Reviewing WhiteGlove Health's IPO This Week

Sep.12.11 | About: WhiteGlove House (WGH)

Any qualified investor with a dream and the right bid can get in on this week’s only IPO at its initial offering price. It’s a Dutch auction. But history tells us: Don’t look for an opening-day moonshot.

WhiteGlove Health (NYSE:WHG), based in Austin, Texas, provides mobile primary and chronic medical care to about 484,000 members (individuals, employers and insurance plan participants) in seven major metropolitan markets including Austin, Boston, Dallas, Fort Worth, Houston, Phoenix and San Antonio.

Founded in 2006, the company has about 92 employees. WhiteGlove Health reported a net loss of $4.1 million on revenues of $3.5 million for the six months ended June 20, 2011, compared with a net loss of $2.7 million on revenues of $1.8 million for the same period a year ago.

WhiteGlove plans to offer 2.5 million shares at $9 to $13 each to raise about $27.5 million.

The IPO is expected to be priced on Thursday evening, Sept. 15, and to trade on Friday morning on the NYSE Amex under the proposed symbol “WGH.” Joint-lead managers are WR Hambrecht + Co. and Rodman & Renshaw.

Dutch Auction 101

The WhiteGlove IPO is being offered through a Dutch auction bidding system. Here’s how it works: Qualified investors (as defined in the prospectus) place their bids with the underwriters giving the number of shares they wish to buy and at what price. Underwriters collect the bids and allocate shares, starting with the highest price, and work down until all the stock being offered is spoken for. It’s called “the clearing price.”

Nevertheless, there are always exceptions on Wall Street.

Sometimes the clearing price becomes the offering price; other times, the stock can be priced below its clearing price. It’s at the discretion of the underwriters. In Europe, when this happens, people have called it a “dirty Dutch auction.”

The Dutch auction IPO process has been around for decades in Asia and Europe, but only since 1999 in the U.S. capital markets.

In April 1999, Ravenswood Winery offered 1 million shares at $10.50 each. The IPO closed its opening day at $10.88 per share, up 3.57% from its initial offering price. Constellation Brands acquired Ravenswood in 2001 at $29.50 per share.

Ravenswood’s opening-day gain of 38 cents per share, 3.57%, was one of the better first day’s gains from a Dutch auction IPO.

To date, 22 companies have gone public in the U.S. capital markets using the Dutch auction system. The median average opening-day gain has been 0.91%. The Dutch auction is designed to get a fair price for both the investor and the issuer.

Revisiting Google

Once again, there are always exceptions on Wall Street.

The highest-profile Dutch auction was Google (GOOG). On Aug. 4, 2004, Google offered 19.6 million shares at $85 each. The IPO started trading at $100.01 and closed its opening day at $100.34, up $15.34 per share, or up 18%, from its initial offering price.

The logical question is: “What happened?”

The Google clearing price was never released, but the financial media supplied the answer. It was widely reported that the winning bids received about 75% of the number of shares they were entitled to, not 100% as one might think. That left about 25% of the orders on the table and the price soared when the deal started trading, begging the question - a dirty Dutch auction?

This gives us a clue as to what to expect from future Dutch auctions: If investors receive full allocations – don’t look for any worthwhile opening-day pops. If allocations are proportioned out – it could be a Flipper’s Paradise.

Disclosure: Neither the author nor anyone else on the staff has a position in any stocks mentioned, nor do they trade or invest in IPOs. The author and staff do not issue advice, recommendations or opinions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.