S U C K

"a fish, a barrel, and a smoking gun"
for 21 September 1999. Updated every WEEKDAY.
 
 
 
 
 
IPO'd

 

[]

There are a million stories in

the naked industry. Stories of

high-tech IPOs turning

garage-bound 23-year-olds into

billionaires; stories of the sky

opening up and raining money on

those below; stories of people

at least competent enough to

pull their heads out of their

asses long enough to nod yes

— they'd love that big bag

of cash that Wall Street is

offering.

 

This is not one of those stories.

 

This is the other kind of story,

the kind where everybody loses.

Nobody gets rich, nobody gets

rewarded, nobody gets their just

deserts, not even the bad guys.

Nobody gets to lounge around a

toy-filled office in bare feet,

while being fawned over by

reporters and basking in

Croesusian riches.

 

Because this is the story of what

happens when an IPO tanks: when

the rickety ship, piloted by

drunks and crewed by

malcontents, steers directly

into an iceberg and takes

everybody — rats included

— down with it. You might

say this essay is just another

case of a survivor swimming to

the nearest deserted island and

surviving on sour grapes. But

with about 100 new IPOs

scheduled to close out 1999,

it's also a cautionary tale of

unhappy endings yet to come.

 

Six months ago, I had a

fractional-percentage stake in a

smallish pre-public software

company and the hope that one

day I would be able to buy a

shiny new Lexus with the

proceeds. Today, I have a

fractional-percentage stake in a

smallish public software company

and enough liquidity to let me

start pricing used Novas. From

there to here, over the last

three months, every expectation

I had — every assumption I

made — was off by about a

factor of 10. It doesn't add up

to much for me, but I know

people who were counting on the

IPO money to pay off their

mortgages and send their kids to

school. They're the ones you

never hear from, save the single

gunshot late at night.

 

The process of an initial public

offering is dark and mysterious

and bound to offend anybody who

values predictability or common

sense. The only defense is an

abiding cynicism, a firm belief

that if there's any way for you

to lose, you will in fact lose.

If you're ever involved in an

IPO, close your eyes, grit your

teeth, and prepare to be

blindsided.

 

[]

When an IPO goes bad, there's

never one thing that causes it.

There's always a trail of

screw-ups, failure cascading

from one problem to the next.

Given the irrational exuberance

of the market today, it takes

more than a few missteps to

leave a sticky, red stain on the

virtual floor of the Nasdaq

— it takes bad timing, bad

mojo, bad luck, and the

occasional catastrophically and

criminally stupid mistake.

 

I got to see all of them.

 

The first problem was the timing

of the S-1 filing with the SEC.

The company had been burning

through venture capital for

almost a decade and suddenly

decided — though still not

profitable — to go public.

There's no better way to acquire

the stink of desperation. Wall

Street's monumental, open-wallet

stupidity is a myth that's

sustained us all these last few

years, but the reality is that

nobody's that stupid. Management

either couldn't squeeze any more

cash out of the venture

capitalists or feared that the

boom market was going to end

before they got their turn at

the trough. Deciding to go

public because you're worried

the money train is leaving the

station is to management what

deciding to have a baby because

you're afraid your boyfriend is

going to leave you is to

romance.

 

The second sign of trouble was

the reverse-split. Almost all

pre-public companies are too

dilute, because they hand out

options like after-dinner mints

in an attempt to keep people

from bolting for the door. When

the IPO rolls around, these

shares need to be cut back to

raise the initial offering price

of the company. This is done by

waving a magic wand and turning

two (or three or four) shares

into one. Poof! The problem with

this is that since the initial

price is unknown before the

actual IPO, everybody's been

counting their unhatched

chickens at 10 bucks each.

Suddenly, paper fortunes are

halved. (The CEO gave a rousing

speech about how this didn't

change anything, but even the

lowest people on the

intellectual totem pole couldn't

swallow it.)

 

[]

Third, the circus-clown

management team bungled the road

show. Aside from the number of

outstanding shares, the initial

offering price is influenced by

the buzz created when the top of

the org chart piles into a VW

minivan and visits all the big

institutional investors, trying

to get them excited about the

IPO. Most worker bees are spared

the sight of the road show

presentation, but rumors

inevitably leak out. As with the

myth of Wall Street's infinite

stupidity, there's a hidden

danger in believing the joke

about how investors are fools

who will hand over cash to

anybody who can prefix every

noun in the business plan with

an "e." Playing to trendy

buzzwords without the software

or the brains to back them up

just makes you look stupid.

 

All this added up to the fourth

signpost on the road to doom:

the initial offering price. A

few weeks before an IPO, the

underwriters decide on a range

for the first trade, usually a

couple of bucks wide. Nobody

really knows how these things

are chosen — outstanding

shares and buzz aside — but

my guess is that there's someone

on Wall Street with a very

special ass, and he spends his

day pulling numbers out of it.

The range is usually set

cautiously low, because

significant drops below the

initial price can bring

lawsuits. On the day of the IPO,

the true price is picked from

within the range, and if it's at

the bottom — as ours was

— it's a signal to the whole

world that even the underwriter

has lost confidence in the

offering.

 

Of course, if your stock doesn't

have a ticker symbol, nobody's

going to be interested in it

anyway. The fifth and final

insult, the cherry on this big

ice cream sundae of

incompetence, was that whoever

was responsible for paying for

the magic few letters used to

trade the stock, um, forgot.

Just ... forgot.

 

If you're going to go to the

trouble of herding the whole

family into the station wagon

for a trip down to the stock

market, you should be damn sure

that you've remembered to bring

along the ticker symbol. Nothing

hurts the first-day prospects of

a freshly minted IPO like hiding

the stock from the public.

 

And so, the sum of all this

bungling: The stock ended its

first day in the big wide world

"broken," trading lower than

even the cautious initial price.

Within three days, it was down

25 percent. Today, six weeks

later, it's down over a third.

Even the "Strong Buy"

recommendation from the stock's

underwriter — an obligatory

move, an attempt by an

interested party to hook

suckers — failed to create a

blip. I wonder if it's possible

for a stock to go negative?

 

[]

It happens, certainly more than

you'd know from reading the

Cinderella stories in the

business press. People who have

worked just as hard as the

soft-focused wonderboys wind up

with a nothing but a lot of big

plans in broken pieces on the

floor.

 

There are deep secrets in the IPO

industry, things that nobody

tells you when you start out,

things that are not designed to

work in your favor. If you're

not important enough to be

listed in the prospectus, either

as an officer or as a large

stockholder, then you're not

important enough to be told that

the ship's going down.

 

In the end, it hardly matters, at

least to me. My stake has

dwindled into insignificance and

the nice bonus that the money

would have amounted to is

probably gone forever. Other

people, who worked longer and

harder than I did, got hurt

worse. In some cases, they spent

six to seven years of their

lives waiting for a single

moment, only to see it crumble

to dust before their eyes. Game

over; everybody loses. Even the

CEO didn't make his million.

 

Which isn't much of a

consolation, but amid the

rubble, you take what you can

get.

 
courtesy of Greg Knauss
 
 
 



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