Internet Outsider: Vonage Underwriter-Analysts Pee on Stock, Further Insulting IPO Buyers

July 06, 2006

Vonage Underwriter-Analysts Pee on Stock, Further Insulting IPO Buyers

The Vonage IPO continues to be a black comedy. A month after the deal was shoved into the hands of customers and others at $17, it is trading at $8.25. And now, in an action that demonstrates the drawbacks of the "new era" of Wall Street research, in which analysts have no role in the IPO process, two of the underwriter analysts have dissed the stock. One is troubled by the company's execution. The other is worried about competition, heavy spending, and IPO lawsuits.

Now, let's look at this from the perspective of an IPO buyer. Your trusted Citigroup or UBS financial advisor calls up and says, "We've got this great new IPO you should buy--a cool Internet phone company that's growing like mad."

You: "Sounds great. What do your experts think of it?"

Advisor: "Well, our analysts aren't allowed to tell us what they think anymore, because that would be a conflict of interest, but our bankers are experts, too, and they LOVE it!"

You: "Awesome, sign me up!"

Now, thirty days later, you've lost half your money. And you learn that, in fact, the analysts at the firm that sold you the stock wouldn't touch it at $8.25 a share, much less the $17 that you had to cough up for it. You learn that, with the exception of the IPO lawsuit issue, their concerns have nothing to do with anything that has happened in the last 30 days. Rather, the analysts are concerned about issues that were exactly the same when you bought the stock.

Question: Wouldn't you have liked to have known that these analysts thought the stock wasn't worth $8.25 before you paid $17 for it? Or, if that was impossible (as it was under the old system, as well--although not in the more-sensible European system, in which the analyst writes a report before the IPO is priced), wouldn't you have liked to have been confident that the analyst had signed off on the deal before it was sold to you? Don't you feel a bit shafted that you were sold a stock at $17 that the only real expert at the firm thinks is not even worth $8.25?

The old system had drawbacks, too, of course. But as far as the IPO process goes, the new one is far from perfect.

Posted by Henry Blodget on July 06, 2006 at 08:08 AM | Permalink

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July 06, 2006

Vonage Underwriter-Analysts Pee on Stock, Further Insulting IPO Buyers

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