Figure

Long-term relative performance of initial public offerings Source: Prof. Jay R. Ritter, University of Florida, 2001.

over the Web. By the end of the year, the firm had sold 860,000 shares to 3,500 investors, and had raised $1.6 million, all without an investment banker. This was admittedly a small IPO, but a low-cost one that was well-suited to such a small firm. Based on this success, a new company named Wit Capital was formed, with the goal of arranging low-cost Web-based IPOs for other firms. Wit also participates in the underwriting syndicates of more conventional IPOs; unlike conventional investment bankers, it allocates shares on a first-come, first-served basis.

Another new entry to the underwriting field is W. R. Hambrecht & Co., which also conducts IPOs on the Internet geared toward smaller, retail investors. Unlike typical investment bankers that tend to favor institutional investors in the allocation of shares and determine an offer price through the bookbuilding process, Hambrecht conducts a "Dutch auction." In this procedure, which Hambrecht has dubbed OpenIPO, investors submit a price for a given number of shares. The bids are ranked in order of bid price, and shares are allocated to the highest bidders until the entire issue is absorbed. All shares are sold at an offer price equal to the highest price at which all the issued shares will be absorbed by investors. Those investors who bid below that cutoff price get no shares. This procedure minimizes underpricing, by allocating shares based on bids.

To date, upstarts like Wit Capital and Hambrecht have captured only a tiny share of the underwriting market. But the threat to traditional practices that they and similar firms may pose in the future has already caused a stir on Wall Street.

Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.

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