Zipcar IPO Gets Flipped

Apr.14.11 | About: Avis Budget (CAR)

Shades of 1999 ...

Based in Cambridge, Massachusetts, Zipcar has risen to become the world’s leading car sharing network since its founders sat in a café and decided to import the European business model, their website says. The company had announced it was expecting its shares to price in at $14 to $16, but saw sufficient interest to price them in at $18 a share on Wednesday night. As the markets opened, and Zipcar, trading on the Nasdaq under the ticker "ZIP," gained 67%, opening at $30.

That's money that should have gone to the company.

This sort of stupidity occurred all the time in the 1990s. For the record, I made plenty of money flipping those IPOs too. The problem is that they're fundamentally dishonest. This game has the underwriters holding some part of the allotment themselves (of course) and so are their favored clients (of course) who both make a damn fortune on the open flipping into the buy-side imbalance.

The problem with this sort of activity is that the underwriters know damn well what demand is for the shares before and when the offering prices. They thus have a very, very good idea that this is going to happen when the stock opens for trading. What should happen is that the price should be moved higher to capture most of this additional revenue for the company offering the stock.

Instead the company gets its $18 but roughly 50% beyond that winds up in the hands of the speculators and underwriters.

I don't know how a company stops this sort of abuse when attempting to go public, but this much I do know - this sort of supply and demand imbalance should inure to the benefit of the company, not the investment banks and their favored clients.