Fickle financing for tech IPOs

While love and romance may endure forever, relationships in the world of finance often are fleeting.

Richard Peterson
3 min read
Back in the '60s a popular song was, Will You Still Love Me Tomorrow? While ephemeral relationships may be the price some are willing to pay for love, in the business world one hopes that ties of commerce will be more enduring.

Yet, some tech companies, given the treatment they have suffered at the hands of their investment bankers, might well be singing The Shirelles' words. While love and romance may endure forever, relationships in the world of finance often are fleeting, as witnessed by Credit Suisse First Boston's recent grab of Deutsche Bank's high-tech banking team, led by Frank Quattrone.

A survey conducted by the Autex Group's BlockDATA tracking service reveals that, sometimes, the banker that took you public doesn't stick around for the trading. Furthermore, the book manager of the IPO sometimes walks away from supporting the stock in the aftermarket, even for issues that rank among the best-performing. For example, Rambus last year was ranked as the top-performing high-tech IPO, with a gain of 281 percent, according to Securities Data.Yet Morgan Stanley, the firm's banker on its IPO, ranks only fifth in terms of the stock's block-trading activity during the five-month period ending last May, according to BlockDATA. Instead, the firm handling the most Rambus block trades was a comanager on the deal, Hambrecht & Quist. Next in line was Schwab/Nash Institutional.

Similarly, Netspeak, whose IPO was led by the firm of Josephthal-Lyon, has been hard-pressed to find support from its banker--despite ending last year as one of a handful of tech IPOs that more than doubled in value from its offering price. Overall, the firm gained about 187 percent last year, yet in all reporting periods this year, Josephthal came in no higher than eleventh among institutional traders who handled Netspeak trades, with no disclosed trades at all during May. Instead, Raymond James consistently has performed more than a quarter of Netspeak's block trades this year.

Some market relationships go through ups and downs. Daou Systems closed last year as the fifth-leading high-tech IPO performer, with a gain of some 247 percent. Its book manager, Alex Brown, aggressively supported the stock during March, with twenty block trades representing more than one-fifth of all such trading. The following month, however, Alex Brown's advertised trade volume of Daou Systems shares slipped to fourth place, with Hambrecht & Quist stepping in as the top institutional trader of the shares during April. Soon after in May, Alex Brown jumped back in as the top block trader of the shares.

On the other hand, frequent suitors sometimes push aside relationships. For example, Yahoo's investment banker, Goldman Sachs, recently has seen its share of institutional trading in Yahoo shares give way to the likes of Schwab Nash, Merrill Lynch, and Fidelity Capital Markets. This suggests that, by way of mutual funds, more retail investors are flocking to the shares than institutions.

Finally, like couples who go on to celebrate silver, golden, and even platinum anniversaries, some connections continue for extended periods. A case in point is Amazon.com, whose block trading consistently has been dominated by its investment banker, Deutsche Morgan Grenfell. In fact, though DMG has averaged about 20 trades or so per month--far fewer than Yahoo's second-leading block trader, Schwab Nash, with an average of 100 per month--DMG has handled over 2 million shares in block trading per month compared with Schwab's estimated 1.5 million.

The bottom line for companies is that sometimes the ties that bind last, while others fade away.

Richard Peterson writes regularly about high-tech IPOs in Marketwise.