IPO reading 2 - Political Capital Politics Policy Let...

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Political Capital Politics & Policy Let Capital Markets, Not Financial Firms, Govern Fate of IPOs By Alan Murray 897 words 10 September 2002 The Wall Street Journal A4 English (Copyright (c) 2002, Dow Jones & Company, Inc.) IT HAS BEEN 13 YEARS since the fall of the Berlin Wall, and 11 since the collapse of Gosplan, the Soviet economic planning agency. So isn't it finally time to get rid of rationing on Wall Street? The U.S. capital markets are the most sophisticated, deep and efficient the world has ever seen. But when it comes time to distribute shares in new public companies, the financial whizzes revert to a system that would make Stalin proud. To each according to his clout. It is a system that let WorldCom Chief Executive Bernard Ebbers pocket $11 million because he had access to 21 "hot" initial public offerings from Salomon Smith Barney that were out of the reach of ordinary investors. The narrow question being asked by investigators for the House Financial Services Committee is this: Did Mr. Ebbers throw his company's investment-banking business to Salomon Smith Barney because of these sweet IPO allocations? If so, they are kickbacks. But the bigger question Wall Street should be asking is: Why in the world are the world's pre- eminent capitalists rationing IPO shares in the first place? When the price of a stock jumps to $20 from $10 in the first day of trading, reaping instant profits for the lucky few who have been allocated shares, the investment bankers celebrate a "hot" offering. They ought to have their bonuses rescinded, for doing a poor job of pricing. Apologists say pricing a new issue is more "art" than "science." That might have been true 20 years ago; today, it is hogwash. As William Hambrecht, CEO of WR Hambrecht & Co. has demonstrated, today's technology makes it perfectly possible to use auctions to find the market price of a new issue. WALL STREET VETERANS whose views I respect (and who have asked that their names not be used in my rant) argue there are subtle benefits from the current IPO system. Much of their argument centers around marketing. Greasing the palms of "distinguished" investors such as Mr. Ebbers, and creating a "buzz" around a "hot" stock, may help companies going public for the first time get attention they desperately need.
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Moreover, these veterans note, there seems to be no pressure from the companies issuing IPOs to do it differently. These companies, after all, are the ones being short-changed by the process. If their shares double in a day, that is money they have left on the table. But taking a company public is a big, one-time decision, fraught with uncertainty. As a result, issuers haven't been inclined to shake up the system. Mr. Hambrecht's efforts to persuade companies to issue IPO shares by dutch auction have had only modest results. "It hasn't been easy," he confesses. Says investor advocate Nell Minow: "If you are 25 years old and operating out of your garage and somebody offers you tens of millions of dollars, are you going to quibble?" So if the people being shafted by the current system don't care, why should I?
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