Barbara Schachman has spent many an afternoon and evening glued to her computer. But the former jewelry importer from Los Angeles isn’t shopping for bargains on the Web or chatting with friends.
Ms. Schachman is playing the online IPO game: She is poised to respond to an e-mail from her online broker Wit SoundView Group Inc., confirming her request for shares in the initial public offering of companies that have just been priced.
This week alone she has tried to get shares in the offerings of Avici Systems Inc., Convergent Group Corp., WebEx Communications Inc., TyCom Ltd., Mainspring Communications Inc. and Blue Martini Software Inc.
“Everybody hopes for that one red-hot one,” says Ms. Schachman, 51 years old, referring to IPOs that register triple-digit moon shots — such as Blue Martini’s 174 percent first-day rocket on Tuesday. Get one of those, she adds, and “It’s like you won the lottery.”
Ms. Schachman laments, however, that as an individual investor she more often gets shares in the not-so-hot offerings. She got 50 shares of TyCom, but noted “it really hasn’t gone up much,” rising just 13 percent on its first day of trading. Meanwhile, she didn’t receive any shares in July’s IPO of Mainspring, which rose 20 percent or in Blue Martini.
“I wanted that desperately,” said Schachman.
The online-IPO game seemed a loser as recently as the spring, when the crash in Nasdaq technology stocks caused the IPO market to dry up. But with the recent signs of recovery in the IPO market, the passion of a group of IPO Webheads has revived.
They are the small investors who use online trading almost exclusively to dabble in the risky business of new-stock issues.
Forget that many IPOs don’t skyrocket on their debut days, or that even the highfliers have a tendency to fall back to Earth eventually. “It doesn’t stop (us from) wanting to get more,” said Schachman.
While IPOs used to be the near exclusive domain of institutional investors and wealthy individuals, efforts by some online brokers to offer IPO access has meant individual investors with as little as $2,000 in assets, in some cases, now have a chance.
The problem: The number of shares available remains small. Fewer than a quarter of the shares in the average IPO goes to individual investors. The hotter the deal, the fewer the shares available (there tends to be plenty of shares, of course, in the small IPOs that are the most questionable).
“Shares are getting harder to come by,” said Jerry Hatchett, an online investor from Tupelo, Miss. “One year ago I probably got roughly half of the IPOs that I applied for. Now it’s roughly closer to 10 percent.”
Even with demand off highs hit in February, orders from individuals for IPO shares are up about 50 percent from this time last year, says Mark Loehr, co-president of Wit SoundView in New York. Wit has cut its typical allocation per individual investor to 50 from 100 shares, but says there still isn’t enough stock to go round. “There are only so many shares in the transaction,” he says.
And demand is only set to pick up with the IPO market showing fresh signs of life.
Schachman has requested shares for more than 150 IPOs in the past 14 months, through her account at Wit and another with Morgan Stanley Dean Witter Online, for which she borrowed money to meet the $100,000 minimum to access IPOs. She’s received shares in only about 20.
How shares are allocated differs among online brokers. Customers are usually alerted when an issue becomes available, and invited to express interest. If oversubscribed, brokers use various criteria to decide who gets shares. Wit, for example, uses a form of random selection, while Morgan Stanley Dean Witter Online takes into consideration factors such as assets and account activity.
In some cases, customers must confirm an order once an issue is priced — typically some time after the market’s close the night before an issue starts trading — sometimes within a few hours, which can leave investors like Schachman keeping vigil at their machines.
Schachman said she has received only two “hot ones,” including Akamai Technologies Inc., which priced at $26, and closed its first day of trading at $145.19 in October. Others have been more lukewarm, and, she said, “I’ve gotten some really bad ones.” She still holds shares of such recent duds as Genuity Inc., off more than 20 percent from its issue price of $11 late June, and Flag Telecom Holdings Ltd., which had an IPO price of $24 in February but was trading earlier this week at about $12 per share.
Ending up with underwater IPO shares is hardly surprising, given that more than one-third of this year’s IPOs are currently trading below their first-day closing price, according to Thomson Financial Securities Data.
But overall, Schachman said she has come out on top. Likening IPO investing to gambling, Schachman noted that it just takes one or two successful IPOs to get you hooked.
Online investor Hatchett agrees. If you get just one of the big ones, “that’s addictive,” he said. Along with his wife, he holds three accounts at both online brokers ETrade and Wit in order to increase his chances of getting in on initial offerings, though he admits it hasn’t helped him much. (ETrade Group Inc. is in the process of merging its investment-banking business with Wit SoundView, in a deal in which ETrade will essentially absorb Wit’s individual-investor brokerage customers.)
Still, he is becoming more selective. “At some point you realize you need to do a bit of research on these,” he said. In June, he launched an IPO-dedicated Web site, called DollarStation.com, that offers “reports” on upcoming issues written by individual investors he teamed up with through online chat rooms. It’s just one of a growing number of Web sites catering to IPO-hungry individuals trying to spot the next big offering.
Message boards are abuzz with theories on how to improve your chances of an IPO allocation and tales of instant riches. “You read the (message) boards and everyone is saying, `I made a killing,”‘ said Schachman. “You sit there thinking, `Why not me?”‘
Such Internet postings require a healthy dose of salt, however.
“People tend to tell stories about their successes rather than failures,” notes Jay Ritter, a finance professor at the University of Florida who specializes in IPOs.
A few individual investors, burned with past IPO investments, have decided to be more cautious.
“I never got the really hot ones,” confessed Amein Alsuezi, 44, a computer consultant who lives in McLean, Va. Alsuezi, who received shares in about 10 IPOs last year, said some shares climbed initially, but most slumped back toward their offer price or headed into negative territory.
“I got lured into a lot of aggressive investing,” said Alsuezi, who has since tried to return to a more long-term approach. “I can honestly say I lost my focus.”
