Setting the price on most IPOs is very tricky - get it too low and the company is mad at you; set it too high and the offering flops. You have to balance retail demand and institutional demand - and if there is mainly retail, then the price typically doesn't pop much.
Just do a Dutch auction like Google did. Let everyone bid for however many shares they want, and the lowest bid that clears the number for sale is the price. All bids above that bid get the low bid, and the bids below the low bid get nothing. Then the market sets the price, not the underwriters.
Underwriters are also on the hook for any material misstatements in the prospectus - so they and their attorneys actually do significant due diligence on the company.
Is this worth $165 million? Attorneys who have done IPOs as a career can crank out prospectuses easily - that's why many of them sound exactly the same, other than about 5 pages of business description. It takes time to check the numbers and relationships, but is certainly not that difficult.
They only look easy.
They could easily have put out a FB prospectus online, and said to all brokeage institutional and individual customers, go ahead, we're selling 500 million shares, the lowest bids that clear 500 million shares (and have the cash in the account) will get allocated one week from today. After that, it's just a distribution network. What's so hard about that?
Hambrecht tried to introduce an "open IPO" process - it failed miserably:
So make it a law, if you want to IPO that's the way to do it. Institutional investors shouldn't need hand holding - evaluating deals is their job. And individuals that can't figure it out probably shouldn't be investing in IPOs.
The reason it might not work without intervention is the strangehold the large brokerages have on the process. They don't want to give up a big money make cash cow which lines their pockets, but adds minimal value. Look at FB on Friday, was it worth $165 million to screw up the pricing as they seem to have done? Mandate that the market set the price in a Dutch auction, and any entity that wants to bid can buy up to X% of the offering. And the brokerages (who serve as distribution) get some nominal brokerage fee - because all they need to provide is the distribution network, the rest of their so called "value add" in the IPO process is not that valuable. |
