‘A-List’ Froth Merchants

There was an interesting article in Wednesday’s Wall Street Journal about how poorly most Internet and other high-tech IPOs have fared in the wake of sizzling ticker debuts.

Granted, that many IPO moonshots have been followed by rapid descents to earth (and below) is no news flash to, say, the investor who bought shares of VA Linux Systems (LNUX) for about $300 when the company went public last December and posted a record first-day gain. LNUX closed Tuesday at 39 3/4.

But what should jump out at investors is the aftermarket performance of the two top underwriters on Wall Street — Goldman Sachs and Morgan Stanley Dean Witter. While the average IPO since the beginning of last year is down 4.3 percent from its first-day close, stocks whose initial public offerings were led by Goldman Sachs during that same period are down an average of 22.4 percent. And shares of companies taken public by Morgan Stanley in that time frame are down 8.8 percent, according to the Journal.

Goldman Sachs defended its record to the Journal, with one spokesman saying, “We try to underwrite the highest quality companies in their respective spaces.”

Certainly a number of companies brought to the market by Goldman fit that description. Still, for every eBay (EBAY), Inktomi (INKT) and RealNetworks (RNWK), there’s an iVillage (IVIL), a NetZero (NZRO) and a TheStreet.com (TSCM).

Morgan Stanley also gets mixed reviews on the quality front. On the plus side, it has led the offering by e-commerce security market leader VeriSign (VRSN) and (going back a decade) Cisco Systems (CSCO), the most highly valued Internet company of all.

More questionable Morgan offerings include troubled high-speed access provider At Home (ATHM) and lastminute.com (LMIN), a London-based British online travel site that had less than $300,000 in revenues last year, against $7.4 million in losses.

Of course, one of the reasons aftermarket performance of IPOs from Goldman and Morgan Stanley are down more than the average (relative to first-day closing price) is the extra froth these “A list” underwriters bring to the markets. Attaching the Goldman or Morgan Stanley names to any offering translates into a higher profile for the IPO, higher demand among investors and, ultimately, higher altitude on the first day of trading. And the higher you go, the further you can fall.

There are two lessons in this for investors: 1) If you can get pre-offering shares from a Goldman or Morgan Stanley at the IPO price, do so. You’ll stand a good chance of making a large profit by flipping them on the first day of trading, something the big institutional investors do all the time. And 2) If

you can’t get shares from the “A List” underwriters at IPO prices, wait for the rocket to come back to earth before climbing aboard. Otherwise you’ll be like Slim Pickens in Dr. Strangelove. And you know what happened to him.

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