From hroberts@uic.edu Thu Feb 10 10:18:30 2000
Date: Thu, 10 Feb 2000 08:03:08 -0800 (PST)
From: hroberts@uic.edu
To: hroberts@uic.edu
Subject: Forwarded article:  ENTRY TO IPO'S PROMISED LAND

The following article was selected from the Internet Edition
of the Chicago Tribune. To visit the site, point your browser
to http://chicagotribune.com/. 
----------- Chicago Tribune Article Forwarding----------------


Article forwarded by: Helen

Return email: hroberts@uic.edu

Article URL:  http://www.chicagotribune.com/business/businessnews/article/0,2669,SAV-0002080149,FF.html


---Forwarded article----------------
ENTRY TO IPO'S PROMISED LAND

By Kathy Bergen

  Like thousands of other Main Street investors, Tony Maruca has tried
repeatedly to get in on the ground floor of promising initial public
offerings.

"And I was told the shares had been gobbled up by the Morgan Stanleys,
the Goldman Sachses, the Merrill Lynches and the rest," said Maruca, a
retired education administrator. "If you are on the outside looking
in, that's as far as you get."

    At least until recently.

Within the past year, the door has opened wider for individual
investors like Maruca who want a chance to compete with Wall Street
bigwigs for a first crack at shares of companies that are going
public. And the entryway promises to open more in the months ahead as
financial services firms scramble to meet exploding customer demand--a
hunger that has intensified as share prices of many IPOs, particularly
in the technology sector, have rocketed into the stratosphere in their
first few days of trading.

On-line brokerages are pushing further into the investment banking
business. And a nascent on-line investment bank is floating a more
egalitarian method of allocating IPO shares--a move that has improved
access for Maruca and others.

"I know some individual investors have been able to get pieces of hot
deals, but from what I know, it's on kind of a crap-shoot basis"
because many offerings have been massively oversubscribed, said Pat
Dorsey, senior analyst with Morningstar Inc., a Chicago-based
investment research firm.

But the moves to "democratize" the IPO process come at a time when
some observers are predicting the gravy train may be losing steam.

"There's a reason why it's getting more accessible," said a skeptical
Jerry Castellini, president of CastleArk Management LLC, a
Chicago-based money management firm.

Although some strong tech IPOs are still to come this year, most of
the better offerings have surfaced, he said.

His advice to individual investors: "I would not blindly buy IPOs
anymore. In the Internet space {hellip} I think we're done."

Prognosticators may differ on what's to come, but there is no
disputing that 1999 was an exceptional year for IPOs.

"I'd be surprised if 1999 was ever equaled or surpassed," said Jay
Ritter, a professor of finance at the University of Florida at
Gainesville.

The average first-day return on an IPO in 1999 was nearly 70 percent,
his research has shown, a far cry from an average first-day return of
14 percent from 1990 through 1998.

And that's only part of the story. He found 116 issues last year that
at least doubled in price on the first day of trading; in the
preceding 24 years, only 39 issues accomplished that.

Eighteen newly public firms last year saw their stock prices rise more
than 1,000 percent from the date of issue until year-end, although his
research also has found that longer-term results from IPOs overall
underperform the market as a whole.

What has aggravated many individual investors has been an inability to
buy shares of IPOs at the offering price set by the underwriters.

Generally, the lead underwriters allocate only 10 to 20 percent of
such shares for retail investors, with the rest going to institutional
investors, such as mutual funds and pension funds whose trading
activity generates commission revenue, and to insiders at the issuing
companies.

The retail shares are allocated to brokerages to distribute among
clients. Traditional full-service brokers tend to give their most
valuable customers the opportunity to buy such shares, Ritter said.

Within the on-line brokerage world, some companies, including E*Trade
Group Inc., offer the shares randomly, while others, such as Charles
Schwab & Co. and Fidelity Investments, make them available only to
customers who either have hefty account balances or who trade
frequently.

"This is not necessarily to reward our best customers," said Schwab
spokesman Dan Hubbard. "IPOs are for investors with experience in
these investments and who are active enough traders that they
understand what IPOs are all about."

Many on-line brokerages have formed relationships with investment
banks in the past year or so in efforts to get increased access to IPO
shares and, in fact, they report significantly increased offerings to
their customers.

But the allocations on-line brokerages receive tend to be small,
especially if the brokerages are not co-managing a deal.

"Even Schwab conceded that, on a good day, they only receive 2 percent
of an offering," said Richard Peterson, a market strategist at Thomson
Financial Securities Data in Newark, N.J.

And this lack of supply at on-line brokerages frustrates many of their
customers.

"It's pretty bad," said Scott Weiner, a 33-year-old investor who lives
in Lincoln Park and has accounts with E*Trade and Wit Capital Group
Inc. "I haven't gotten any [IPO shares] in a while. Every so
often I'll get 100 shares, but it's rarely the decent ones."

Retail investors who manage to get a crack at an IPO generally can
only land up to 100 shares. As well, most on-line brokerages have
rules to discourage customers from quick selling, or flipping--a
technique often used by institutional investors to capture the rewards
of first-day run-ups.

As investors clamor for IPO shares, on-line brokerages, in an effort
to get larger slices of share allocations, are moving into the
investment banking business. As underwriters on deals, they will
control share allocations.

E*Trade, for example, has a 25 percent stake in E*Offering, a year-old
on-line investment bank, and has rights to 50 percent of all shares
offered in IPOs underwritten by E*Offering.

Meanwhile, Schwab has linked up with rivals TD Waterhouse Group Inc.
and Ameritrade Holding Corp. and three venture capital firms to create
an on-line investment bank to underwrite and distribute offerings of
information-technology and Internet firms. That enterprise will go
head-to-head with a number of existing on-line investment banks,
including Wit Capital, a leader in the area, and WR Hambrect + Co.,
which has rolled out a new IPO process designed to be more accessible
to individual investors.

Based on a Dutch auction system, the firm's OpenIPO uses a
mathematical model that treats a bid from an individual the same as a
bid from a large institution. Individuals and institutions offer to
buy a number of shares at a price they specify; bids are ranked, and
winning bidders all pay the lowest price that completes the
subscription of the offering.

In its first three auctions, individual investors won 40 to 50 percent
of the available shares, said spokeswoman Sharon Smith.

The underlying idea behind opening access is that the opening price
will better reflect what the market will bear, theoretically reducing
the size of a first-day trading run-up that benefits traders, rather
than the issuing company.

Only three deals have been completed with the OpenIPO process, all
last year, and many observers see the method as a marginal development
so far in the IPO world, but one worth watching.

"Potentially, it's pretty attractive as a way to level the playing
field," said Morningstar's Dorsey. "The difficulty is {hellip} the
deal flow is not there yet," he said.

Investor Maruca participated in two of the auctions, winning small
stakes in Ravenswood Winery and Salon.com, an Internet-content
company. He still holds both stakes, and while neither has taken off,
he is content to wait and see.

"I'm retired, so I'm not a whiz-bang speculator," said Maruca, 67, of
Vineyard Haven, a town on Martha's Vineyard, Mass. The IPO shares
constitute only a small part of his diversified portfolio.

And he hopes to participate in another OpenIPO auction in the future.

"It kind of gives capitalism a good name," he said.