Peet’s Surge Calls ‘OpenIPO’ Into Question
A surge in the stock price of Peet’s Coffee & Tea since its initial public offering last Thursday may be making the company’s investors happy, but it is raising new questions about the special auction system used to sell the deal.
Shares of Peet’s, an Emeryville, Calif.-based coffee producer and retailer, more than doubled in the days after its IPO, which was priced at $8 a share through the “OpenIPO” system developed by online investment bank W.R. Hambrecht & Co.
The auction, the fifth such deal done by Hambrecht since 1999, allows investors to effectively set the IPO price by bidding for the stock online. In a conventional IPO, by contrast, underwriters set the price after canvassing big investors for their interest.
While quick stock price gains are considered a good thing in a typical IPO, Hambrecht has pitched its auction system specifically as a way to avoid such pops by more accurately judging market demand--ensuring that an issuing company raises as much money as possible.
Bill Hambrecht, the longtime Bay Area financier who launched his online firm in 1998, insists that the Peet’s auction was a success, and that investors are becoming more comfortable with the auction idea. He attributed the stock’s gain--it hit a high of $17.75 on Monday--to an improving market. “We were pleasantly surprised the market reacted as well as it did,” he said.
Peet’s shares have fallen back since then, closing at $11.50 Wednesday on Nasdaq, but are still up 44% from the IPO price.
But even some experts who praise a key goal of Hambrecht’s system--to get more IPO shares into the hands of average investors--say the process needs improving. “The jury is still out on [open] auctions,” said Jay Ritter, a professor at the University of Florida and an authority on IPOs. “The process is flawed, but there are flaws with the traditional [IPO underwriting] as well.”
In fact, Peet’s isn’t the first Hambrecht deal that did not appear to work as expected. The firm’s IPO for Web site operator Andover.net in late 1999 was priced at $18, but the shares soared to near $70 within days.
Hambrecht’s rivals are less than impressed with OpenIPO.
“It’s a nice little gimmick,” said Mike Ogborne, head of corporate finance for Thomas Weisel Partners in San Francisco, a Hambrecht competitor. “But I don’t think it’s the best [IPO process] for a company.”
Ritter said there can be problems in judging true demand for a stock under the auction system, as well as with traditional underwriting.
The Peet’s pop after the first trading day may have been due to ignorance about the auction process by potential investors who didn’t want to spend an hour online to open an account but were counting on the stock trading flat and buying it in the first few trading days, he said.
The issue of IPO pricing is important for two major reasons: First, the company involved naturally would want to raise the most money possible. Second, investors obviously want to get a good deal.
In the case of Peet’s, Hambrecht initially expected to get as much as $14 a share for the company’s 3.3 million shares. Yet the company ended up with $8 a share, raising $26 million.
Chris Mottern, Peet’s chief executive, played down criticism that Hambrecht’s system priced the Peet’s deal too low. He said he was happy with the process and the stock’s rise after the offering.
Mottern said the auction system let many of the coffee chain’s customers have access to shares. “This IPO was very Peet’s-like,” he said. “It was a perfect way for us to go public, because it was open to everyone.”
About 34% of the Peet’s shares were purchased by individual investors, he said, compared to 20% for a typical IPO.
Hambrecht’s first auction IPO, for Sonoma-based Ravenswood Winery in 1999, appeared to work as planned: The stock was sold at $10.50 a share and lingered in that range for days afterward.
“A lot was made about how we didn’t have a big pop, but we didn’t expect one,” said Callie Konno, chief financial officer at Ravenswood.
Under the conventional underwriting system, big first-day gains for IPO shares have been viewed as a sign of success: Though the companies arguably give up potential capital by pricing shares low, Wall Street has persuaded the firms that such deals are important marketing events, Ritter said.
Indeed, first-day trading gains of 100% to 600% have catapulted unknown firms into newspaper headlines and business stardom.
But as dot-com firms in particular have quickly run out of cash in the last year, more of them may now wish they had raised as much as possible in their IPOs, Ritter said.
At Salon.com, another company that went public through Hambrecht’s auction system, CEO Michael O’Donnell said he’s happy that the market set his IPO price.
“We were vilified because we didn’t have a first-day pop,” he said, noting the stock was sold at $10.50 and finished at $10 the first day. “But now the money we have in the bank from the IPO is what is keeping us going,” he said.
Hambrecht said his firm continues to improve the auction process after each deal and expects to do more of them this year. “We’re learning from each one,” he said.
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How Hambrecht’s IPOs Have Fared
Here’s a look at the five initial public offerings brought to market under W.R. Hambrecht’s open-auction system, where the stocks were selling three days after their IPOs, and their current prices, if applicable.
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IPO IPO Stock price Current Stock date price 3 days later price Ravenswood Winery 04/99 $10.50 $10.50 $12.75 Salon.com 06/99 10.50 10.00 0.94 Andover.net 12/99 18.00 67.50 NA* Nogatech 05/00 12.00 7.44 NA* Peet’s Coffee 01/01 8.00 16.13 11.50
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* Not applicable: Andover.net was acquired for about $15 a share in stock by VA Linux in June; Nogatech was acquired for about $7 a share in stock by Zoran in October.
Source: Bloomberg News
