Building The Perfect Shareholder
Internet investment banks have a problem, and its name, at least symbolically, is Mark L. Walsh. The CEO of Web publisher VerticalNet Inc. has a tart assessment of the shareholders most likely to be drawn to initial public offerings over the Web: "Ralph from a trading room in Detroit," he sneers. Like many other CEOs, he worries that he could end up with fast-trading shareholders who would handicap his efforts to build a company by slamming his stock around like a Ping-Pong ball.
So backers of e-IPOs are beginning to develop a fascinating new twist to their pitch: Use the Net to build the perfect shareholder. Advocates say Net banks can take advantage of the unique characteristics of the Web to match specific people to stocks they're likely to hold for the long term--just as Amazon.com Inc. can use information about old book purchases to recommend summer reading. "We're trying to find the person with a natural reason to hold the stock," says Daniel H. Case III, CEO of San Francisco investment bank Hambrecht & Quist.
So far, proponents are taking only the most basic steps toward building the perfect shareholder. Hambrecht and online investment bank Wit Capital Group Inc. weed out "flippers"--those who sell shares days after an IPO--by refusing to let them buy stock in other IPOs for 60 days or so. Net banks also target an issuer's customers and partners. For example, Hambrecht sold shares in the music site MP3.com to musicians whose work is available on the site. And Wit used a mailing list from Physicians Online Inc. to pitch a medical company's IPO. "Creating a relevant shareholder base is Wit's whole proposition," says Susan Berkowitz, Wit's senior vice-president for marketing.
Whether these early efforts will be successful is still uncertain. Case figures that Hambrecht & Quist can get 10% more money for companies going public by using the Net to find individual shareholders willing to pay top dollar for a certain company's stock. But it's not at all clear that Net banks are getting more loyal shareholders. Even though Wit requires clients to hold shares they buy for at least 60 days, 18% don't comply with the rule.
To find shareholders more loyal than that, Net banks have to move beyond the basics. What E*Offering, Hambrecht, and others want to do is use sophisticated data-mining to match investors and stocks. For example, an investment bank preparing an IPO for a PC manufacturer could trawl through its retail brokerage accounts to pluck the 60-year-old Iowa woman who loves PC makers and has never sold a single share in such companies. That kind of data-mining is the competitive advantage traditional banks such as Salomon Smith Barney would have the hardest time matching. But the e-IPO firms aren't using it yet--largely because they're worried about a backlash over privacy.
FAT AND HAPPY. Such privacy concerns probably are surmountable. Georgetown University business professor Mary J. Culnan says that consumers typically won't object to such data-mining techniques if they're convinced they're getting something worthwhile for surrendering personal information. In this case, that means persuading them they'll profit if Net banks like E*Offering help them pick stocks.
The technology for such data-mining also needs refinement. Most difficult, successful database marketing requires that you understand the patterns that connect different kinds of financial decisions. That's particularly tough since IPO returns can be large enough to change people's habits. "I haven't made a trade in nine months," says University of Iowa business professor Todd Hogue. "But if I had an IPO with a 300% return in one day, I can't say I wouldn't sell it."
The biggest reason this e-IPO revolution hasn't hit, however, may be that the would-be revolutionaries are a little too fat and happy. Through Labor Day, the $30.1 billion raised in IPOs this year was up 39% from the same time last year. With so much business to go around, the new investment banks have been sharing with traditional banks more than competing against them. Aggressive moves to change stock underwriting may have to wait for a market where there's not quite so much business to go around.