Ip Os: On The Outside Looking In

Brad Price was tired of hearing about how a lucky few were getting rich buying hot Internet stocks before their shares were bid sky-high. So the 30-year-old Souderton (Pa.) computer consultant opened accounts at E*Trade and Wit Capital, and placed orders for 100 shares apiece in six initial public offerings, including VerticalNet and MarketWatch.com. So far, Price has received only E-mail saying, "Sorry, sold out." The same goes for Rebecca Dru, a Los Angeles investor who has tried to buy IPOs online for a year. "Getting in on the bottom of an Internet stock is the fastest way to make money right now," she says. "It's very difficult for the average person to get in."

IPOs are the hottest things on Wall Street. With the average Internet IPO up 84% on its offering day last year, who hasn't watched with awe as ".com" confers instant riches on shareholders? But with online brokers saying on TV and in print that they'll help regular people get shares in offerings, plenty of investors wonder why they've been left out of the loop. "If you don't respond within 10 minutes of when the deals are posted, you don't have a chance," says Price.

Indeed, the odds are still overwhelmingly against the millions of small investors who dream of getting in on the ground floor of the next Yahoo! Sure, Charles Schwab, E*Trade, Fidelity, and a handful of other brokers that cater to mom-and-pop investors have deals giving them a seat at the table when the Street's power brokers divvy up IPO shares. But for now, online and discount brokers are receiving minuscule allotments. That can't come close to satisfying demand when some 60% of individual investors want IPO shares, says Gomez Advisors, an E-commerce research firm in Concord, Mass.

Just look at this year's crop of IPOs. Seventy-three companies went public through Mar. 31, according to Securities Data of Newark, N.J. In 24 of those deals, Schwab, Wit Capital, and others with programs to channel IPOs to individuals were listed as underwriters--the folks who buy and distribute the stock. But in each case, the total share allotment to these brokers was just 2%, on average. The real number may be lower. Jay Ritter, finance professor at the University of Florida, says underwriters of small portions of new offerings get less than what they sign on for because lead underwriters keep the majority for themselves. Brokers that don't act as underwriters are generally shut out altogether. "There is increasing talk about [IPOs and] retail investors, but it's more about marketing than anything else," says Manish Shah, publisher of IPO Maven, a research service following new issues (www.ipomaven.com).

BIG APPETITE. Take priceline.-com's Mar. 29 IPO. The company's filing with the Securities & Exchange Commission says E*Trade underwrote 5% of the 10 million-share offering--500,000 shares. But because the online broker distributes IPOs in blocks of 100 shares, at most only 5,000 of its more than 500,000 clients would have received shares. E*Trade did not return calls seeking comment.

Even Wit, whose name has appeared on more deals this year than any other discount or online broker, has failed to keep pace with the public's appetite for IPOs. "To date, we have been given only minimal share allocations in the offerings in which we have participated," Wit said in a Mar. 18 registration statement filed with the SEC for its own IPO, which it will help sell online. "We have experienced a high level of customer dissatisfaction."

How high? Wit declines to comment, citing SEC curbs on companies going public. But six weeks ago, Wit founder Andrew Klein told The Wall Street Journal that only 10% to 25% of his 17,500 clients who want shares get some of the stock they request.

Still, online and discount brokers are bringing some democracy to the IPO market. Schwab says 25% of its customers are eligible for IPOs. Clients must have $100,000 on deposit with the firm, or can get by with $10,000 if they trade at least 12 times a year. Wit says anyone who deposits the $1,000 needed to open an account is eligible. E*Trade requires investors to have enough in an account to cover the cost of 100 shares. But DLJdirect requires a $100,000 balance.

Behind the surge in retail demand for IPOs is the explosion of online trading. One in seven retail trades now takes place on the Net. Many firms going public also see an advantage in putting stock in small investors' hands--they're considered more loyal than institutions that buy shares only to sell them for a quick buck. A desire to distribute its IPOs online was behind Goldman, Sachs's purchase of 22% of Wit Capital on Mar. 29. Bill Burnham, who analyzes electronic commerce for Credit Suisse First Boston, notes that brokers are bypassing investment banks by going directly to companies planning IPOs for permission to distribute part of the deal. According to Burnham, one example is E-Loan's upcoming IPO.

If you're intent on playing the IPO game, you can take steps to give yourself a better shot (table). Wit Capital and E*Trade say they divvy up shares on a first-come, first-served basis. But Fidelity favors "customers who do more business with us, have been with us longer, and pay us on time," says Robert Mazzarella, president of Fidelity Brokerage Services.

If you have a significant net worth and trade frequently, you'll have a better chance of getting an IPO with a full-service brokerage firm, says Dan Burke, senior brokerage analyst with Gomez. The key is to have a relationship with a broker who gets IPO shares, he adds. But whichever route you take, know what you're getting into before you enter the IPO sweepstakes. John Markese, president of the American Association of Individual Investors, says to look for big-name underwriters with histories of bringing successful deals to the market. That information can be had from the investment bank. Investors should also read prospectuses filed with the SEC (available at www.sec.-gov) to assess management's experience and the company's risks and growth prospects.

If your prospect is a Net company with no earnings, look for a unique market niche, Shah says. Examine where rival stocks are trading, and make sure the final offering price isn't below the range in the preliminary prospectus. Otherwise, "there is a 50% chance the stock will start trading at or below the offer price," Ritter says. And "don't invest any money you can't afford to lose."

That's especially sound counsel in this environment. True, the average new issue rises 16% in its first day of trading, Ritter says. But of 3,521 companies that went public since 1993, 55% are trading at or below their offering prices, adjusted for splits, says CommScan, a New York research firm. Because E*Trade, Wit, and others blackball those who "flip" shares within 30 to 60 days of an IPO, forget about selling on day one for a quick gain.

Such risks are not deterring investors such as Price from trying to jump on the next hot offering. "I've read [Net] postings from people who have gotten IPOs after trying a number of times," he says. For now, they remain a lucky few.

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