February 15, 2005
IPOs and Frank Quattrone
Posted by Victor Fleischer

This semester, I'm teaching a seminar called "Regulating Wall Street." It's really about the regulation of financial intermediaries, but if I called it that nobody would take it. Today, we'll be talking about the underpricing of IPOs, using Frank Quattrone as a case study. I was in practice during the dot-com bubble, and I remember being astonished by the huge pops that companies were getting on their first day of trading. Who in the world, I wondered, was setting the price?

Thanks to Christine's great article, which my students are reading for today, I now understand the process better than I did when I was in practice. (I was in the tax department, and IPOs are incredibly dull from a tax point of view, so I didn't have to know much about pricing. The bond offering pricing process is actually much more interesting from a tax point of view because of something called OID, or original issue discount.)

At the time, I remember thinking that with issuers leaving so much money on the table, that value had to be going into someone's pockets. At the end of the day, it seems to be going mostly to underwriters.

But lately I've been intrigued by the notion that maybe issuers got something out of it after all. First of all, without underpricing they'd probably have to pay more to the underwriters to get the offering done and to get the price support they want after the IPO. Second, the first day pop was as a great marketing event. Huge first day pops generated buzz in the financial press and garnered attention for the company. Since many of these companies were engaged in fierce battles for on-line advertising, buzz was especially important.

Next week we'll be discussing the Google IPO, which is the subject of an Article I'm working on. My thesis is that the Google IPO, which was heralded (by Google) as a model for making IPOs more fair and democratic, did nothing of the sort. Whatever the original intentions of the founders, the actual offering was not especially democratic, and the insiders appeared to have conciously generated a 15% pop. Was the Google IPO a failure? Only in the narrow sense that it failed to solve the underpricing problem. It was successful in generating buzz, which was not an easy task in the post-Bubble era. And it allowed Google insiders to appear to thumb their noses at Wall Street without actually doing so.

The Google IPO, in short, was great marketing event. More on this next week.

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