Salon Goes Dutch

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Rocket ships, shooting stars and race horses have been brought into service this past spring as metaphors for IPOs from web sites such as and iVillage that tripled or quadrupled on their first day of trading. But when the highbrow site Salon when public yesterday the image was a flat flounder. Key was Salon's pioneering participation in a Net experiment that uses a Dutch auction to set the IPO price before trading. The Dutch format helped kill any big first-day run-up but it also cut out the Wall Street middlemen. Early shareholders may have missed out on a Net IPO bonanza, but Salon is laughing all the way to the bank.

Usually when companies go public they use an investment bank like Morgan Stanley or Goldman Sachs to help market the stock to big investors. The banks charge a hefty sales commission -- called an underwriter's fee -- for the service, customarily around 7 percent of the total offering price. Instead Salon paid just 5 percent to San Francisco's W. R. Hambrecht. But here's the more important part. The mechanics are complicated, but common sense says that iVillage's offering price was set too cheap if it immediately quadrupled. Even though iVillage's first-day run-up was spectacular, most of that money went to the investment bank's big customers who were allocated apparently underpriced shares. In Salon's case, the offering price was determined by auction beforehand, ideally capturing money that traditional IPOs leave on the table. Hambrecht has tried the "OpenIPO" Dutch format only once before, with a California vintner called Ravenswood Winery. Next is MORE >>