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Andover.Net success boosts OpenIPO concept

To Andover.Net and investors, last week's IPO is a huge success and seems to redeem a novel approach to allocating coveted IPO shares.

When shares of Andover.Net more than tripled on their first day of trading last week, institutional investors and company employees weren't the only winners.

Under a unique method for launching initial public offerings, individual investors also were able to obtain shares at the offering price of $18 and watch them surge to more than $63 within a day.

For underwriter WR Hambrecht, Andover.Net's success seemed to redeem a novel approach to allocating coveted IPO shares. Two previous efforts had been far less spectacular. However, at least one institutional investor who missed out on the run-up believes the process was flawed.


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Underwriters typically deal only with institutional investors when lining up buyers for a new stock. But under WR Hambrecht's format, called OpenIPO, individuals are allowed to bid on shares prior to public trading.

Specifically, investors in the OpenIPO can submit bids with the price they are willing to pay and the number of shares they want to buy. WR Hambrecht then tallies up the highest bid price that will result in the sale of all the shares being offered.

As a result, an individual who is willing to pay the same price as a large, institutional investor can acquire the shares.

OpenIPO is intended to raise the most money possible for the company that is going public while giving individual investors an equal shot against institutional investors. This "Dutch auction" process is among the latest techniques investment banks are using to give individual investors access to IPO shares.

Another method that is gaining acceptance calls for lead underwriters to allocate a portion of a traditional IPO to customers of brokerages such as E*Trade, Charles Schwab and Ameritrade. In these cases, a random drawing is used to determine the "winners" of the stock.

Critics have said the OpenIPO process deflates some of the potential for a big jump on the first day because the individual investors have been allowed into the bidding process prior to the public launch. But Andover.Net's success proved otherwise.

"People don't realize that the Dutch auction is innovative and new. Some people think they get screwed out of a deal. It gives them a chance, but not a guaranteed chance," said Jeff Hirschkorn, senior analyst with IPO.com. "I think the OpenIPO concept is successful because it measures demand [among individual investors] before it goes out."

The Andover.Net IPO did result in a large first-day gain that proved profitable to the individual investors who bought shares at the offering price. However, two previous attempts were not so rewarding.

Web publisher Salon.com closed at $10 a share on its debut, down from its offer price of $10.50. Ravenswood, a California winery, closed its first day of trading at $10.88 a share, up slightly from its offer price of $10.50.

Peter Phelps, chief financial officer of Andover.Net, said his company selected the OpenIPO process because it wanted Linux developers to be part of the IPO.

According to Phelps, Andover.Net shied away from a traditional IPO because of snafus associated with allocating IPO shares to developers in the Red Hat IPO.

As a result of the Dutch auction, the company could have priced its shares at $24. Instead, the company elected to price its IPO at $18 a share, the high end of its previously announced range. The move cost the company $24 million, said Phelps.

"The price people were willing to pay kept going up and up. We had already raised our range once and if we filed again, who knows where the markets would be and whether we'd be done before the holidays," Phelps said.

He added that although the process was handled in a Dutch auction format, the IPO wasn't a pure Dutch auction because Andover.Net elected to price the deal lower than the $24 clearing price.

Sharon Smith, a spokeswoman for WR Hambrecht, said Andover.Net's prospectus states that it has the discretion to price the IPO at its choosing. She added that Andover.Net has been the only one of its three OpenIPO clients to use the option.

Phelps, as well as executives from Salon.com and Ravenswood, said their firms were pleased with the OpenIPO process.

Todd Hagen, Salon.com's chief financial officer, said the OpenIPO process allowed his company to maximize the amount it raised and he does not attribute the stock's after-market performance to the method.

Meanwhile, Ravenswood, which also priced at $10.50, currently trades at its offering price.

Callie Konno, chief financial officer, said that the Dutch auction may have reduced the potential for a big gain on the first day of trading. However, the company considers the IPO a success because the winery was able to receive the full value for its shares under the process.

Although Andover.Net's IPO appears to be a strong endorsement for WR Hambrecht's system, not all investors were impressed.

One institutional investor said that although his firm was successful in snapping up shares in the two previous WR Hambrecht OpenIPOs, this time he felt his firm was "steered away from the deal" by receiving misleading information.

Prior to bidding on the Andover.Net deal, the investor said his firm received guidance from WR Hambrecht on how high the deal was likely to price.

"We were told to stay within 20 percent of the high range and that would allow us to be part of the deal," said the investor, who asked not to be named.

Because the deal was expected to price at $18, the investor believed a bid of $21.60 would be sufficient. Instead, the clearance price was set at $24.

Joe Carberry, a WR Hambrecht spokesman, said that if such guidance was provided it would be a violation of company policy.

"The only policy and practice by the institutional sales people is to state the range that's in the prospectus," Carberry said.