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 GreatFood.com. MORE>>
Salon Goes Dutch
From TIME Digital: A Net-inspired IPO format cuts out Wall Street middlemen
Rocket ships, shooting stars and race horses
have been brought into service this past spring as
metaphors for IPOs from web sites such as
TheStreet.com 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.