Over the past year, companies like NYMEX Holdings (NYSE:NMX) and Fortress Investment Group (NYSE:FIG) have posted first-day performances of 60% or more on their IPOs. It's a good bet that individual investors didn't get shares of those firms at anywhere near their offering prices. Yet the recent Interactive Brokers (NASDAQ:IBKR) IPO, which used WR Hambrecht's OpenIPO platform, shows that sometimes, small investors can get a piece of the action.
OpenIPO allows any investor to bid on an offering's shares. The system then crunches the assembled numbers and comes up with a clearing price, at which supply and demand for shares achieve equilibrium. Any shareholders who bid at this price or above are guaranteed an allocation of the IPO.
In the Interactive Brokers IPO, the clearing price was $33, but the company priced its shares at $30.01 per share. I think the price cut was a way to reward shareholders who participated in the offering. On the first day of trading, shares of Interactive Brokers topped out at $34.25, ending the day at $31.30.
"The main problem I see with IPO auctions is the idea that there's this automated, 'untouched by human hands' method that prices shares perfectly every time," said Notre Dame professor Ann Sherman, a researcher on auction IPOs, when I interviewed her yesterday. "Auctions may be a useful way to collect information, but for such complicated securities, there will always be a role for an underwriter to actively participate in the process."
In light of this need for human insight, it appears that WR Hambrecht is starting to refine its system. Pricing its Interactive Brokers IPO at $33 would have created many unhappy investors, since the stock price now hovers at $29.75.
For Foolish investors, investing is still about picking solid companies, not finding a trading advantage on an IPO. Even if you invested after the IPO auction, you would still have made tidy sums from companies like Morningstar (NASDAQ:MORN) and Google (NASDAQ:GOOG).
Further fairly allocated Foolishness:
Read my full interview with Ann Sherman, including her interesting strategies for Foolish investors, on my blog at the CAPS website.
Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 1,610 out of 28,402 in CAPS. The Fool has a disclosure policy.
