PROSPECTUS PERSPECTIVES PUBLIC PERSONAS · company can attract a high valuation even though it has...

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PROSPECTUS PERSPECTIVES To IPO or NotPUBLIC PERSONAS The View from the Fishbowl

AUDIENCE DEVELOPMENT Investors and Analysts

HITTING THE ROAD The Really Big Show

LIFE AFTER IPO Not Business as Usual

AMERICANLAWYER MEDIA

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The Decision 2Cash. Growth. Investment. Options.Share the wealth—and share theownership. IPOs are red hot—andyou’re ready to get in on the action.Or are you? Before you call theunderwriters, make sure you’ve gota clear notion of what you’re get-ting yourself into. Nothing will everbe the same again.

The Plan 6Once you’ve decided the public

field is the one on which youwant to play, it’s time to suitup—and choose sides. The bestinternal team. The best under-

writers, lawyers, accountants,printers. Then, hunker down and

focus your energies on crafting thebest prospectus. And don’t forget:You’ve still got a business to run.

The Roadshow 12You know your message. All sys-tems are go. Now’s the hard work:convincing investors to buy andanalysts to nod approvingly. It’sshow time! And you’re the star.Don’t schedule a vacation.

Life After IPO 14You got your wish. But be carefulwhat you’ve wished for.

Jupiter’s JourneyFollow Jupiter Communications asit moves from decision to IPO.Starting on page 4.

Practical TipsIn blue type throughout this Guide: adaptations from Bowne’sThe Initial Public Offering: APractical Guide for Executives,written by Wilson SonsiniGoodrich & Rosati.

The Survival Guide to IPOsProduced by:

American Lawyer MediaCustom Publishing

EDITOR/PUBLISHER

Michael Winkleman

ART DIRECTOR

Carole Erger-Fass

WRITER

John W. Milligan

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Glenn Filippone

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Melissa Scragg

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American Lawyer Media, Inc.CHAIRMAN

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PRESIDENT/CHIEF EXECUTIVE OFFICER

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VP/CHIEF FINANCIAL OFFICER

Leslye G. Katz

VP/STRATEGIC PLANNING

Jack Berkowitz

VP/CORPORATE AFFAIRS &GENERAL COUNSEL

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DIVISIONS

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editor’s note

Among the many chal-lenges facing corpo-rate leaders, few are

more demanding, moredaunting, more full ofrisk—and potentialreward—than the IPO. Thelevel of attention to minus-cule detail, the level of par-ticipation in every aspect ofthe process, and the level ofshowmanship required as“closely held” becomesclosely watched can come as a less than welcome surprise—unless the execu-tives, embarking on thisjourney, are forewarned,forearmed, and forthcoming.

And that’s the reasonAmerican Lawyer Media,working with Bowne & Co.,Inc.—the ultimate IPO veteran—embarked uponThe Survival Guide to IPOs:to share not only the gloryof the successful IPO, butthe war stories; to gird, toguide, to get executivesready for an experience that will undoubtedlychange their companies—and their lives.

This publication isdesigned to provide accurateand authoritative informationin regard to the subject mattercovered. It is published withthe understanding that thepublisher is not engaged inrendering legal, accounting or other professional services. If legal advice or other expertassistance is required, theservices of a competent professional person should be sought.

THE SURVIVAL GUIDE TO IPOS

contents

Copyright © 2000 NLP IP Company and Bowne & Co., Inc.

Cover photo: © TSM/The Stock Market Printed by Bowne Version 2

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Buy.com, an Aliso Viejo, CA-based retailer that sells its wares overthe Internet, raised $182 millionthrough an initial public offering inmid-February—not bad for a compa-ny that lost $146 million in 1999 andcan’t predict when it will becomeprofitable. The stock was priced at$13 a share but closed out its first dayof trading on the Nasdaq StockMarket at a little over $25 a share.Some analysts have questionedwhether the company has a viablebusiness model, but investors don’tseem to care. Buy.com’s “pop”—thegain in its stock price during the firstday of trading—of nearly 100 percentis characteristic of many IPOs today.

It’s hard to imagine such a thinghappening even a few short years ago,but the IPO market is unlike anythingWall Street analysts, bankers, orinvestors have ever seen before. Newofferings raised more than $69 billionlast year, according to ThomsonFinancial Securities Data, 39 percentgreater than in 1996, the previousrecord. Technology companies—including the red-hot Internet servicessector—accounted for the vast majori-ty of those offerings.

The IPO market is driven in largemeasure by the strong performance ofthe technology-heavy Nasdaq, whichsurpassed 5,100 in the first quarter of2000. There is a strong demandamong investors of all stripes for techstocks, and this has brought manytechnology companies into the marketfor the first time. Market observersexpect IPO activity to remain strongthis year so long as the Nasdaq holdsup. “When the Nasdaq does well,IPOs are booming,” says Jeffrey R.Hirschkorn, a senior market analyst atIPO.com, a Website that tracks new-issue activity.

Some well-established namescame to the market for the first timelast year, including The GoldmanSachs Group, United Parcel Service,and Charter Communications. Butaccording to IPO.com, 57 percent ofall IPOs in 1999 were brought bycompanies that had been in businessfor less than five years. Also, 81 per-cent of all companies with new issueslast year had sales of less than $100million, a lower sales base than inprevious years. In other words, theapples being picked from the tree aresmaller and greener than before.

This perception is underscored byanother telling statistic: 73 percent ofall companies that came to market forthe first time in 1999 had no earnings.Indeed, profitability no longer seemsto matter very much to investors. Notknowing which companies will be thewinners, many large institutionalinvestors have put money into asmany new companies as possible. If ithas a promising business model andlooks like it might be a survivor, acompany can attract a high valuationeven though it has yet to report anyearnings. “Are companies comingout sooner than we’ve ever seen?Absolutely,” says Merrill Lynch &Co. analyst Edward McCabe, whocovers the business-to-businesstechnology sector. “Arguably, this isventure capital investing in the publicmarket. There will be many more los-ers than winners. Winners will createtremendous value. Losers could beclose to worthless.”

Okay, so here you are, running asmall private company with a greatidea and an insatiable appetite forcapital. Wouldn’t an extra $100 mil-lion make your business move alongat a faster pace? Oh yes, you say, likea turbocharger on a minibike. And so,you wonder, why not me?

It has become a story of our times.

2 THE SURVIVAL GUIDE TO IPOS

the decisi02-05654 IPOdecision 5/2/00 10:56 AM Page 2

Why not, indeed. Clearly the tra-ditional criteria for taking a companypublic have changed. It used to be thatyou needed to show eight consecutiveprofitable quarters as validation thatyour business model works, but that’sno longer the case. Last year, invest-

ment bank Robertson Stephens tookSanta Monica, CA-based Stamps.compublic despite two risk factors thatwould have killed the deal just a fewyears ago. The company is developingan online postage service, but at thetime of the IPO, the U.S. Postal

Service hadn’t approved its productidea, and another company claimed toown the technology. Investors stilllined up for the shares, which werepriced at $11 but eventually shot up to$98.50 before setting in around $30 inmid-February. All this despite the fact

Wouldn’t that extra $100 millionhelp your business move along ata faster pace? With so manyIPOs flying high, why not you?

THE SURVIVAL GUIDE TO IPOS 3

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that “the business model hadn’t yetbeen established,” says ChristopherBulger, the head of technology invest-ment banking at Robertson Stephens.

There are several compellingarguments in favor of going public.New companies need capital to fundtheir growth, and at some point theventure capitalists who nurtured themthrough their early years will give wayto the vastly larger financing capacityof the public market. The money canbe used to fund new product develop-ment or build brand awarenessthrough extensive marketing. Theavailability of stock options is a criti-cal factor in recruiting and retaining

employees, while the availability ofstock as a currency can enable a com-pany to grow through acquisitions.

Companies that go public sharemost if not all of these motivations.U.S. Interactive, an Internet market-ing, consulting, and technology firmbased in King of Prussia, PA, wantedto prepare itself to nearly triple in sizethis year. U.S. Interactive had rev-enues of $38 million in 1999 butexpects to hit $100 million in 2000.President and chief executive SteveZarrilli raised $46 million in Augustof last year, and some of that moneyhas been used to build out depart-ments like human resources, the legal

department, and a wide array of othercorporate functions. Zarrilli wantedworking capital “so we could continueto expand the infrastructure of thecompany,” he explains.

Look Before You LeapJupiter Communications, a NewYork-based research firm that spe-cializes in Internet commerce, wantedto be able to reward longtimeemployees who had been working atbelow-market compensation levelsfor a few years with an equity stakein the company. Jupiter chief finan-cial officer Jean Robinson also saysthe firm’s IPO was a highly valuablebranding event, “and a big part of ourasset is our brand name.”

And often, companies will gopublic because they see an opportuni-ty in the marketplace that can only beexploited through access to a deeppool of capital. David T. Blair, CEO atRockville, MD-based HealthExtrasInc., which sells a variety of insuranceprograms directly over the Internet,cites the importance of the “firstmover advantage”—being the firstcompany to occupy space in anemerging industry. Blair thought hesaw that opportunity last year andultimately raised $60 million throughan IPO in December. “There was justthis tremendous advantage that wedidn’t want to let slip by,” says Blair.

If the reasons for going public arecompelling, it’s not a decision thatshould be made lightly—more sotoday than ever. There is, first of all,the grueling nature of an IPO, and“grueling” is a word that veteransoften use to describe it. The processplaces extraordinary demands on sen-ior management, particularly the CEOand CFO, and it’s important to makesure your team has enough bandwidthto run the company and put together

the decision


JUPITER’S JOURNEY

In the BeginningWinter 1998-99

Founded in 1986, New York City-based Jupiter Communications

sought to help its clients understand and seize the potential of

Internet commerce—a specialty that dovetailed nicely with the explo-

sion of the Net in the mid-’90s, as Jupiter became one of the most

prominent providers of research on the Internet economy. Having

analyzed an industry that has brought renewed excitement to IPOs,

Jupiter was well-prepared to contemplate its future as a public com-

pany and had looked toward 1999 as the year it would happen. That

contemplation got more serious during early 1999, and by March,

when CFO Jean Robinson came on board, the company had begun to

aggressively pursue its goal. “There’s a huge amount of work that

goes on,” says Robinson. It involved maintaining both an external

and internal focus. Jupiter’s team talked about the company during

informal discussions with a bunch of banks and also worked to get

its shareholders on board, while at the same time spearheading the

normal pre-IPO effort to get its house in order.

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an offering simultaneously. In the caseof Jupiter Communications, the com-pany hired Robinson, who had beenan investment banker for J.P. Morgan& Co. doing public offerings includ-ing IPOs, seven months prior to itsdeal. “From the moment I came in, allI did was the IPO,” she says.

There are also the added demandsof running a public company. Thereare Securities and ExchangeCommission (SEC) disclosurerequirements that must be metthrough various quarterly and annualfilings. And it’s critically importantthat new public companies maintainstrong ties with Wall Street securitiesanalysts and their new investor base,all of whom will be watching theirevery move with the close attention ofa country sheriff at a hippie revival.

Most important, if the barriers tothe IPO market have never beenlower, the risks of failure have neverbeen higher. It’s difficult to watchthe level of new issue activity andnot want to take advantage of a his-toric opportunity to raise capital,build your company, and becomewealthy in the bargain. “Everyonewants to go public,” says securities

attorney Andrew Tucker at McLean,VA-based Shaw Pittman.“Everybody looks at a 4,600 Nasdaqand says my personal wealth couldgo through the roof.”

But analysts and investors havelittle patience with a new companythat doesn’t meet or exceed its rev-enue and earnings projections duringits first year of operation. Investorswill quickly dump the stock, and the

company may find itself in a weakerposition than before it went public.Institutional shareholders who wereless than discriminating when makingtheir initial decisions will flat outabandon a company that can’t deliverconsistent performance. “Missingyour numbers is not just viewed as anoperational issue, but as a strategic

issue,” says Stephan J. Mallenbaum,head of the technology issues practiceat Jones, Day, Reavis & Pogue in NewYork. “Missing your numbers is seenas a marker for a much bigger prob-lem.” What worries investors,Mallenbaum explains, is that yourbusiness model might be invalid.

A new company that has disap-pointed Wall Street suddenly findsitself in a tenuous position. Its stock

may be trading below the IPO price,rendering all those employee stockoptions worthless and poisoningmorale. It also might become anacquisition target for a competitor.

“When you go public, you’ve betyour business,” says Merrill Lynch’sMcCabe. “And if you missed yourforecast, you lose.”

And yet, while failure would bepainful for the company’s senior man-agers, some good might still come ofit. “The companies that stumble willget merged or consolidated,” saysMallenbaum. “But they will be betteroff for having gone public.”

For some companies, the smartestdecision is to wait until their businessmodel has been more thoroughly vali-dated and their forecasting skillshoned. Of course, the IPO marketmight turn against them and an oppor-tunity to raise capital would be lost.But there are worse things. “People gopublic too soon,” says Tucker. “Theyrarely go public too late.”

Are YouReallySure About This?If you’re a CEO who’s contemplating an IPO, walk over to a mirror and take a

long, hard look. The person you see there—does he or she have the right

stuff? Taking a company public is a grueling affair, especially since the process

occurs while you’re also trying to manage its day-to-day affairs—a big

enough job in itself. Perhaps the senior management team needs to be

strengthened first through additional hires. Also, has your company’s business

model been thoroughly validated? Failing to meet Wall Street’s expectations

can be a fatal mistake for a new public company. The smartest decision you

ever make may be to delay the IPO for a few quarters.


“Missing your numbers is seen as amarker for a bigger problem.”

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of doing an IPO is the unavoidablefact that all the necessary labor—writ-ing a prospectus, meeting with yourvarious advisors and making a zilliondecisions both piddling and porten-tous—must be done while you’re alsorunning a business. And if yours islike most small companies still instart-up mode, that in itself is an 80-hour-a-week proposition. Let’s face it:IPOs are tough.

Here are some of the more impor-tant things that must be done over thethree- to four-month period duringwhich you will put together your plan:• Assemble a working team that

includes the CEO, CFO, corporateattorney, and possibly the chief mar-keting officer. This may involverecruiting new players.

• Pick your outside advisors, includinglawyers, underwriters, accountants,and a financial printer.

• Write a registration statement thatmust be approved by the SEC. Thisincludes your prospectus, the offer-ing document that lays out yourcompany’s story and explains whyit’s a good investment opportunity.

• Go through a rigorous due diligenceprocess, under the direction of yourinvestment banker’s own legal coun-sel, to verify all of the factual infor-mation in the prospectus.

• File your registration statement andthen wait, possibly after several revi-sions, for approval from the SEC.

There is no easy way to juggle thedemands of running a company whileyou’re also working on an IPO. It maysimply be the price of gaining accessto the public equities market. U.S.

Interactive president and CEO Steve Zarrilli, who took his company publicin August 1999, takes the stoicapproach that in a fast-paced, run-ning-at-Internet-speed environment,“putting together an IPO is not out ofcharacter.” Zarrilli says it helped thathe had a strong management team toleverage against. While he concentrat-ed on due diligence, his CFO andattorneys focused on writing theprospectus.

One of the most difficult aspects


the plan06-05654 IPOplan 5/2/00 10:59 AM Page 6

Writing a prospectus while stillrunning a business demands notonly focus, but the right team—with the right stuff.


anDrafting a registration statement

is a labor-intensive engagement thatinvolves an ongoing series of worksessions. The statement is dividedinto two parts. Part I, which containsinformation in the prospectus, pro-vides much of what investors willneed to make their decision, includ-ing a description of the company’sbusiness, comprehensive financialstatements, a discussion of relevant

risk factors, and an explanation ofhow the IPO proceeds will be

used. Part II, which does nothave to be distributed toinvestors but is publicly avail-able, provides additional

financial and operatinginformation.

Due diligence is athorough examination of

the company’s prospectus thatmay make you feel like you’relocked in a room with the Grand

Inquisitor but protects both thecompany and its underwriteragainst liability from share-holder suits after the IPO.

And they do happen.Value America Inc., anonline retailer based inCharlottesville, VA, wentpublic last April at $23 ashare, raising $126.5 mil-

lion. The stock hit $74.25the same month, but has since

plunged to around $5 a share, begin-ning when the market grew skittishabout the profitability outlook ofmany dot-com retailers. ValueAmerica has been sued by sharehold-ers who believe they were misledabout its outlook. Comprehensive duediligence is crucial because a compa-ny’s only defense in a shareholder suitis that information in the prospectuswas accurate and no material informa-

tion was omitted.Due diligence is largely confined

to information in the prospectus, butAndrew Tucker, a securities attorneyat Shaw Pittman in McLean, VA, saysa broader internal review effort shouldbegin as soon as a company knows itwants to go public. “Part of the IPOprocess is flashing a light in everycorner and finding every skeleton andthen burying them properly,” he says.

JUPITER’S JOURNEY

The TeamJune 1999

The various aspects of Jupiter’s pre-IPO preparation were all happening

simultaneously by the time the key players gathered for the first formal

organizational meeting in June. By that point, Jupiter’s planets were in

alignment, with Donaldson, Lufkin & Jenrette as lead underwriter and

Deutsche Banc Alex. Brown and T. Weisel Partners as co-managers;

Brobeck, Phleger & Harrison as legal counsel; KPMG as auditor; and

Bowne as printer. The launching pad, says CFO Jean Robinson, was not a

long and laborious session: “You meet for an hour. You say, ‘Here’s the

timeline; let’s coordinate schedules; we need to do this and we need to do

this; what other issues do we need to deal with?’ We moved right into

the due diligence, where different department heads made presentations.”

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Tucker provides an example of thesort of problem that might seem rela-tively minor when a company is stillprivate, but takes on great signifi-cance in the context of an IPO. Whena Shaw Pittman client was preparingfor an IPO recently, a reference wasfound in company documents to awarrant to purchase common stock.But there was no record of the war-rants being issued, evidence of the laxrecord keeping that’s not uncommonin small companies. The problem hadto be resolved before the IPO couldgo forward, Tucker explains.

“The worst nightmare is surprise,”says Tucker. “It damages your credi-bility, both with your investmentbanker and your shareholders. We reg-ularly see issues that management dis-missed as inconsequential resurface toharm the company or the process.”

The most important decisions youmake may be the selection of youradvisory team. Choose them as care-fully as you would partners in yourown business. The lead underwriteradvises the client on structuring, tim-ing, and pricing of its IPO and man-ages the roadshow where the offer ispresented to investors. You also maychoose one or more co-managers toassist the lead underwriter.

In selecting a lead underwriter,Jupiter Communications CFO JeanRobinson stresses “chemistry with thebanker because you’re going to beworking with them a lot.” She alsocites the importance of the under-writer’s reputation because “yourname and that bank’s name are goingto be put together.”

For Christopher Bulger, the headof technology investment banking atRobertson Stephens, “the No. 1 issueis strength of research. Who is goingto be the research sponsor?” The lay-ing on of hands by a respected

the plan


JUPITER’S JOURNEY

ProspectusJuly 1999

For the crucial and time-consuming step of developing the prospectus,

“we did it the way it is typically done,” says CFO Jean Robinson, “which

is that the lawyers do the heavy lifting and the company and the bankers

try to bring the story to life.” The lawyers tried to streamline the

prospectus process as much as possible, often setting up the necessary

phrases and allowing Jupiter’s folks to fill in the blanks with specifics.

Several drafting sessions were held during July, though an initial draft

had been prepped earlier. Robinson emphasizes the importance of the

prospectus summary: “We spent a lot of time on the first two pages,”

she says, noting the need to catch investors’ eyes at the start. The sum-

mary highlighted Jupiter’s variety of services and diversified client base.

When it Comes to Publicity,

Don’t Jump the GunThe SEC takes a very dim view of any effort to hype an upcoming IPO

through publicity that would, in effect, precondition the market to

think favorably about the company. But that doesn’t mean you

have to go incommunicado during the registration process. The

key is whether a company’s public statements are consistent

with its past practices. For example, if your company normally

issues a press release when it makes significant personnel moves,

this would be permissible during the months leading up to an IPO—so

long as it was made in a manner consistent with previous announcements.

In other words, don’t start substituting half-page ads in The Wall Street

Journal for simple press releases. When in doubt, check with your legal

or investor relations counsel. If the SEC thinks you’re engaging in “gun

jumping,” it may force you to postpone your IPO—which could cost your

company a bundle, depending on market conditions.

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...an UnderwriterAnalyst Coverage: The underwriting firm should

have a respected research analyst who cov-ers your industry since ongoing research iscrucial in building an investor following.

Chemistry: You’ll be working together closelyfor months at a time, so it’s crucial that youdevelop a solid professional relationshipwith your underwriter based on mutualrespect and trust.

Distribution: Can the investment bank place yourstock in the hands of desired investors,especially in a difficult IPO market?

Commitment: Who will be the lead banker work-ing on your account—the senior bankerwho met with you initially or someone less experienced? This bait-and-switch tactic can be a problem at the large firms,especially if you’re a smaller company.

...a Financial PrinterQuality of Service: Your printer should do more

than print your SEC documentation. Theyshould come on the scene well beforethe prospectus is completed. While the IPOprocess might be new to you, a seasonedprinter will have been through the drillnumerous times and can guide you.

Facilities: Since many drafting sessions takeplace at the printer’s offices, they shouldhave excellent facilities in every financialcenter worldwide, capable of accommodat-ing teams working around the clock.

Breadth of Service: Your printer should providetypesetting, printing, and EDGAR filingservices for SEC compliance documenta-tion, including your initial registration doc-uments and 10-Ks, 10-Qs, and proxy materi-als. They should also be able to repurposethese documents for electronic distribution,translate and localize your information intoany language, and manage these versionsso your message remains consistent.

...an Auditing FirmIndustry Knowledge: Accounting issues can vary

widely from industry to industry. It’simportant that your auditor is well-versedon the important accounting issues facingyour company.

Familiarity with IPOs: Does the firm have a large IPO practice? Beware of retaining anauditor that doesn’t have a lot of experiencewith the highly charged process of taking acompany public.

Reputation: Most companies retain one of theBig Five public accounting firms because it gives investors a higher level of comfortwith their IPO.

...a Law FirmExperience: The firm should have an active

IPO practice and should have experienceworking with companies in your industry.Your securities lawyers write the registra-tion statement and handle problems withthe SEC, so it’s vital that they know whatthey’re doing.

Broad Perspective: It’s important that yourlawyers have a good enough feel for yourindustry that they can advise you on impor-tant business issues as well. Just writingthe prospectus isn’t enough.

Chemistry: This is just as important with yourlaw firm as with your underwriters—perhaps even more so because you will bejoined at the hip for three to five months,and possibly longer since you may needhelp after the IPO adjusting to life as apublic company, including SEC disclosurerequirements.

Fees: Generally speaking, you get what you payfor. Picking the lowest bidder could turnout to be penny-wise and pound-foolishwhen you consider the potential liabilityyou face from shareholder suits if yourdeal blows up.

How to choose...

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research analyst can provide a power-ful boost to an IPO.

One factor that shouldn’t be animportant consideration when select-ing an underwriter is cost. Most firmscharge a standard fee of 7 percent ofthe proceeds raised, which is dividedamong the members of the underwrit-ing syndicate.

Moving the Process AlongThe company’s law firm is “primarilyresponsible for drafting the prospectusand keeping the process movingalong,” explains Shaw Pittman’sTucker. IPOs are very detail intensive,and you don’t want to fall behind. “Ifyou don’t get ‘A’ done in a timelyfashion, it can lead to problems downthe road,” he says. “It’s an ‘A’ leads to‘B’ thing.” A good securities lawyerwill keep the gears from jamming asthe pieces come together.

Tucker advises companies toassess law firms based on the numberof IPOs they’ve worked on and whothe clients were. It’s also important toknow whether the same partner whomarketed the firm to you will handlethe deal. “Or will it be handed off toa third-year associate who will strug-gle with it?” Tucker asks.

When it comes to selecting anauditor, Tucker suggests that compa-nies seriously consider retaining oneof the Big Five accounting firms.It’s important that the auditor have athorough understanding of theaccounting issues in your industry,along with IPO experience. But per-ception can be as important as realityin this situation. Tucker says manyinvestors simply have greater confi-dence in a larger firm. “If you don’thave one of the five, you take a bighit,” he says.

Another key service provider dur-ing an IPO is the financial printer,

Andrew TuckerSHAW PITTMAN

“Once your company is public, analysts watch your per-

formance closely and expect you to make quarterly

revenue and earnings targets. If your company misses

these expectations, your stock price will decline,

often permanently. This demands that you have vali-

dated all the elements of your business model. If

you have difficulty meeting your quarterly projections

as a private company, then you should delay your IPO.”

Christopher BulgerROBERTSON STEPHENS

“You must exceed your earnings forecasts. If you say

you’re going to grow by 30 percent and only grow

by 29 percent, the analysts are going to cut your

valuation and raise questions about your credibili-

ty. The penalty for not hitting your numbers has

never been higher.”

Stephan MallenbaumJONES, DAY, REAVIS & POGUE

“What it means to be a public company has changed. It

used to mean that your business model had been vali-

dated through operational experience, that your abili-

ty to execute was proven. It doesn’t mean that any-

more. Some companies that are going public today

are really venture capital plays.”

the plan

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which will assume responsibility forprocessing changes to the registrationstatement as it gets closer to a finaldraft. The printer will “EDGARize”and submit the final document to theSEC. Later they will print theprospectus and deliver paper copies tothe underwriting syndicate plus pre-pare electronic versions for posting onthe IR section of the company’s Web

site. “At a minimum, a financial print-er must constantly invest in the righttechnology, systems, and people,which enables it to put together aglobal distributive print network inNorth America as well as in financialcenters in Europe, Asia, and LatinAmerica,” says Robert M. Johnson,chairman and CEO of Bowne & Co.,Inc., which filed and printed 10 of the

top 20 IPOs, by offer amount, in1999. Adds Tucker, “I’ve been atsome of the smaller printers and hadreal nightmare problems when thingsgot complicated at the end.”

Companies that intend to go publicmust handle their publicity carefullyonce they have entered the pre-filingperiod, which begins when a companystarts to formally plan its IPO. TheSEC watches closely to ensure thatcompanies don’t try to hype theirstory in advance of an offering,although companies are permitted toengage in legitimate marketing activi-ties and make routine announcements.Care also must be taken during theperiod from the date the registrationstatement is filed through the quietperiod which generally extends 25days from the effective date of theregistration statement. During thistime, when the underwriting groupwill be marketing the offering toinvestors, it’s important to limit yourdisclosures to information in theprospectus. “During the quiet period,you have to keep to the letter of theprospectus,” cautions Andrew S.Edson, chairman of Andrew Edson &Associates, a PR firm that advisescompanies during IPOs.

There’s one other consideration.Underwriters routinely insist on lock-up positions to prevent companyinsiders from selling their stock for aperiod after the IPO. You may reallywant that vacation home, but investorswouldn’t like a company official tounload a big chunk of stock soon afteran offering. Lock-up provisions pre-vent you from accessing your new-found wealth too soon. “There’s virtu-ally no more liquidity six months afterthe transaction than before,” says U.S.Interactive’s Zarrilli, who owns about5 percent of the company—a stakeworth approximately $10 million.

Give Diligence Its DueTaking a company public is a detail-intensive process that never seems to end. Just

when you think you’ve answered the last due diligence question, your pesky, per-

sistent underwriter comes up with another one. Due diligence is a process whereby

your underwriter determines that all the information in the registration statement is

correct—although at times it may seem like an interrogation. No factual stone is

left unturned, and the process can overwhelm you if you let it get out of control.

Here are two suggestions: Designate one person at your company as the primary

contact for due diligence materials and have everything flow through him or her,

otherwise it will turn into a free-for-all. Also, if a due diligence request seems

unreasonable, negotiate with the underwriter to narrow it. Due diligence is intended

to protect you and your underwriter from shareholder suits. So remember, the devil

is in the diligence.

JUPITER’S JOURNEY

RegistrationJuly 30, 1999

Successfully reaching its target date, Jupiter filed its registration

statement with the SEC at the end of July. Its stock would be listed

on the Nasdaq Stock Market, home to many tech-oriented companies.

Registration was followed by the SEC comment period, and, in this

case, those comments went a bit beyond standard accounting issues.

“At the time we were doing it, the SEC had just implemented the ‘plain

English initiative,’” says CFO Jean Robinson; accordingly, the language

of the detailed document was scrutinized on more than one level.

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Once the preliminary prospectus—the red herring—has been printed, it’stime for the roadshow, a show in whichthe company’s senior managementteam and underwriters are the actorsand investors are the audience. Theroadshow enables management tospeak directly to the people who mayend up being their shareholders. “Thisis your opportunity to position thestory with the investors,” says JeanRobinson, CFO at New York-basedJupiter Communications, an Internetresearch company that went public inOctober 1999. Some investors want tosee if management—usually the CEO

and CFO—can distill their story to itsmost essential points. Management’spresentation is also an opportunity forinvestors to “look them in the eye” andsee if they can deliver, Robinson adds.

The trip, which is organized andrun by the lead underwriter, will gen-erally last two or three weeks and hittwo dozen U.S. cities—sometimes twoor more in the same day—and foreigncountries if an international tranche isplanned. There will be large groupmeetings and one-on-one sessions.

Christopher Bulger, head of tech-nology investment banking atRobertson Stephens, says there are

about 200 institutions nationwide thatroutinely invest in new offers. “You’relooking for the eight to 14 who willwant to keep [your stock] long-term,”says Bulger. “In the short-term, every-one will buy your deal. The key isfinding people who will hold on to it.”

Veterans of roadshows say it’simpossible to overprepare. “You espe-cially have to prepare for the onequestion you don’t want to haveasked,” says Robinson.

It’s also important to stay mentallyfresh despite the taxing travel sched-ule. Jupiter’s IPO team visited 15 U.S.cities over a two-and-a-half-weekperiod, plus a London trip. Robinsonsays it’s important to remember thatwhile you may have done an IPOpresentation a dozen times, it will bethe first time for your audience. “Ialways wondered how an actor got onstage every night and stayed fresh,”she says.

Rockville, MD-based Health-Extras, which markets various insur-ance programs over the Internet, wentpublic last December. CEO David T.Blair, met with more than 100investors in 18 cities over two weeks.“The second week is like pullingteeth,” says Blair. “You’re tired oftelling the same old story.” Blair paus-es a moment, thinking of the bruisingtravel demands of a roadshow, thenadds: “A corporate jet is key.”

At the conclusion of the roadshow,the lead underwriter will price thedeal, determining what the offeringprice will be. Underwriters will use amultiple of earnings or revenue to seta valuation if there are similar compa-

Let’s see, if it’s Tuesday this must beDetroit…and Denver…and Minneapolis.


the roadsh12-05654 IPOroadshow 5/2/00 11:01 AM Page 12

nies available for comparison. But thepricing process is also based on theunderwriter’s assessment of investorappetite. Throughout the roadshow,the investment banker will be takingindication orders—nonbindingexpressions of interest—frominvestors in a process called “buildinga book.” “If the banker does the jobright, they’re giving you feedback allalong,” says Robinson. If indicationorder volume is strong, the under-writer will start inching the offeringprice upward. In Jupiter’s case, thelead underwriter, Donaldson, Lufkin& Jenrette, originally considered anoffering price in the $15 to $17 range.As interest in the company’s storygrew, the price moved to $18 and thento $20. DLJ finally priced the deal at$21 a share, raising $65.7 million.

A striking characteristic of thecurrent IPO market is the substantialpop that occurs in the early days oftrading. According to IPO.com, anInternet site that tracks IPO activity,the average first-day gain for newoffers in 1999 was 181 percent.Traditionally, underwriters have want-ed to price new offers conservativelyenough that something was left on thetable for investors to sustain theirinterest in the aftermarket. If a newissue was priced too high and lan-guished in the aftermarket, it couldresult in investor apathy or hostility.

Of course, when a company seesits shares jump 100 percent the firstday, management may think its under-writers left too much money on thetable. “But that’s just sort of the reali-ty of today’s market,” Robinson says.

This could be the performance of your life.Be ready to give it againand again and again.


Hold ThatVacationOkay, it has been a tough four

months full of marathon meetings

capped by a grueling roadshow that

felt like a cheap European vacation—

you know, one of those 12-cities-in-11-days

packaged tours. Your IPO has finally closed, and you’re dying to split for

a few days with the family in Cozumel—or Bali, if things went really

well. Don’t, at least not yet. Many closing documents require original

signatures, so it’s best if the CEO and CFO stick around until the closing

has been completed. Otherwise, your secretary may be forced to hunt

you down on the beach.

JUPITER’S JOURNEY

HeadlinersSeptember 1999

Two-plus weeks. Fifteen-plus cities. In typical roadshow fashion,

Jupiter’s team played rock stars and set out on a grueling, whirlwind

tour. Having spent a lot of time in August developing the roadshow

presentation, the group was ready to hit the high points during a

variety of 20-minute presentations, one-on-one meetings, and other

exchanges. At the end, Jupiter and its underwriters priced the deal,

negotiating an IPO price of $21 per share.

show12-05654 IPOroadshow 5/2/00 11:01 AM Page 13

On the one hand, you’ll have tensof millions of dollars in financing tocreate the infrastructure for a largercompany, develop new technology, orbuild your brand through marketing.But this comes with certain stringsattached. You’ll give up some of thefreedom you enjoyed as a private com-pany and find that your new boss—Wall Street—can be demanding.

Consider, for example:• Your company will be under tremen-

dous public scrutiny, and there willbe severe limits on certain activitiesmanagers once enjoyed, includinggranting themselves dividends tomeet their financial needs orextending certain perquisites tothemselves.

• You must hold an annual meetingfor stockholders and distribute cer-tain information in advance.

• The compensation of top officerswill be publicly disclosed.

• Your company could find itself suedby its own shareholders.

• You will be exposed to the risk of ahostile takeover.

• Your senior management team willbe tempted to live or die by theprice of the company’s stock.One of the most important require-

ments of public ownership is the needto disclose, on a regular and timelybasis, information to your shareholdersthrough a variety of filings that mustbe made with the SEC. These largelyfinancial filings invariably become theresponsibility of the CFO. A 10-Q,detailing the company’s financial con-dition, must be filed within 45 days ofthe end of each of the first three quar-ters. A more extensive10-K must befiled within 90 days of the end of thecompany’s fiscal year. And significantevents, such as a change in corporatecontrol, a major acquisition, or achange in accountants, must be filed inan 8-K report. These reports must befiled on time; missing a deadline raisesa red flag with analysts and investors.

Preparing these reports “is not dif-ficult intellectually in the management-challenge sense,” says JupiterCommunications CFO Jean Robinson,whose company went public lastOctober. “But it’s another task we didn’t have to do before.”

While meeting these filing dead-lines can be an administrative chal-lenge for a small organization, thereare probably few aspects of public

Public ownership will impose changesthat are both subtle and profound.


life after I14-05654 IPOlifeafter 5/2/00 11:02 AM Page 14

ownership that newly converted com-panies are less prepared to handle thanmanaging their ongoing relationshipswith securities analysts. And having agood relationship with the Street isessential in creating an investor follow-ing for your stock. But the timedemands analysts place on senior man-agement can be very disruptive. That’swhy most companies end up hiring aninvestor relations manager to workdirectly with analysts. This individualcan’t be a substitute for the CEO andCFO, who will still need to talk withanalysts regularly, but he or she canrelieve pressure on senior managementby fielding calls and responding tostraightforward information requests.

The normal tendency, especiallywhen a company is trying to encourageStreet analysts to cover its stock afteran IPO, is to be helpful. But there arelimits to how much help you can—orshould—provide. Says Jupiter’sRobinson, who handled IR tasks forawhile after her company went publiclast fall, “I find it a little hard to knowhow far I can go in guiding analystswith the [company’s] numbers.” Addssecurities lawyer Andy Tucker at ShawPittman in McLean, VA, “I field callsfrom companies every day asking,‘Can I tell the analysts this, or can I tellthe analyst that?’”

It often takes awhile before thesenior executives at new public compa-nies understand how to manage theircontact with the Street. For example,

You’ve achieved yourgoals. You’re flying high.And business is not “asusual” anymore.


JUPITER’S JOURNEY

AftermarketOctober 1999

The JPTR symbol became a reality as it jumped into play on the

Nasdaq on October 9—with one direct result being a dramatic increase

in champagne consumption back at Jupiter’s HQ. “It was pretty exciting,”

says CFO Jean Robinson, who had previously been part of the process

from the banker side. One of Robinson’s challenges leading up to the

IPO had been to keep employees focused on their jobs, and, overall, to

help manage the expectations of everyone involved. Those expectations

were met as the first day of trading witnessed a nice pop in Jupiter’s

performance, with a first-day closing price of $35.50. Since then, the

stock has hit a high of $47.38.

IPOStreet TalkOne of the skills every new public company

must learn is managing its relations with

Wall Street securities analysts. Analyst

coverage is vital because it helps create a

following for your stock. You’ll need to

set up an investor relations program and

designate someone to handle analysts. In a

small company that can’t afford to hire a full-

time IR director, that job will probably fall to the CFO. Make sure that

only certain people are authorized to talk with analysts. It’s also a good

idea for them to all be trained by the company’s securities lawyers, so

they know what to say—and what not to.

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it’s important not to provide select-ed analysts or investors with signif-icant information that has not beenmade publicly available. This“selective disclosure” can lead to ashareholder suit from investors whofeel they were disadvantaged or toenforcement action by the SEC.

Companies also need to beespecially careful not to provideoverly optimistic earnings predic-tions to analysts or investors that

might subject the company to ashareholder suit if they are not met.In this regard, securities law doesprovide some protection in theform of a “safe harbor” for for-ward-looking statements on suchthings as earnings or revenuegrowth, so long as they are accom-panied by cautionary statements—“Miranda Warnings”—that identifythe risk factors.

Spokespeople should be desig-nated to talk with analysts andinvestors—and trained by the com-pany’s securities lawyers. Tuckerexplains it’s not unusual for ana-lysts to call people throughout thecompany looking for information.

Perhaps the best advice is fornew public companies to workclosely with their securities counselfor the first year after their IPO toput in place appropriate disclosurepolicies everyone understands.Information is the grist of the WallStreet research mill, but whenserved up injudiciously it can betoo much of a good thing.

life after IPO

Shareholdersuits can resultfrom “selective disclosure.”

Show Me the Money


So, should you do it? Access to capital for small, fast-growing com-panies has never been greater. Institutional investors are clamoringfor technology stocks to cram into their portfolios, especially in thered-hot business-to-business market where innovative companiesare growing like mutant weeds. Portfolio managers who missed anearlier investing opportunity when they didn’t believe Internetretailers like Amazon.com were for real are determined not to getleft behind this time.

Taking a company public can lead to the fulfillment of an entre-preneur’s dream. Indeed, the completion of an IPO can be an intenseemotional experience. “It’s certainly a thrill to see your company goacross the ticker and to deposit a big check in the bank,” saysDavid Blair, president of Rockville, MD-based HealthExtras Inc.,which went public in December 1999.

Clearly the barriers to the public equities market for small, privately owned companies have never been lower. But is this apositive thing in every instance? “For good companies, it’s anexcellent thing,” says Farrokh Billimoria, a Menlo Park, CA-basedgeneral partner at venture capital investor Sprout Group, an affiliateof Donaldson, Lufkin & Jenrette. But the decision to go public shouldbe made very carefully. Could the easy availability of equity capitalend up being a trap for your company? “I think the answer to thatquestion is that the money is just too good right now,” saysStephan Mallenbaum, an attorney who heads up the technologyissues practice group at Jones, Day, Reavis & Pogue in New York.“It’s so good that companies are willing to run the risk of stum-bling.” DLJ’s Billimoria isn’t so sure. “I don’t think that peopleunderstand the risks of going public,” he says.

The performance expectations of Wall Street can only bedescribed as brutal. Miss your earnings forecasts, especially in thefirst year after your IPO, and you could see a catastrophic decline in the price of your stock of 50 percent or better. Once a youngmanagement team has thoroughly discredited itself with WallStreet, there may be no recovery.

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