4. Choosing Your Investment Banker 32

To help maintain an orderly market, the underwriter buys from the issuer a set number of additional shares (typically up to 15 percent of the offering) at the offering price, solely for covering overallotments. The “Green Shoe Option” —so-called because the first instance involved the Green Shoe Company — must be exercised within 30 days of the effective date. Thus, this additional supply of stock can help unsatisfied demand from causing a “run up” of the stock.
New models – online IPOs
E-syndicate houses
New investment banking houses, leveraging the Internet and catering to the needs of individual investors, emerged in the mid-1990s. Most of the original players have since been acquired or merged with other well-known financial firms. As of 2004, the most widely known e-syndicate houses are CSFB Direct, E*Trade, and Charles Schwab. These firms disseminate new offering information online
to their clients and networks of online brokerage firms. The typical investment banking relationship with the issuing company still involves a lead underwriter as outlined above, but an e-syndicate house participates as part of the syndicate orco-manager of the offering. As noted by Sanford Miller of 3i, “e-syndicates are really an evolution that reflects the reality that online information is convenient and speedy. The syndicates are only as strong as their underlying retail networks.”
Dutch auctions
This widely successful procedure for issuing Treasury Notes was adopted by
W. R. Hambrecht in 1999 in what is termed the “OpenIPO” method. This method is designed to provide more efficient pricing and allocation directly to the highest bidders. All successful bidders pay the same price per share. But as Robert Tomkinson, a Principal at Athena Technology Ventures, notes, “Unfortunately, OpenIPO arrived on the scene just as the Internet bubble was about to burst and thus has not had the opportunity to establish its credibility.” In fact, of the nine OpenIPOs led by W.R. Hambrecht, as of March 2004 six are significantly under water. Tomkinson adds, “One concern has been adverse selection: the worry that only companies passed over by Wall Street heavyweights like Morgan Stanley or Goldman Sachs would be willing to risk a novel approach such as OpenIPO, for all its theoretical merits.” Sanford Miller, a general partner at 3i, shares Robert’s view and adds, “Intellectually the concept is quite appealing. The reality is that traditional IPOs work very well and are an effective way to market a new company. For secondary offerings of reasonably well-known companies the Dutch Auction format can be an effective means of offering.” Whether this approach will succeed in the long term is yet to be seen.
Regardless of approach, Peter Ziebelman, a general partner at Palo Alto Venture Partners, offers this sage advice, “The advent of the new models for IPOs (whether they are E-Syndicates or OpenIPOs) may help the market redefine what is commonly thought of as a ‘successful IPO’. But, a successful IPO should not be measured on the price jump on its first day or even first month of trading.
32
PricewaterhouseCoopers LLP Roadmap for an IPO

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