Commentary: Pop! Goes The Offering -- Again

Conservative pricing and pent-up demand from investors are fueling jumps

One thing most investors sure don't miss about the late-1990s stock market boom is those first-day price pops for initial public offerings. Small investors were often burned, buying high as well-connected players who could get in at the offering price unloaded shares at huge profits. For startups, the memories are no better. They liked the buzz when their shares soared after going public -- then realized they had raised too little cash to survive the bust. Selling new issues for less than the market was willing to pay in first-day trading cost companies about $35 billion in 1999 alone.

Well, the pops may be coming back. Although the average first-day boost for the 66 IPOs this year that closed at $8 a share or higher has been a relatively modest 12.2%, some 14 companies have risen 25% or more. A few are even edging toward the look and feel of those frenzied boom days. Software-over-the-Web leader Salesforce.com Inc. (CRM ) gained 56% in initial trading on June 2, for example, while online jeweler Blue Nile Inc. (NILE ) rose 38% when it went public on May 20, and educational-software company Blackboard Inc. (BBBB ) booked a 43% hike on June 17.

Why are IPOs soaring again? In the case of Salesforce, a leader in the up-and-coming business for productivity-enhancing software, its IPO was the most anticipated tech offering of 2004 this side of search engine Google Inc.'s planned IPO. And though the company isn't talking, setting a conservative price was clearly in its interest: After Salesforce CEO Marc Benioff had been forced by the Securities & Exchange Commission weeks earlier to delay the deal following a lengthy interview he gave to The New York Times, there were clearly risks in setting a price so high that it might diminish enthusiasm for the stock. The $11-a-share price helped rekindle investor excitement and quickly turned talk away from Benioff's gaffe. But Salesforce paid dearly for the buzz: In selling 11.5 million shares for $11 instead of the $17.20 first-day close, it left about $70 million on the table.

That isn't likely to be fatal to the company or its investors. Finance professor Kent L. Womack of Dartmouth College's Tuck School of Business notes that shares in companies that enjoy a first-day pop of 10% to 60% perform better than other IPOs over the first year of trading. The worst performers are those that rise over 60%. Besides, leaving some cash on the table has its benefits. Womack says a IPO pop boosts trading volume and attracts analyst coverage.

In an otherwise sideways market, there's plenty of enthusiasm for IPOs. Mutual funds are taking risks on them because fat returns are harder to find than in 2003. Indeed, unlike the '90s bubble, institutions, not small investors, are leading the surges. Laszlo Birinyi Jr., whose firm Birinyi Associates Inc. tracks bulk trading, says early Salesforce trades came from big players, including one that bought nearly 10% of the offered shares in one trade. Institutions also led Blue Nile's jump in its first weeks, when shares doubled from the $20.50 IPO price.

There's another reason big public-offering pops are staging a comeback. Despite piecemeal reforms to tackle the abuses of the bubble years, little has changed. Issuers still make pricing decisions based on incomplete or flawed information: Investment banks and companies selling stock meet with dozens of institutions, collect orders for shares based on a tentative price range set before the roadshow, then set a price the night before an IPO. But at the end of the day, that still gives companies only a limited view of what price investors will pay or how high the issuer can push the price without risking the deal. As Salesforce quickly discovered.

By Timothy J. Mullaney

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