May 04, 2005
Morningstar's Auction IPO
Posted by Christine Hurt

Yesterday, Morningstar's auction IPO was executed flawlessly, using Hambrecht+Co.'s OpenIpo platform.  You can see the details here.  Morningstar is the second company to go public using an auction format since Google went public last August.  I am a big proponent of the auction IPO, which avoids abusive underwriting practices of underpricing shares and allocating those shares to cronies, letting IPO recipients make profits in the first few days, rather than the issuer.  I analogize to having a real estate broker tell me to accept an offer on my house today because the offer is a good one, only to find out that the broker then resold my house for the buyer the next day at an average 18% profit.

Unfortunately, I am becoming cynical on the future of auction IPOs.  Hambrecht has hosted about one or two auction IPOs a year since 2000 -- not exactly a sea change at this point.  One Catch-22 about auction IPOs involves the fact that in an auction, the final offering price should capture the entire market demand.  Therefore, when shares begin trading in the aftermarket on the first day, the price should not fluctuate.  Unfortunately, Wall Street views this as an IPO failure.  For example, in Motley Fool's article about the Morningstar IPO, it criticized the Bank of Internet IPO in March because the offering price was $11.50, and the closing prices for the next few days were $11.50, $11.52, and $11.50.  The article implies that this proves that the IPO was not "well-received in the market."  On the other hand, it saluted the Morningstar auction for having a small but respectable pop on the first day ($18.50 to $20.05).  However, the catch is that if the pop is too big, like the Google 18% pop, then Wall Street will charge that the auction was a failure on its own terms.

Many have charged that the biggest stumbling block to auction IPOs is the Wall Street machine of investment banks and analysts.  Auction IPOs will not be covered heavily by analysts if the investment banks are circumvented.  Hmmm.  Maybe that's why the Morningstar IPO was covered in the WSJ on page C17.

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