January 10, 2005
Morningstar's IPO Auction
Posted by Christine Hurt

Morningstar's IPO Auction

Saturday was a fairly big news day in the corporate law world (see, Enron), but two of the most interesting stories to me were on B3 in the NYT. I am very excited to see the first big post-Google IPO auction. Morningstar, an investment research company, is planning to go public using an Internet auction, with W.R. Hambrecht + Co. as the lead underwriter. Hambrecht + Co. is the main player in this niche industry and uses its OpenIPO auction platform to conduct auctions, including Google's IPO auction and the IPO and follow-on auctions of other companies, such as Overstock.com, Red Envelope, and Peet's Coffee and Tea.

Many of the other companies that Hambrecht has brought to market through the auction platform are companies that you would expect to be more cutting-edge: West Coast companies and internet-based companies. However, Morningstar is a Wall Street player with long-standing connections with traditional investment banks. The company itself is a seasoned company with a business plan that is easy to analyze and understand. Therefore, Morningstar's interest in doing an auction IPO is notable, particularly in light of the fact that Morningstar abandoned lengthy discussions with Morgan Stanley after that investment bank continued to push for a run-of-the-mill bookbuilding offering.

I'll be watching to see how this IPO unfolds. As has been discussed here before, Google's use of the auction democratized access to the auction, but did not fully open up the pricing of the IPO shares. In a true Dutch Auction, the bidders set the value of the shares (sometimes within a range), and the shares are priced at the highest number at which all shares are sold. In these types of auctions, there is no IPO "pop," because the original IPO share price was the price that the market would bear, and no less. In the Google IPO, however, there was an 18% pop, an almost predictably average pop in bookbuilding IPO. Of course, the Google IPO was almost bizarrely idiosyncractic -- in the weeks leading up to the IPO, analysis went from hysterically exuberant to a backlash of anti-Google hype. A true auction could have let loose an unpredictable windstorm of investor sentiment. Morningstar, however, is more of a known quantity with a fraction of the non-professional investor interest; let's see if the Morningstar auction is any different.

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