No. of Recommendations: 0
It is my understanding that the pricing of IPOs is far more complex than this article makes it sound.
First, Let's first consider the analyst's reputation. If the analyst who will eventually cover the company for the underwriter has looked at the deal and through the negotiating team set a price which seems to be a fair price (as agreed presumably by the issuer), then to get a pop or sharp drop in price will look like they are not a good judge of valuations.
Second, Companies want investors who will hold onto their company stock. They don't want it flipped within minutes (for huge gain) any more than the retail broker who doesn't make a concession if it is sold prematurely. There is enourmous pressure to get the pricing correct.
Third, The market sets the ultimate price. The traders are under obligation to keep an orderly market. When you have wayyyyy to many buyers, the indications from the market makers will gradually rise to price out the flood of investors, who want the issue at a low/reasonable? price upon the onset of trading. If MOMENTUM has favored IPO's lately, it has been fickle and while there have been tremendous POPs, there have still been issues which fizzle. Compare Priceline.com (PCLN) to Musicmaker.com (HITS) this past year. Supply and demand seem to be the ultimate forces in where the issue will go. 3 billion (not neccessarily accurate #) shares of UPS had far less POP than 2 million RedHat.
In summary, no one seems to know exactly where these things will go in price. If the company indicates its fair price (based upon financial strength) is $12 a share, then the underwriters seems to be pricing it fairly close to that. Heaven forbid the underwriters price a $12 fair value at $45 and let their investors lose money as the issue plummets. They would lose customers as quickly as the company stock would lose price. The average investor, whipped up by CNBC seems to have forgotten how risky IPOs can be and it would not be suprising to see a majority continue to disappoint investors who compare each issue to RedHat.
Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.