Majestic Research

SNL Financial

Interactive Brokers IPO a Hit, but Will Others Go Dutch?

By Thomas Mason
Published: May 04, 2007

While Interactive Brokers Group Inc. was by several accounts a hot initial public offering, with a doubling of the offering amount from original estimates, observers told SNL Financial it might be premature to call it a victory for the Dutch auction system.

After climbing as high as 14% above its $30.01 IPO price, shares of the Greenwich, Conn.-based electronic market maker closed its first day of trading at $31.30, up 4.30%, with more than 23 million shares trading hands. It may not have popped as much as some other IPOs, but the offering was compelling in that it was conducted through W.R. Hambrecht + Co.’s OpenIPO auction-based system and represented another high-profile deal utilizing the Dutch method, after Google and Morningstar Inc.

Along with W.R. Hambrecht, HSBC Securities (USA) Inc., Fox-Pitt Kelton Inc., Sandler O’Neill & Partners LP and E-Trade Securities LLC served as placement agents in the Interactive Brokers offering.

In the view of Majestic Research President & CEO Doug Atkin, a member of the W.R. Hambrecht board, the Interactive Brokers Group IPO could help to popularize the open auction method. In his view, it was a win-win for all parties involved, and its democratizing feature makes it attractive. “The retail investor was treated the same as Fidelity,” he said in an interview with SNL Financial.

The first-day results were also on par with Atkin’s expectations, giving a decent return to investors, albeit without the kind of pop witnessed in the traditional IPO process. “My view is that a fair bump in the first day is between 5% and 10%, and if it’s more than that, the company left a lot of money on the table,” he said.

For Ann Sherman, an assistant professor at the University of Notre Dame who studies the IPO market, the results should indeed prove a notch in the belt for the lead placement agent, telling SNL, “This is huge for W.R. Hambrecht.” Outside of the Google and Morningstar IPOs, U.S.-based offerings using the open auction system have been relatively tiny, with such companies as Pete’s Coffee, Ravenswood Winery and New River Pharmaceuticals populating the roster.

But while the open auction system might pick up some new adherents after the success of Interactive Brokers, on the long-run prospects of the method Sherman is less sanguine. “Long-term, I don’t think it will stick,” she said. While it might seem to be a novel approach in the United States, the system has actually been in use for decades in more than 20 countries around the world, according to Sherman. “The reason you don’t see it today is because other countries tried it and didn’t like it, not because the U.S. invented it.”

As Jay Ritter, a finance professor with Cordell University who tracks IPOs, also pointed out, one of the main drawbacks with the Dutch method is that underwriters tend to bundle services, such as analyst coverage, and a company cannot mix and match underwriters at will. “As long as the bulge-bracket firms basically refuse to do auctions, a company that wants to use an auction basically has a choice of using W.R. Hambrecht and not having the option of using Bear Stearns or Goldman Sachs.” A notable exception, however, was Google, in which the popularity of the offering likely convinced the underwriters to participate. “But even there, Goldman Sachs and Merrill Lynch weren’t real wild about using an auction,” Ritter added.

But instead of a vindication for the Dutch auction system, the Interactive Brokers debut could be more a bellwether for the seemingly endless popularity of the exchange space. Not even a week before, Deutsche Boerse AG and International Securities Exchange Holdings Inc. became the latest in a string of exchange mergers, and IPO activity has been similarly robust. Within the past few years, IntercontinentalExchange Inc., CBOT Holdings Inc. and NYMEX Holdings Inc. have all filed for public offerings, and more could still be on the way, with the Philadelphia Stock Exchange reportedly mulling the decision to go public.

Based on all the activity in the arena, the pricing of the Interactive Brokers deal did not come as too much of a shock for Tom Taulli, who operates Investoroffering.com. “I’ve kind of given up on saying things are overvalued in this area,” he told SNL. While a number of smaller exchanges might eventually be merger candidates, more IPOs might not be out of the question, as a way of attracting those very acquirers. “The idea is that they’ll go public, show their wares, and get bought out before they hit the market,” Taulli said.

Indeed, that could be the very fate of Interactive Brokers Group. “I don’t think that IBKR will stay alone for long,” Scott Sweet of advisory firm IPO Boutique, told SNL. Given the firm’s outstanding profits and margins, as well as their cost-saving proprietary software, Interactive Brokers could draw the interest of exchanges, as well as brokerage houses. “In this case, I wouldn’t be surprised to see them taken out by a major bracket firm,” he said.