IntroductionMy Digital Dream

Picture a plush private dining room, high above Manhattan. Polished walnut paneling on the walls and an Aubusson carpet on the floor mute the rough edges of conversation from the thirty power-suited businessmen gathered in the room. Outside thefloor-to-ceiling windows, the world’s most famous skyline glitters like diamonds. Inside,discreet waiters continually refill crystal goblets with wine priced at $400 a bottle. Thecuisine is

nouvelle américaine

, the china is antique Limoges. Everything within reach— everything in sight—is the top of the line, the best you can get.The occasion is an IPO closing dinner, one of the investment world’s mostcherished rituals. The company hosting the dinner has made an Initial Public Offering of its stock; it has “gone public,” selling shares on the open market for the first time. Thedinner celebrates that fact, and it brings together, for the last time, the bankers andinvestors and lawyers who made it happen.But the dinner is something else as well. It is a meeting of a very private, veryexclusive club. The members of this club have in common that they are the guaranteedwinners in the IPO process. When American companies raise capital by selling shares onthe stock market, these people cannot lose.The institutions and very wealthy individuals who have bought the company’sfirst stock issue cannot lose because the investment bankers got them a bargain-basement price. All they have to do is hold onto the stock until the public starts to bid up the price,then flip their shares to retail investors and pocket the profit.1

The investment bankers cannot lose because they are making anywhere from sixto seven percent on the sale of the issue. No wonder they have traveled far and wide tohold meetings, to stage presentations, to arrange lavishly persuasive lunches and dinnerswith potential investors. No wonder they have urged a wide network of brokers to hypethis stock to retail investors and smaller institutions. The more the issue raises, the bigger their spread.The lawyers cannot lose because lawyers almost never do. For their hard work late at night and on week-ends—regiments of lawyers poring over every detail of thestock offering prospectus—they have billed hundreds of dollars an hour.The company cannot lose because its coffers are now awash with money. It hasraised capital—perhaps, since the offering price was so low, not quite as much asmanagement would have liked, but enough to carry out plans.Who loses in the IPO process? With all these guaranteed winners taking thechoicest morsels, who gets the pickings that are left?You do.You, the retail investor. The millions of American shareholders who tend to holdonto the stocks you buy, thus providing the company its base of financial support. You’revirtually shut out of the initial part of an Initial Public Offering. You’re almost always cutoff from that alluring offering price. That goes to the big guys—the institutions, thefunds, the super-millionaires. After they have bought up the bulk of the issue, it’s your turn. But not until then. And not without the big guys raking in a hefty profit.2

This is the dirty little secret of American investing: where the institutionalinvestors and mega-wealthy individuals are welcomed through the front door and offeredfirst pick at the goods—and a discount price—retail investors are asked to go around tothe back door, wait for the leftovers, and pay through the nose.There’s another side to this dirty little secret. The fact is, the company issuing thestock has most likely been muscled into undervaluing its stock, setting a lower offering price than it could have gotten. That’s because the leverage is with the investment banksand the big institutional buyers. They control most of the capital in an IPO, so when theyexert price pressure on the company issuing the stock, the company invariably knucklesunder. Then the investment bankers go to work hyping the stock to their vast network of retail brokers, the public starts buying, and the stock price shoots up from its artificiallylow offering price.As to little companies, they can’t be said to lose out in the IPO process becausethey almost never get to be part of an IPO process. The investment bankers aren’tinterested in the small potatoes capital-raising goals of small-cap companies. And smallcompanies that need to raise capital rarely have the wherewithal for an IPO. Just getting astock to market can cost a king’s ransom: fees for that army of lawyers billing hundredsof dollars an hour to create a detailed, lawsuit-proof prospectus of the offering… costs for printing, packaging, and distributing the prospectus… travel and accommodations for theinvestment bankers shopping the prospectus around the country—maybe around theworld—delivering glossy presentations, staying in first-class hotels, wining and dining prospective institutional investors over expense-account lunches and dinners.3