technology was doomed to fail. Too big a job, too little time, Wall Streeters said; Google would be better off going back to the old way of doing business -- letting investment bankers sell the stock to hedge funds, pension funds and other regular clients.
"That's when I smelled a skunk," said Patrick Byrne, chief executive of Overstock.com, one of the first companies to go public under the Hambrecht system in 2002. "It was an orchestrated campaign by the banks that just didn't want to see it succeed."
Overstock.com is based in Salt Lake City but has Washington roots. Byrne went to Walt Whitman High School in Bethesda when his father, Jack, was rescuing the Geico insurance companies from near-collapse back in the late 1970s. Jack Byrne is co-chairman of Overstock.com, which sells excess merchandise over the Internet.
Overstock's board members include Gordon S. Macklin, the former chairman of the National Association of Securities Dealers here, who is also on the boards of MedImmune Inc. and Martek Biosciences Corp.
Wall Street firms "had to be dragged into" participating in the Google stock offering, Byrne added. "From day one, I think they set out to sabotage it."
Byrne said investment bankers also were behind stories saying Google's presentations to big investors did not go well, that there was no institutional demand for Google shares and that the stock was likely to tank on the first day of trading as IPO investors bailed out.
The computerized system of signing up small investors and taking their bids worked fine and so did the offering. Google stock jumped from $85 a share to $100 on the first day of trading and closed Friday at $108.
"None of the bad things that were supposed to happen occurred," said Byrne, such an ardent advocate of the Dutch auction IPO process that he often sounds as if he's speaking on behalf of Google.
Byrne said that in 2002, when he brought up the idea of a Dutch auction IPO for Overstock.com, "Wall Street was able to just laugh at us. Google has the clout that Wall Street couldn't do that."
New River has no such clout. While Google garnered $1.8 billion in its IPO, New River collected $33.6 million by selling 4.2 million shares.
Since it was started in 1966, the company has burned through about $24 million -- mostly provided by Kirk, who owns about 65 percent of the stock. Because of securities regulations, company officials would not comment on the offering.
New River's goal is to develop new, safer forms of widely abused drugs. It has patented a technology called Carrierwave that locks the active ingredients into pills so they can't be extracted by abusers and limits release of the drug into the body to prevent overdoses.
Auction IPO advocates say that the company also is advancing the art of raising capital. New River completed its offering during a week in which 17 IPOs were scheduled and only three were completed.
Like Google, New River did not get the price it was seeking in the Dutch auction, taking $8 a share rather than the $10 to $12 the drug company was seeking. "But it got done, in a really bad market," said Bruce Mann, a senior partner in the San Francisco law firm Morrison and Foerster. Mann is one of the creators of the Dutch auction IPO and a former executive of W.H. Hambrecht and Co., which the law firm represents.
Mann argues that New River's success in selling stock when other deals were being delayed shows that the Dutch auction process can succeed where conventional IPOs fail.
Since the Aug. 5 IPO, New River stock has slipped to $7.28 a share, but the stock wouldn't be trading at all if the company hadn't decided to go the auction route.
Google will be remembered as the IPO that broke Wall Street's investment banking monopoly. But if Dutch auction offerings are to change the way that new businesses raise capital, it will be because of lots of little companies like New River Pharmaceuticals.