George Shaheen must have been feeling a bit giddy when he sat down in October for interviews with Forbes and Business Week. The former CEO of Anderson Consulting, who only weeks earlier shocked employees with his resignation, had taken the helm of Webvan Group, an online grocer heading toward an internet IPO that has turned mere mortals into millionaires. With options to buy 15 mn shares at $8 a piece, Shaheen stood to make a paper profit of some $180 mn.
But perhaps it was more than just the fat pay check and the chance to rub shoulders with the internet titans that influenced his performance. People do funny things when the media spotlight comes calling. And Shaheen did a funny thing. He started gushing about Webvan. He boasted to Forbes, that ‘Webvan was all about reinventing the grocery business, just as Andersen had reinvented consulting.’
What’s so odd about a CEO promoting his company? Nothing, unless the company is in the registration or ‘quiet’ period for an IPO, which Webvan was. Under US securities law, companies in the so-called quite period are prohibited from selling or promoting their shares outside of a prospectus. Shaheen, it would seem, was doing a good deal of promoting. And it wasn’t just the articles that were raising eyebrows. In October, TheStreet.com published financial projections that a reporter had picked up during Webvan’s roadshow, projections not included in the prospectus.
The SEC had apparently had enough. It objected to the publicity, noting the potential violation of the quiet period. Neither Webvan nor the SEC would comment for this article. Webvan and its underwriter Goldman Sachs postponed the IPO, and the company updated its documents on the initial offering to include some of the published information. As for Shaheen, the company distanced itself from his comments, noting in the amended prospectus: ‘Andersen Consulting and Webvan are vastly different businesses and you should not make any comparison between the two companies.’
So much for CEO over-exuberance. Of course, Shaheen isn’t doing so badly. On November 5, Webvan’s IPO went forward, with shares rising roughly 73 percent, from $11 to $26, and giving Shaheen an obscene nest egg. But while a chastened, well-compensated CEO may not draw much sympathy, a number of trends, including the impact of the internet on securities offerings and changes to US securities laws, suggest that there’s more to the Webvan episode than meets the eye.
Matter of interpretation
It could be argued that Webvan simply got caught doing what a number of its peers have done over the past year. While boundaries of the quiet period are clearly defined – from the period leading up to registration (when companies are proposing to make an offer and sale) to 25 days after the shares begin trading – there are some provisions that afford companies a bit of flexibility.
For instance, they can continue with publicity if it is part of the normal course of business. So if a company has always advertised new products, it can carry on so long as it isn’t being done to sell the security. Clearly, such a provision is open to interpretation.
For the most part, companies have tended to be conservative, avoiding any actions that might be construed as stepping over the line of stock promotion. But if you’ve been paying attention to the dizzying array of internet IPOs, you’ve probably noticed a number of CEOs talking up their companies on CNBC and CNNfn during the quiet period. Webvan’s actions may have been particularly egregious, but many companies, and in particular internet companies, seem to be pushing the line between quiet and not-so-quiet.
Too much noise
Many internet IPOs are willing to risk SEC enforcement because of the fierce demands of their industry. ‘I believe that internet companies, in order to survive, must engage heavily in branding their business,’ says Rubi Finkelstein, an attorney with New York’s Orrick Herrington & Sutcliffe. ‘It’s a crowded field, so they need to get their brand out there and do it quickly. A lot of them are engaged in heavy publicity campaigns even before they go public, which is why they are more apt to fall afoul of these rules than another company would.’
According to Bill Schaff, chief investment officer at San Francisco-based Bay Isle Financial Corporation, the need to generate publicity, combined with a lack of experience with the securities markets, is fueling the shift away from silence. ‘The more experienced the management team is in dealing with the public markets, the more likely they won’t say anything inappropriate during the quiet period. To say the smaller internet companies give out more than they’re supposed to, however, is putting it lightly. Management teams are stretched too far, so they don’t have the type of experience that keeps you out of trouble.’
To offset a lack of experience with the securities markets, companies must turn to their legal counsel and investment bankers for guidance. Foundry Networks, a technology company that went public in September, conducted two media appearances during its quiet period. CFO Tim Heffner admits neither he nor CEO Bobby Johnson had ever conducted a securities offering before, and were ‘a bit in the dark.’ But he stresses the company was heavily coached. ‘Our legal team went over what was appropriate, so the CEO knew what he could or couldn’t say. He also made reference to the quiet period, explaining he couldn’t go into certain details,’ says Heffner.
In addition to limiting what companies disclose during media appearances, Finkelstein says the audience makes a difference too. ‘If it’s before a trade gathering, arguably you’re doing it to grow your business, which would fall under the normal course of business. If you’re doing it before an investor conference, you’re doing it to sell securities. Talking to Business Week, the Wall Street Journal, and Forbes is different to talking to the Silicon Alley Reporter.’
No matter how much guidance these companies receive, they are still exposing themselves to SEC enforcement by discussing their companies publicly. However, recent SEC actions suggest help may be on the way.
Although the most recent proposal to open up the regulations governing communications for securities offerings are currently stalled as part of the gigantic securities overhaul known as ‘the aircraft carrier proposal,’ two new rules covering domestic and cross-border M&A transactions offer a taster of the future.
In the ‘regulation M-A release’, passed in October, the SEC reduced the restrictions on communications surrounding M&A work. Brian Lane, outgoing director of the corporation finance division at the SEC, explains:’Today, if you’re doing a merger or takeover transaction, you have to be silent following the announcement until you file the registration statement with the SEC – sometimes weeks later. Once you file, then you can do some speaking, but you can’t do it in writing, and there are other restrictions. Under the new rules, companies can announce a tender offer and then file at any reasonable time thereafter. They also allow companies to talk freely following their announcement, so long as any written materials are filed with the SEC the same day,’ says Lane.
Welcome news
The changes are welcome news for companies with experience navigating the communications rules. Take Tyco International which has completed over 100 acquisitions in the last seven years. ‘The difficulty for us is that we always seem to be in the registration period,’ says Brad Magee, director of IR. ‘Some of our deals are very small, but they still put us in the quiet period, which can be very constraining.’
Siemens, which as of October 25 was in the quiet period, having announced the sale of its Nixdorf Retail & Banking Systems to Kohlberg Kravis Roberts and GS Capital Partners, is equally optimistic. Says Christina Schmoee, IR manager at Siemens: ‘We’re preparing for our listing in the US for 2001, and therefore we’re very cautious of what we can say and what we can’t say for a securities offering. But the changes for M&A are encouraging.’
Unfortunately there is no timetable for revising the communications rules governing such transactions. But Lane holds out hope. ‘I think the regulation M&A communications scheme will be a great test case. If it works well – investors benefit and companies comply – I think there will be great pressure to move forward on the IPO/securities offering component of the communications section of the aircraft carrier proposal.’
Until then, companies staging media appearances risk SEC enforcement. ‘When you tell your clients they can’t go out there, they say their competitors are doing it, so they have to. I think every securities practitioner in the country is cutting out the Webvan article and dangling it in front of their clients and saying see?’ says Finkelstein.
