Let's Go Dutch

Proving that alternative methods by which a company can go public are becoming more attractive in this market environment, one can point to the OpenIPO or Dutch auction process pioneered by W.R. Hambrecht + Co. Founded by Wall Street maven William R. Hambrecht, the Dutch auction method of underwriting levels the playing field amongst individual and institutional investors. The OpenIPO process allows a potential investor to bid on the offering by determining what price they want to pay for each shares. Share purchases are in lots of 100; the clearing price from the auction may not necessarily be the final offering price.

Success from this method of underwriting does take time to develop. Case in point: Salt Lake City, Utah-based close-out retailer Overstock.com (OSTK) used this process to go public earlier this year. Like most on the Street, shares of Overstock.com struggled to gain a solid foothold and even fell to a low of over $4. However, an unexpected surge in sales from Black Friday, shares of Overstock.com rose 25% following the report that sales rocketed 151% over year-ago levels.

While Overstock.com is losing money, Scott Devitt, an Internet analyst at Legg Mason Wood Walker, projects that fourth quarter sales could top $60 million, up from $24 million year-ago. Patrick Bryne, the firm's chairman and a big stockholder attributes the company's success to "women finally taking to online shopping." Preliminary estimates foresee a strong climate for consumer spending during the holiday season.

This is extremely good news for the folks at Overstock.com and other major e-tailers. Cantor Fitzgerald Securities served as co-manager on the Overstock.com offering, of which priced three million shares at $13. Affiliates of Amazon.com were a selling stockholder in the Overstock.com transaction. Amazon.com received stock in Overstock.com related to the acquisition of Gear.com by which the online retailer held a majority stake.

Another case to provide investors with success of the OpenIPO model stems from the 2001 initial public offering of Peet's Coffee & Tea (PEET). Shares of Peet's Coffee, which debuted at $8, trade for $15. Subsequently, the company was able to complete a follow-on offering for additional capital that will allow it to expand into new markets. The company is run by industry veterans who learned their trade while stirring to pot at Starbucks.

Perhaps, with the market more vulnerable right now as regulators further investigate significant breaches of ethics, it will certainly allow more deals to be led to market by regional underwriters. More importantly, issuers and investors will be looking toward Hambrecht for guidance amidst this huge albatross within the investment underwriting community.

Investor Demand

With market conditions tightening and investors being more selective with transactions they will invest in, demand for imminent or current profitability was a major factor for bankers when determining valuation structures for IPOs. As stated earlier, over half of the year's issuance came from profitable entities. Situation at hand: JetBlue Airways (JBLU), a start-up airlines financed in part by investment extraordinaire George Soros aimed to become the next Southwest Airlines. So far, JetBlue hasn't disappointed investors. Not only has the company maintained profitable levels despite complications from Sept. 11, it has also begin to enter new air markets and recently rewarded stockholders with a 3-for-2 stock split.

Offered at a split-adjusted $18, underwriters for the $158 million offering were Morgan Stanley and Merrill Lynch. Shares of JetBlue have done quite well in the market, having touched $55 (prior to its stock split) earlier in the year. JetBlue stock did come under pressure when affiliates of J.P. Morgan Chase sold a rather large position in the air carrier. That setoff fireworks between J.P. Morgan and JetBlue; it wholeheartedly explained the downtick in JetBlue stock.