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Aug. 9,  ISSUE #151
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It was a remarkable debut. Chinese search engine Baidu.com's shares sold in the United States for US$27 ($39) - then surged on day one to close at US$122.54 ($177.46).

Friday's result was the biggest first-day gain for a new listing in the US for five years.

Investors had more than quadrupled their money.

An analyst in New York with IPOdesktop.com, a website devoted to initial public offerings, John Fitzgibbon, said: "This one is the return to the internet bubble. Last time we saw a deal skyrocket was during the frothy IPO markets of 1999 and 2000."


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Then came the post-mortem.

Some analysts said the internet search engine could have had an even better payday for itself if underwriters had sold the deal at a higher price to begin with.

"It looks to me like the underwriters should have had a better indication of the appetite for this stock than they did," said Donald Straszheim, president of Straszheim Global Advisors.

Investors were eager to own a stake in a company that many say could grow as dramatically as Google and is based in a country itself undergoing explosive growth.

But other analysts are not so sure the underwriters made a mistake, given that the company's shares were priced at a relatively high multiple of revenues.

"It wasn't priced out of line with the rest of the market. In a situation like this, you're dealing with the unpredictability of the after market," said Tom Taulli, of Instream Partners in Newport Beach, California.

At issue is the underwriting process. Banks selling shares to the public - in this case Credit Suisse First Boston, Goldman Sachs, and Piper Jaffray - are paid to use quantitative models to determine a fair price for shares, but also to gauge investor demand.

Underwriting has both subjective and objective elements, making definitive evaluation of a bank's performance difficult. In this case, demand for the IPO was evidently outsized, but so were the unknowns for the company.

"We don't know the potential impact of censorship in China, or how quickly the internet will grow there," said David Menlow, president of IPOfinancial.com. Had the IPO been priced higher and then fallen in the first day of trading, investors could have sued.


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Baidu.com chairman and chief executive Robin Li, speaking on CNBC, said he was not upset by the potential lost proceeds of the IPO because the company had only sold a small portion of itself, and had significantly more growth ahead.

But University of Florida Professor Jay Ritter, an IPO expert, said Baidu.com left money on the table by introducing the shares at a level well below where they ended hours later.


 

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