An IPO for Everyone
According to the cofounder of investment firm Hambrecht
Investment pioneer Bill Hambrecht foresees an entirely new way for companies to go public. His vision amounts to nothing less than an IPO revolution -- for founders and investors alike
It's no surprise that small-business owners today view initial public offerings with a jaundiced eye. Blame it on the dot-coms. Many acted as if doing an IPO in record time was their primary reason for being in business. And with so many dot-com failures all around us, the heady era of IPOs has come to a sudden end. -- Not so fast, says investment pioneer Bill Hambrecht. He believes the IPO game will change dramatically in the next decade or so. So dramatically, in fact, that thousands of small-business owners who never before considered going public could soon enjoy IPOs of their own. Consider it a sort of democratization of the IPO market. Small businesses with real products, real services, and real earnings will be greeted with open arms by a waiting investor public. But hold on. Can this be the same IPO market we've watched with equal parts envy and scorn during the Internet era? -- In fact, no. Hambrecht foresees the opening up of an entirely new market for IPOs, thanks to a Web-based version of what's known as a Dutch auction. (In a Dutch, or descending-price, auction, the price of a sale item opens high, then falls until it meets a responsive bid.) Assuming he's right, the rules for taking companies public will change utterly. -- Hambrecht's firm offers a variation on the Dutch auction, which he calls the OpenIPO. Its chief virtue is that bids from individuals are treated the same as bids from institutions. First, WR Hambrecht & Co. -- acting on behalf of a client company going public -- uses the Web to accept investors' bids for shares of the IPO. Next, the underwriter and the client company examine the bids, and the company decides the price at which it wants to go public. All qualified investors who have bid at or above that figure are allowed to buy a proportionate allocation of the stock at the IPO price. -- By contrast, in traditional IPOs, underwriters allocate IPO stock to institutional investors and select individuals, who buy it at a discounted price before it begins trading in the public market. -- To be sure, not every small business will suddenly be able to go public under Hambrecht's approach. But if your company meets certain, fairly basic qualifications, Hambrecht says, it could be a contender.
But who is Hambrecht, you ask, and who put him in charge? For starters, he's a cofounder of investment bank Hambrecht & Quist, which was acquired by Chase Manhattan, now J.P. Morgan Chase & Co., in 1999. Hambrecht has also invested in, and helped take public, many high-tech innovators, including Apple Computer, Genentech, and Sybase. Most recently, he founded WR Hambrecht & Co., a financial-services firm that offers the OpenIPO approach to entrepreneurs and investors.
Hambrecht, 66, discussed the changes coming to the IPO market with Udayan Gupta, an Inc contributor and the editor of Done Deals: Venture Capitalists Tell Their Stories (Harvard Business School Press, 2000).
Is there a new IPO paradigm?
There are many companies out there waiting to go public in a new structure and a new setting. I'd bet there's a huge number of companies, probably as many as 10,000, that are good enough to go public over the next decade.
How would a Dutch-auction IPO work? Where did the idea come from?
All investors get the share price they're willing to pay or lower. But by the same token, if there are six bidders out there and they're all professionals, none of the six can say, "I got a better deal than the other five." You've got to protect investors because you want them back every day. What is material to me as a buyer is that I get the IPO stock at the same price as the other guy does, and I don't look foolish.
I remember going to Amsterdam and looking at the flower auctions. I asked the flower growers why they sold flowers with a descending auction, and they answered that the buyers are all professional people: they do it for a living; they buy for the accounts of other people. I realized that, like flowers, an IPO is very perishable. You have to get rid of an IPO very quickly, or the demand will fade. And as in the flower market, most of the buyers are professional; you have to make them look good.
As I got into it and began digging, I realized a lot of academic work has been done on the subject. In Israel they've been doing Dutch-auction IPOs for decades.
How does pricing work in a Dutch auction?
In a hermetic environment, a Dutch auction should price IPO shares about 3% below what the highest bidder is willing to pay. Therefore, investors should have some more dollars to spend. But we found we don't deal in a hermetically sealed market, so 3% isn't enough. Instead, we found that the right discount price is somewhere between 10% and 15% -- enough to make the buyer feel really good, but not enough to make him flip.
That fits in very well with the original intent of the discount, which is to make you a long-term buyer and a happy shareholder.
Companies aren't interested in getting the absolute maximum dollar amount for their stock. They want a happy bunch of shareholders. And they're more than willing to give away a modest discount if that will start shareholders off on the right foot.
What new kinds of companies can go public through OpenIPO?
To go public, you have to have a successful business model that's going to survive over the long pull. Strong brands generally have that. Normally, a strong consumer brand or a strong business brand has value under any circumstance. So we look hard in the branded area.
There are a lot of personal-services companies that build up a franchise and that can be very attractive. But the business has to have gone beyond one person's ability to do business, and it has to have evolved either brand value or franchise value, or have a position in the marketplace as a permanent player. And if you're going to have a growing business and a permanent business, you have to be pretty geographically spread out -- both in the United States and abroad. You really have to know how to do business in the world markets.
You also must have people with business sense. It's the vision of management, more than anything else, that determines how a company is going to do. Good management comes in very different packages, and what you have to do, of course, is to look at the key players' record, their background. Are they people who know how to run businesses? Are they people who know how to build businesses? And if they're real young, it can be a real problem -- the way it was in the Internet space. Many of the really good ideas were generated by the young technology people. But they just didn't know how to run a business.
