The IPO Buzz: ECON 101

Clearwire closed on Friday at $22.10, DOWN 11.6 percent from its initial offering price. 
Let’s take a closer look at the Clearwire IPO. Bankers were planning on pricing 20 million shares at $23 to $25 each. They priced 24 million shares at $25 each. That was an increase of 20 percent. But there’s more.
If exercised, the over-allotment agreement would add another 3.6 million shares to the deal. That would make it a 27.6-million-share offering, plus the normal short position the bookrunner builds. All in all, the underwriter could very well have put out about 30 million shares on what was a 20-million-share offering.
In doing so, bankers filled many indications of interest (pre-offering buy orders), and took many aftermarket orders off the table. It was a simple case of ECON 101 – supply versus demand. You increase supply, it cuts demand.
Plenty of Baggage
Clearwire also came to market with some baggage that can be found in the prospectus under “Risk Factors.” One item stood out: “We are an early stage company with a history of operating losses and we expect to continue to realize significant net losses for the foreseeable future. As of December 31, 2006, our accumulated deficit was approximately $458.6 million.”
To Clearwire’s credit, revenues are soaring. They have gone from $15.3 million in 2004 to $33.5 million in 2005 and up to $100.2 million in 2006.
On the flip side, for every dollar of revenue that Clearwire generated in 2006, it cost the company $3.84.
And finally, the IPO took another mysterious flop in Friday’s market. It opened at $24.80 and got slammed to $21.49 before closing at $22.10. No explanation surfaced.
Xinhua Finance Media (NASDAQ: XFML)  was another IPO that fell from grace.
When the company filed for an IPO on Feb. 21 to price 23.1 million shares at $12 to $14 each, the deal was rated as “hot.” After all, any IPO out of China recently has been on a roll. Then the Shanghai stock market took an eye-popping plunge of almost 9 percent on Feb. 27, the sharpest drop in a decade.
Nevertheless, unconfirmed rumors continued to circulate that the Xinhua deal was still oversubscribed. Reality hit the deal when bankers priced it at $13 per share on Thursday evening. That was the mid-point of its filing range. “Hot issues” are not priced at the mid-point of their filing ranges.
On Friday morning, the IPO opened at $13, its offering price, and tanked. It closed its opening day at $11.35, DOWN 12.7 percent from its initial offering price.
Of the 31 IPOs priced in 2007, excluding 14 unit offerings, the Xinhua opening-day loss was the sharpest of the year.
True, last week’s IPO market ran into some rough sailing, but it was not the end of the world. All the major stock market indexes registered gains of about 1 percent each.
There is always tomorrow.
Well Connected
Take a look at this IPO on tap for the week of March 12.
BigBand Networks (NASDAQ: BBND proposed) is a Redwood City, California-based provider of network-based platforms that let cable operators and telephone companies offer video, voice and data services across coaxial, fiber and copper networks.
Check out its recent quarter. The story is in the numbers.
For the three months ending December 31, 2006, BigBand Networks reported net income of $8.9 million on total revenues of $63 million, compared with a net loss of $5.8 million on total revenues of $26.7 million for the same period a year ago.
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