Contrasting IPO styles

There’s a nice piece in today’s NYT ruminating on the coincidence that just as Google plans an auction as a way of launching its shares on the market, Frank Quattrone — a leading practitioner of the old, corrupt way of doing IPOs — was convicted of obstructing the course of justice. “Once, Wall Street considered it embarrassing to have a stock soar right after it went public”, says the Times, “because the underwriters had obviously left a lot of money on the table and deprived the issuing company of the best price for the shares sold.

But in the late 1990’s it became a badge of honor to have a new offering double or even quadruple the first day of trading. That meant the potential for phenomenal profits to those who could buy at the offering – profits that could be realized within minutes after the stock began trading, long before it became clear whether the company would prosper or fail.

Mr. Quattrone put himself at the center of that process. Moreover, despite nominal rules separating investment banking from research, Mr. Quattrone had analysts reporting to him, allowing him to influence their recommendations to clients.” Google wants to play by different rules. It proposes to sell its shares in a version of a Dutch auction. That means any investor – whether the best friend of the lead underwriter or a small investor should have an equal chance of buying shares at the offering price. The auction will set the price.

At the height of the Internet boom, Mr Quattrone’s cronies — those who had been allocated shares prior to the market launch — could make obscene profits on the first day of trading. The Times mentiones one of his triumphs — VA Linux which Quattrone’s group took public in December 1999. “The shares were priced at $30 in the offering, but traded for $320 the first day, ending that day at $239.25, for a gain of nearly 700 percent. By the end of 1999, the shares were trading for less than the first-day close, but were still viewed as a great success. (They later fell as low as 54 cents in 2002, and now sell for about $2.)”

The nice thing is that Google is not confining its innovation to technology.