Wall Street prides itself on ginning up new financial structures. In some cases, it almost requires a Ph.D. in nuclear physics to figure some of this stuff out.
However, as for IPOs, there has been little innovation over the years. In fact, the traditional IPO is very straightforward: An investment bank -- or group of banks -- and the company go on a road show, get indications of interest, and come up with a final price for the offering. It is usually less than the market value -- so as to create a "pop" on the first day, thus encouraging investors to participate.
Recently, Wall Street has been working its creative magic on IPOs. The latest invention: the IDS (Income Deposit Securities). It's a structure common in Canada and is making its way into U.S. markets.
An IDS is meant for mature companies that generate solid cash flows. To this end, the security consists of two parts: common stock and a subordinated note. The company passes much of its cash flows through a dividend on the common stock and interest on the note.
With the lower tax rates for dividends, it is intuitive that income investors would be interested in IDSes.
Last year, Volume Services (AMEX:CVP) was the first IDS to go public in the U.S. The company is a cash cow, as it is a provider of concessions, catering, and merchandise services to sports facilities, convention centers, and entertainment facilities throughout the U.S.
The stock was priced at $15 and is now trading at $13.55.
So what went wrong?
Well, the bankers may have been too aggressive. For example, it is unclear whether the Internal Revenue Service will agree to the ultimate tax treatment of the IDS.
Last week, another IDS, American Seafoods Group, was supposed to go public but then decided to postpone its offering.
But IDSes are not the only complex IPO formulation. IPO complexity may also be a problem for the year's most high-profile offering, Google. The Dutch auction is new to investors, and there appears to be much frustration from investors. Bill Mann recently wrote a story on the inherent problems with the offering.
Sometimes tradition is not a bad thing. Companies such as Starbucks (NASDAQ:SBUX), Microsoft (NASDAQ:MSFT), and eBay (NASDAQ:EBAY) launched their IPOs the old-fashioned way. Maybe it's time to just make things simple again.
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Fool contributor Tom Taulli is the author of The EDGAR Online Guide to Decoding Financial Statements. He does not own shares in any of the stocks mentioned.
