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Success in Pricing IPOs Is Measured in Different Ways


Believe it or not, it was once considered not only rare but downright embarrassing when an initial public stock offering, or IPO, rose 200% or more in price on its first trading day.

A move like that was seen as a sign that the stock was priced far too low in the offering, cheating the company out of additional cash to fund its growth.

Which also meant that the underwriter, who is paid large fees to successfully price and sell the deal, had failed to do its job for the company, said Tom Taulli, an analyst with IPO Monitor, a data firm in Calabasas.

Those days are going, going, gone.

IPOs like the recent one by, which was priced by its underwriter at $9 a share--only to soar to $97 in the first hours of trading--are instead hailed as huge winners.

"Especially in the world of Internet companies, having a 200% gain or more on the first trading day is now considered a hallmark of a great IPO. It creates a good image for the company," said Taulli. "There is so much placed on perception."

Dramatic price gains on an IPO's first trading day naturally generate an immediate buzz. Although the company's proceeds in the deal total just what the initial investors pay for the stock--not what buyers pay once the shares begin trading--the company makes headlines and immediately becomes well known, which in the long run is seen as financially beneficial in terms of raising additional money.

What's more, the initial investors get rich, and the underwriters, while not earning as much as they could have had the deal been priced higher, suddenly become known as IPO gurus, Taulli said.

On Nov. 13,, a New York company that helps members create their own home pages on the Internet, set a record for a first-day IPO when its stock surged from an offering price of $9 to close at $63.50 a share on Nasdaq, for a 606% gain.

Orders from individual investors are the main force pushing IPOs up so much on their first day of trading, experts say. With Internet stocks red hot in recent weeks, many individuals apparently put in so-called market orders for The- on its first trading day. A market order instructs a broker to buy a stock at the prevailing price--regardless of how high.

Demand for was so strong that traders were able to open it at $90, or 10 times its IPO price. The stock reached $97 that morning.

"There's no rational explanation for it," said one investment banker. "It's a retail phenomenon. That morning, CNBC was mentioning the deal every half hour. People throw caution to the wind and put in orders to buy at any price."

But as those retail orders were filled, the price declined for most of the day and ended at $63.50. Since then, the price has slid further. The stock ended at $45.31 on Friday.

Setting the IPO Price

Meanwhile, the initial investors who got the stock at $9 through lead underwriter Bear, Stearns & Co. are "gone by midafternoon the first day," said one banker.

Still, even at Friday's close, is valued at five times its IPO price. Which begs the question: How does an underwriter set that initial share price to be fair to the company and its investors?

With an established, profitable company, underwriters try to value the stock relative to others in its industry. The underwriter also relies on input from the institutional investors who express interest in the IPO during the "road show," when the company is presented to potential investors.

But because many technology and Internet-related companies that go public aren't yet profitable ( has lost $11.5 million so far this year), it's difficult to price such IPOs using any standard financial model, said David Menlow, president of IPO Financial Network, a New Jersey data firm.

Rather, many are priced based on expectations of future revenue growth, from one to five years out.

Yet at $9, was priced well below its original expected range of $11 to $13 when the deal was scheduled for mid-October. That range was cut to $8 to $10 because underwriters found potential investors balking. The deal then was postponed altogether--only to be revived by mid-November as the Net sector got hot again.

Bear Stearns declined to comment on the deal because the stock still is in the Securities and Exchange Commission-imposed "quiet period," when company executives and underwriters can't say anything that could be interpreted as touting the company.Esther Loewy, a spokeswoman for, said executives there also could not comment.Precisely because Net stocks had been so hot in the days leading up to the's offering, it might seem logical that Bear Stearns could have raised the IPO price range for the 3.1 million shares offered. Even a $10 offering price would have raised 11% more capital for the company.

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