In May Clarissa, the two ton cow elephant, ran away from the Madrid Bolsa where she had been hauled to launch the IPO of Parques Reunidos. She was probably looking for a bull elephant, since it was not a bullish day for the Bolsa – the new stock fell 4.4 percent on the first day’s trading.
In the US, however, IPOs are still roaring along in the best taurine tempo, although there are signs developing to indicate that putting ‘.com’ on the tail of an offering won’t always guarantee a rocket-assisted take-off (see Heard on TheStreet.com).
Even so, dot-com stocks have pioneered a pattern of selling small stakes in the IPO that roar into orbit on the first day, establishing a high valuation for a larger secondary offering six months later. Non-cyber stocks may prefer to get as much as they can for themselves up front.
In either case, ‘The basic ingredient is having a good product,’ says Corey Cutler of IR agency Morgen Walke. But of course the IPO also needs assiduous advance preparation. ‘A lot of them act like a public company beforehand,’ notes Cutler. ‘They get one of the big five accountants to do the books, solidifying their boards with outside members, positioning themselves for the aftermarket not just as a concept but as a legitimate play.’ And before entering the registration period, good public relations raises the profile of the company.
Cutler suggests taking the company story to a trade publication or an industry analyst, which help in getting a good underwriter – one with ‘a strong analyst in your specialty, particularly in the internet where there are so many companies reinventing the way business is happening. You don’t want an underwriter to put you in a pigeon-hole that you may want to get out of later.’
Going ballistic
Dartmouth College’s professor Kent Womack, has studied IPOs en masse and particularly recommends firmness with the underwriters when it comes to pricing. ‘Typically,’ he says, ‘to get a deal off the ground, the underwriter has to have one share of interest for each one that’s sold. In fact, they’re very uncomfortable with less interest than 150 percent of the issue. And to get a really solid deal that’s going to go up in the aftermarket, then you are looking at two to three times the demand for every share on sale.’
And if you want to get internet-style ballistics with the stock going up 50-100 percent on the first day, then there will probably be ten to 20 times the demand for every share offered. In any case, he suggests – the question to which the issuer wants a straight answer from the underwriter is, ‘How many indications of interest are there for my deal? Don’t discount it by how many you think are reasonable.’ As Womack explains, ‘The night before is when the indications of interest are summed up and the price decided. Then the issuer can get a very good feel for the price.’
Womack believes most underwriters would recommend, and most issuers would agree, that they’d like the stock to trade up a little bit, ‘So it doesn’t leave a bad taste in investor’s mouths.’ He recommends 5-10 percent as a comfortable margin of where the stock should trade up ‘to keep it out of the doghouse’ and calculates that on average they go up some 12-14 percent.
Capital giveaway
Any more than that and the company is giving away the capital it may need for expansion – unless of course, as in the case of internet stocks, you are trading for effect as much as capital. However, ‘A company that doesn’t need the advertising value of giving away its capital needs to focus on those indications of interest.’ Mostly, Womack’s research shows that the underwriters and the issuers don’t raise the price enough.
It is in the rustling up of those expressions of interest that the IR element comes in – with a professional and convincing roadshow. Womack cautions, ‘For those companies whose management is uncomfortable in speaking or is not competent in delivery, that’s the first priority if you want to see demand escalate and get those indications of interest.’
We spoke to four companies honored by the Investor Relations Magazine US Awards for the quality of their investor relations during an IPO. The common threads are indeed good management, good product, good presentation – and having fun.
eBay: Having lots of fun
At one of the web’s most astutely commercial firms, it is hardly surprising that eBay CFO Gary Bengier was happy with the results of this particular auction. The IPO of the online auction house in September 1998 raised $76 mn. A secondary offering in April raised $1.28 bn.
The launch boldly went where few had gone for some months before, since it broke last year’s IPO drought. Bengier explains, ‘We were looking to get the name recognition that comes with being a public company and we were gratified by the enormous publicity.’ The follow-on offering came because, ‘We were looking for additional financial flexibility, given that we were the most undercapitalized of companies.’
‘We were happy with the price and thought the underwriting team did a great job for the company,’ he says. The IPO was led by Goldman Sachs, with BT Alex Brown, Donaldson Lufkin & Jenrette, BancBoston Robertson Stephens as co-managers, and Morgan Stanley added for the secondary offering. eBay used a detailed and ‘very fair’ selection process to pick the team of underwriters from ‘some fairly dynamic competition.’
‘We had great support from all those five firms’ analysts and from quite a number of others,’ adds Bengier. He says an important role for the analyst team was road-testing the IPO presentation at the beginning of the roadshow.
Targeting was an important part of the strategy. ‘In the nature of internet companies, there’ll be retail trading, since they tend to be consumer-focus companies anyway,’ he reasons, although in both offerings eBay looked for a mixture: it concentrated on the institutions, and was happy that the secondary offering brought a lot of new ones on board.
Surprisingly, Bengier describes the internet as ‘only minimally helpful’ in launching the IPO. Instead, he reports that the norm are ‘the traditional methods that let the investors understand and make rational decisions.’ eBay used the whole range of media and Bengier advises that ‘word of mouth becomes very important.’
He stresses that ‘A company’s management should take the time to make their plans and their strategy clear to themselves. From a communication point of view, with that in place, it simply became a case of describing it.’
Bengier’s final piece of advice is ‘Have fun! You’ve got to have fun! It’s a once-in-a-lifetime experience. To stand on the trading floor and watch the company’s symbol cross the ticker for the first time – that’s an incredible high. It gives you the feeling that you’re in at the creation of something that’s incredibly important.’
Conoco: Playing the passion card
Tom Henkel was ‘ecstatic’ at the way Conoco’s IPO turned out, raising $4.4 bn for 191 mn shares as it was spun off from DuPont. One of the fundamental aspects of planning for the oil company’s IPO was careful targeting. ‘We wanted long-term investors, people who understood the value story, who understood our competencies.’ The roadshow’s logistics were designed to track down the 120-150 individual analysts and funds they’d targeted. ‘In the end, we made about 120 presentations in 47 cities in ten countries.’
Conoco chose Morgan Stanley as its lead underwriter, ‘because of its work, experience, reputation and, of course, its work with DuPont.’ Henkel adds, ‘It wasn’t a one-way street: they also took advice from us. We had certain characteristics about Conoco that we wanted to communicate, so it was very much a partnership process.’ Another interesting source of comfort and help was industry peers who had been in a similar situation – a sort of IR camaraderie of senior executives.
Despite volatile oil prices Conoco succeeded in pricing at the high end of the range – $23 out of a range of $20-24. He ascribes that to the roadshow’s success ‘in demonstrating a strong cash flow and earnings potential regardless of oil prices.’ DuPont’s flotation of Conoco also allowed the latter to become a pure play escaping the increasing conglomerate discount.
The IPO team rehearsed the roadshow as if it were a Broadway hit. Dry runs in Houston were followed by fine-tuning with the co-managers in New York before a week’s tour in Europe. Getting the jokes right is not to be neglected, he cautions. ‘At the end of the three-and-a-half weeks on the road, it was obvious to the audience that we had more fun with this than you can imagine.’
An IPO is a beginning, not an end in itself, and a roadshow offers the chance to build IR relationships for the future. ‘I worked very carefully with Morgan Stanley and the co-managers to create an up-and-running IR department. I hired Jean Hunter as director of IR even before the roadshow started.’
He suggests, ‘Preparation above all. Know your story before you go. Then put your heart and soul into it. If it’s a good story then tell it straight, don’t put a spin on it.’ However, straight doesn’t mean flat. ‘Play the passion card. When you walk in to an investor, he’ll have seen something similar 150 times before. What he might not have seen is passion.’
Teligent: Kick-starting IR
‘We think it went fine,’ sums up Robert Schwartz, VP at Teligent, the wireless telecoms carrier. He adds that bringing in NTT as a strategic partner was a big boost to Teligent’s IPO. ‘It adds credibility in the market place because investors realize that if someone that smart in the industry takes a stake in the company then there is definitely something going on.’ The next prerequisite is ‘having an incredible management team. We brought in some real seasoned veterans as senior management, people who really know the investment community, which helps when you’re out there on the roadshow.’
Even with those assets, he cautions, ‘You can’t have a me-too business plan. Investors have to be able to look at it and see that this is a unique opportunity that no-one else is addressing in the same way. So you have to take time to think through all the issues.’
Teligent only floated 10 percent of its shares because, as Schwartz declares confidently, ‘In our minds the IPO price would be the lowest that we’d ever have to sell equity for.’ They chose Merrill Lynch and Salomon Brothers as joint book running managers, mostly because of previous relationships. ‘None of us were new to the business, we all had people we knew and trusted,’ explains Schwartz. ‘Clearly market power was important, and with their retail and institutional distribution, we thought it was about as strong as you could get.’
‘There were no hints that coverage would get results or vice versa. We thought our story was good enough to get coverage anyway and now we have over ten firms,’ he says. Performing for the underwriters’ analysts and salesforces ‘helped iron out some of the kinks.’ But just as importantly, ‘The management team were all seasoned roadshow veterans ‘so critiquing each other was critical as well.’
Schwartz’s advice is to keep your flexibility. ‘Listen to the investors, find out what they’re looking for, and be willing to reassess your plan because some institutional investors are some of the smartest guys out there. They have more information than anyone because they listen to everyone.’ In fact in his dual role as VP for corporate strategy and IR during the IPO, he reckons that ‘Listening to their insight was valuable input on our business plan as well. And clearly getting out there and meeting them is a good kick-start for an IR program.’
EOP: building up strong
Equity Office Properties won the 1998 Investor Relations award for best investor relations for an IPO. ‘We priced at the high end and we appreciated 28 percent in the first day of trading with 28 mn common shares,’ says Frances Lewis, senior VP for corporate communications at the real estate investment trust (Reit). The team already had the experience of taking several of Sam Zell’s various Reits public, not to mention his own exposure as a major equity investor. ‘That experience was definitely very helpful to us as we developed the presentations and the roadshow. We really believed they should reflect the company and its operating strategy, and we wanted to set the agenda for IR and communications efforts for the long-term since the IPO was just the beginning of our story as a public company.’
EOP used Merrill Lynch, but Lewis stresses, ‘We refused to simply take the investment bankers’ outline slide show, and our management team spent hundreds of hours making sure that what was shown was our story – the strategic story, who we are and where we are going.’ Hours in rehearsals and Q&A sessions tested and reviewed the presentation. ‘We felt that it was very important to get all the analysts’ input so we could get the IR program up and running as soon as possible. We got Diane Morefield on board as senior VP of IR right after the offering.’
The other advantage of designing the presentations in-house was a greater opportunity to showcase management. ‘Of course, Sam Zell is a star, but even though we were a big company, because we were private we had a lot of managers who were not well-known. It was our responsibility to make sure that the investors met our management.’
