INVESTMENT BANK TAKES A PASS AT IPOS FOR THE MASSES: HAMBRECHT HOLDS FIRST ONLINE ‘DUTCH AUCTION’ — FOR A CALIF. WINERY

W.R. Hambrecht & Co., the online investment bank founded by former Hambrecht & Quist chairman William Hambrecht, has begun its mission to fundamentally change the way initial public offerings are conducted.

On Friday, the firm brought California’s Ravenswood Winery Inc. public through a Dutch auction, in which individual investors make bids ahead of the offering date. A million shares of the stock were then offered to bidders at the highest price at which all the shares could be cleared: $10.50.

Ravenswood, which closed at $10.88 on Nasdaq, didn’t enjoy the explosive type of first day that offerings ending in .com have experienced. Then again, Mr. Hambrecht says, it wasn’t supposed to.

“People who want big road shows and an elaborate marketing job go to major bankers; people who believe that their company is strong enough to attract attention want to go public in a fairer, more efficient way.”

Indeed, not only is Hambrecht’s underwriting system, called OpenIPO, trying to give individual investors a better shot at grabbing some IPO shares out of the gate, it’s giving issuing companies a price break. Hambrecht’s underwriting fees run between 4% and 5% of the total amount raised, versus the 7% to 10% for small-cap issues charged by other investment banks.

The savings could amount to hundreds of thousands, if not millions, of dollars for an issuing company. But not everyone sees savings as compelling enough to forgo an underwriter with an established track record.

“A 7% fee doesn’t seem an exorbitant price to pay for a successful IPO,” says Michael Gazala, a senior analyst at Forrester Research in Cambridge, Mass. “Most companies that have the opportunity to go public with a Goldman Sachs will.”

Hambrecht’s electronic egalitarianism has been called into question, as well.

The Ravenswood road show was open only to institutional and “accredited” investors, meaning only those with a net worth of at least $1 million were qualified to participate.

That limitation is standard practice based on Securities and Exchange Commission rules, says Mr. Hambrecht. “We’d love to show the road shows to everyone; I hope someday the SEC finds a different answer to that question.”

What Mr. Hambrecht hopes to address himself is the distribution problem he perceives. “The big brokerages divert IPO shares to their best accounts,” including big mutual and pension funds. “Everybody else ends up buying most of them in the aftermarket — at a premium.”

Mr. Hambrecht also complains that pricing at traditional investment banks — which set prices based largely on their conversations with institutional investors — sometimes don’t generate the maximum capital sought.

Think back to Internet stock Theglobe.com. Offered at $9, it gained an unbelievable 606% during first-day trading, movement that would have better benefited the company had its shares been priced higher.

With OpenIPO, the offering price is determined by the market rather than the underwriter. OpenIPO merely establishes a range based on comparable publicly traded companies (in Ravenswood’s case, companies like Robert Mondavi Corp., Beringer Wine Estates Holdings Inc. and Chalone Wine Group Ltd.)

Egalitarianism aside, Mr. Hambrecht’s new company, which joins a handful of online underwriters like Wit Capital and EOffering, has its skeptics. Says John Keefe, a New York consultant to investment banks: “The Dutch auction process might change things minimally. But it’s certainly not going to turn a cold deal into a hot one.”

Robert Hoog, director of investment banking practices at Micro Modeling Associates, a New York consultancy, says the auction process is more gimmickry than substance. “Frankly, I think Hambrecht is just creating a lot of news and customers for its business.”

Meanwhile, Steven Tuen, director of research at IPO Value Monitor in New York , worries that W.R. Hambrecht can’t provide the after-IPO backup a major brokerage can.

“Not only does a Goldman have highly respected analysts following the company,” he says, “but to keep it in front of investors they’ll continue touting the stock long after the initial interest has faded.”

Mr. Hambrecht says his firm has eight researchers and plans to beef up that department considerably. “An underwriter has to have a research capability,” he admits. “But it’s more important that a company’s progress be given to the market in a credible way and its stock traded, both of which we do.”

There are those who think Mr. Hambrecht, who left Hambrecht & Quist two years ago to start work on this new venture, is on the right track.

“It’s a viable distribution channel,” says Greg Smith, an analyst at Putnam Lovell DeGuardiola & Thornton in San Francisco. “I could see it help change pricing in the industry.”

Potential investors are certainly excited about it. Paul Fenwick, a Westfield, Mass., investment adviser and self-described active trader, says his clients “always ask me if they can get in on some deals,” largely because of the fanfare surrounding Internet stock IPOs. “They’ve been locked out of anything good, so if I could offer some to them, it would be fantastic.”

Meanwhile Mr. Hambrecht, who is being watched closely because of his pioneering role in Silicon Valley investment banking, isn’t at all fazed by critics. “This will permanently impact the distribution channel,” he says matter-of-factly. “We’ll be able to prove this isn’t a flash in the pan.”