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.