As investment research firm Morningstar Inc prepares to launch the first high-profile auction-based IPO since Google Inc's deal last year, the chief of one company that pulled out of that route said he's not surprised auctions haven't found more followers. Marty Manley, chief executive of online bookstore Alibris Inc, had pursued an auction-based initial public offering last year but withdrew the offering of at least $25 million after it failed to gather attractive prices.
"There's some intuitive appeal to the idea that bids set your opening price rather than the judgement of bankers who are potentially self interested," said Manley.
"Our experience would say that the difference between an auction-style IPO and a well-executed regular IPO may ... be less than meets the eye," he said.
Morningstar, by contrast, had originally filed to use the traditional method to sell its shares to the public, but changed its mind in January.
When announcing the change, Morningstar Chief Executive Joe Mansueto said the auction offers "equal access to shares and information" to all potential investors, not just larger ones. It also hired investment bank WR Hambrecht & Co as its underwriter.
Hambrecht has championed auction IPOs since the late 1990s, developing its own patented OpenIPO process. But the method, which means smaller fees for bankers, has not gained wide support on Wall Street.
In a traditional IPO bankers use their own discretion to allocate shares and set the price. But in auctions, potential buyers submit orders for the number of shares they want to buy and the price they are willing to pay.
The final price is set at the highest level that sells all of the shares being offered - which typically maximises the amount of money an issuing company pockets and minimises the chance of a first-day pop for the shares.
After Google chose an auction for what was expected to be a $3 billion IPO, questions swirled as to whether the deal would usher auctions into the mainstream.
In the end, after bumps and lowered expectations, Google raised less than $2 billion through the IPO, which was managed by Morgan Stanley and Credit Suisse First Boston.
Alibris' Manley said auction-based IPOs can take away some incentive for potential investors to buy shares because they aim to eliminate first-day gains.
"It is risky to be the first bidder," Manley said. "You need to be paid for that risk, otherwise the view is I'll buy on the second day of trading when the price is established. If you want me to go first, you've got to pay me something."
Manley said he expects stocks to trade up 5 to 10 percent in their debuts. But he said he was not advocating huge jumps.
"If I were taking my company public and the stock went up 60 percent the first day, I would throw chairs out the window because that's the definition of an underpriced offering," he said. "That's a broken process."
That trend of day-one spikes in the 1990s, which left money on the table for issuing companies and gave favoured investors ensured gains, soured investors on traditional IPOs, he said.
In what Manley calls "well executed" deals, where bankers use their investor contacts to price IPOs where true demand lies rather than at an artificially low level, traditional IPOs can work, he said.
"It is possible that a well run traditional offering can be perfectly successful and well priced," he said.
Manley said he does not think Alibris' IPO would have been successful if they'd chosen the traditional method either. And he commended Morningstar for using an auction.
"Companies ought to look at an auction process and banks ought to look at an auction process," he said. "But at the same time, if you're a small company where there are going to be any kind of liquidity issues in getting your IPO off the ground, an auction isn't a silver bullet to solve that problem. And you better be clear that your first-round investors are taking risk and would want some compensation.