The IPO professionals are in agreement that this offering, which they have dubbed “IBK,” is a “hot issue.” They think it will have a good upside pop when it starts trading.
But consider this: Given the nature of structuring a Dutch auction, maybe not.
Including the first Dutch auction in the United States, which made its Wall Street debut in April 1999, there have been just 17 companies to walk that road so far. Most floundered in aftermarket.
{mosgoogle}Twelve Dutch auction IPOs closed their opening day above their offering prices, four closed below and one finished unchanged. A huge opening-day pop by the Dec. 8, 1999, Andover.net offering (UP 252.1 percent) would cause a major distortion in calculating an “average” opening-day gain; the mean average is more accurate. That is the mid-point between the top and the bottom performers. It is the Jan. 25, 2006, offering of Traffic.com (Nasdaq: TRFC). It was priced at $12 per share and closed its opening day at $12.15, UP 1.25 percent from its offering price.
Here’s what happened with the Andover.net deal, as reported by Red Herring’s “IPO Watch” column in October 2005: “On December 8, 1999, Andover.net, an Acton, Massachusetts-based operator of a network of Web sites, priced 4 million shares at $18 each. It closed its opening day at $63.38 per share.
“Informed sources said Andover.net’s ‘clearing price’ was well above its offering price. The issuer and the underwriters had a choice of running the deal out at a price lower than the clearing price or delaying the pricing date to file an amendment with the U.S. Securities and Exchange Commission to increase the price.”
In 1999, the IPO traffic was hot and heavy and the new-issues calendar had already launched five IPOs to trade on Wednesday, Dec. 8. There were another 12 IPOs lined up to trade on Thursday and Friday. Had the Andover.net deal been delayed, some believed that the Dutch auction IPO could have been lost in the new-issues stampede. The deal was priced and the winning bids got rationed on the number of shares each received -– nobody got their full indication of interest.
The Pricing Game
This brings up the next question: What determines how a Dutch auction gets priced?
After the bankers collect all the bids, the Dutch auction’s offering price is determined by the highest price it takes to sell all the shares. This is called “the clearing price.”
In a true Dutch auction, all bids higher than the “clearing price” have been absorbed in to the offering and there are no aftermarket orders on the table to drive the IPO sharply higher once it starts trading.
On the other hand, if the Dutch auction is priced below its “clearing price,” then expect an opening-day pop. This was the case with the Aug. 18, 2004, IPO of Google (Nasdaq: GOOG).
It was widely reported that Google’s winning bids were rationed to about 75 percent of their indications. The IPO popped in the aftermarket.
The deal was priced at $85 per share and started trading at $100.01, UP $15.01 or 17.7 percent from its offering price.
This brings us back to this week’s offering.
Interactive Brokers Group, also known as IBK, plans to offer 20 million shares at $23 to $27 each. Please note a 4-point spread has been the norm for all U.S. Dutch auctions. What will determine the aftermarket performance will depend upon the allocations — not its offering price.
Should investors get 100 percent of their indications, then expect a flat opening.
Should investors get anything less than 100 percent of their indications for IBK, then expect a pop.
As for a SCOOP rating, it’s your call.
For IPOScoop.com subscribers: Please check the IPO SCOOP Rated Calendar for the latest Street Consensus of Opening Premium ratings, and standby for IPO Alert emailings for any changes in those SCOOP ratings.
Stay in the loop with the IPOScoop.com
To learn what’s “hot” and what’s “cold” on the calendar, IPOScoop.com subscribers, please use your passwords for the SCOOP ratings. For others, we invite you to sign up for a 30-day free trial subscription. There is no obligation and you can cancel at any time.