Big Float From Brit IPO

The Times headline Tuesday morning said, “Internet Stock Fever Spreads to Britain as Freeserve’s Issue Surges.” And indeed, free Internet-access provider Freeserve did see its shares jump 37 percent on its first day of trading. Of course, for U.S. investors a 37 percent gain hardly constitutes Internet fever. But that’s in no small part due to one crucial difference between the American model and the nascent European one: When European companies go public, there are a lot of shares to buy and sell.

In the short term, after all, the prices of many American Internet IPOs have been inflated by the fact that there are just too few shares out there to meet demand. A typical Internet IPO these days will offer somewhere between 4 million and 6 million shares. That has two consequences: It means companies don’t raise as much cash in the IPO as they might otherwise, and it means that the pop on the first day of trading is larger than it otherwise would be. And while those 300 percent and 400 percent leaps get lots of attention, the company reaps no long-term benefits from them.

Freeserve, by contrast, is no bigger as a business that most American Net startups. In fact, with just 2.73 million pounds in its first eight months of operation, it’s probably smaller than most. But in the offering yesterday it floated 153 million shares (63 million were offered by its parent, and 90 million by Freeserve itself), raising almost 150 million pounds. Now, the 153 million is still just a fifth of all the shares outstanding. But the fact that the “float”–the shares that can be bought and sold by the public–is so large almost certainly kept the stock from rising even more sharply when it first opened. (Of course, that’s kind of scary when you consider how audacious the market’s valuation of Freeserve is. This is a company with less than $10 million in annual revenue which now has a market cap of $3.3 billion.)

In the long run, the size of the float doesn’t determine anything. If demand for shares remains strong, companies eventually offer more shares for sale in secondary offerings. And if the company is a dog, then not even having a small float can save it. When it comes to stocks, rarity doesn’t mean value in the long run. Given that, more Net companies should think about forgoing the pleasure of getting big headlines after their first day of trading and choose instead to get a real sense of what the market thinks of them. On the other hand, I suppose that finding out what the market really thinks of them is the last thing that a lot of Net companies want.