When CMGI’s IR director, Catherine Taylor, began work on Engage Technologies’ directed share program, she had no idea what was in store for her. She had been helping prepare the internet marketing firm to go public, and this program would give CMGI shareholders a chance to get in on the ground floor of the IPO. Sound simple? Think again. The Engage program taught CMGI how complicated a simple idea can become.
Taylor and PR director Diedre Moore were sure they would have no trouble promoting the concept. By last spring, shareholders had long been clamoring to gain more from CMGI’s stock-picking successes, which included Lycos, GeoCities and dozens of other internet firms. Furthermore, CMGI’s growing prominence as a venture capital powerhouse and internet incubator was certain to distinguish Engage from the glut of IPOs on the market.
To provide online brokerage services and handle all of the program’s transactions, CMGI partnered with the New York-based internet banking pioneer Wit Capital. Taylor says Wit’s experience with online IPOs and federal regulations made it a natural choice.
Only certain shareholders were to be eligible for the program – those who owned at least 100 shares. This cut CMGI’s retail shareholder base roughly in half, from 140,000 to a more manageable 77,000. To prevent stock fluctuation, CMGI would not recognize those investors who purchased their CMGI shares after the Engage announcement. ‘We didn’t want to issue a press release and have people go out on the market, buy a hundred shares to participate in the program, and then dump their shares,’ Taylor explains.
Instantaneous reaction
Despite her efforts to make the deal run smoothly, Taylor never imagined the announcement would cause such a huge, instantaneous reaction. ‘To say there was tremendous interest is a real understatement. Even though a lot of people had not seen the actual press release, the rumor mill out there in cyberspace is very fast,’ she recounts. ‘Investors were calling us to find out the details: when were the letters going to be mailed, why hadn’t they received their letter, what was this program about, could they get more shares if they didn’t have enough…you name it, we had hundreds and hundreds of questions.’
While Taylor was on the phone, her voicemail was filling to capacity, and soon telephones were ringing in every CMGI office. If investors couldn’t reach anyone in IR they would try the CFO and the CEO and basically any living being that would talk to them. ‘Believe me,’ Taylor confides, ‘it tied up our whole phone system.’
Though Diedre Moore was swamped at the time, she says in retrospect she can understand the shareholders’ need for hand-holding: ‘These are people’s investments we’re talking about. This is people’s money. They really want to hear the confidence in your voice – they want to understand how the program works and get all their questions answered by a real person.’
Contrary to what Taylor had wanted, most shareholders did not go to CMGI’s web site for information. Most of them picked up the phone to call the company directly. Taylor and company would spend the next several weeks answering questions, returning phone calls and referring people to the web site.
During this time Taylor began to see an emerging investor profile: these were often people who, despite their holdings in internet companies, were not very internet-savvy. ‘Those who had a hundred shares of CMGI had a minimum investment of ten thousand dollars – that’s not your average everyday investor,’ she explains. ‘The majority of people who were calling us were doctors and lawyers and CEOs. These are not people who are on the internet all day long. For a lot of them, this was their first foray into actually using the internet.’
Many people were uneasy about opening online accounts. Some had no access to the internet at all but wanted to participate anyway. The situation was a sticky one. Diedre Moore recounts her message to shareholders: ‘The big picture is that we’re an internet company and our goal is to always reinforce that business model. We believed very strongly in the spirit of what Wit Capital was doing and we felt that offering the stock through an internet broker was really a reinforcing element. So while we certainly did weed out some people who were not active internet users, that was a trade-off we decided to make.’
After a hectic month, Taylor and Moore had endured phase one of the program. All the questions had been answered. All the bids had been placed. From 77,000 eligible participants, they had helped get 23,000 to the web, of whom nearly 14,000 actually opened accounts. That’s 17.7 percent, or about eight times, their original expectation.
Hold your horses
It all looked promising except for one thing: the SEC was taking a long time to approve Engage’s registration statement. This was a necessary step before they could have shareholders confirm their bids. Meanwhile the July 20 IPO date was drawing near. By July 19 there was still no word, and that day passed slowly in nail-biting suspense. Finally, that night at 7 pm, the SEC approved.
Wit Capital immediately sent e-mails to investors telling them to confirm their bids before 4 am. But some had already left their offices, while others were unaware of the need to monitor e-mail at all. Some didn’t see the notification until the next day and by then it was too late: Engage’s stock had opened and was trading on the market. They were shocked to realize that their bids had not gone through.
Understandably, many investors were furious. After having opened an online account with Wit, placed their order, written their check and mailed it off, they were left holding nothing. Once again they jammed Catherine Taylor’s phone lines, although this time there was nothing she could do to help them. She apologized. The SEC’s timing had been out of her control. What else could she say? They had missed the boat. All they could do was watch as the stock shot from $15 to $47. By the end of the day Engage closed at $41. It had been the eighth most active stock on the Nasdaq, trading 14.9 mn shares.
This was one of those situations that all IROs dread. What had started out as an offering of kindness, had ended as a bitter lesson. Despite months of hard work and attention to detail, Taylor was powerless to console her angry shareholders who now numbered more than 3,000. Those people who she had helped usher to the internet, felt burned. Why? Because they hadn’t been glued to their monitors in the wee hours of the night. Contrary to her efforts, the directed share program had confirmed many people’s suspicion of online trading. She wanted to make it up to them.
Take two
CMGI and Wit Capital reviewed the program’s details. Despite a good idea, they knew their breakdown had occurred in communications. Engage had been a test that revealed many pitfalls. They decided to try again, this time with CMGI’s web-hosting supplier, NaviSite.
They set aside a number of NaviSite shares for people who had registered for, and had missed out on the Engage program. Then they would distribute the remaining shares among other eligible CMGI shareholders. If there turned out to be more bidders than available shares, then they would hold a lottery to choose the recipients.
Next, they revised and broadened shareholder literature, which included a checklist of procedures, a ‘frequently asked questions’ page and a step-by-step guide to opening a Wit Capital account. They posted this material on both CMGI’s and Wit Capital’s web sites. They also mailed it out in hard copy.
‘When we went through the first program we really learned a lot about our shareholders and about their comfort levels with online information,’ Taylor explains. ‘Even though we didn’t change the content much, we changed the way we presented it. We found that people needed to go through a step-by-step process.’
This time, Taylor wanted nothing left to chance. Determined to avoid having callers end up in voicemail, she hired ten new assistants and set them up in an office which would soon become known as ‘the war room’. Her objective was to give shareholders as many avenues as possible to have their questions answered.
Last, but certainly not least, CMGI extended its notification period. It vowed not to repeat what had happened with Engage; this time it would contact shareholders as long as two days before the IPO.
Hitch-free
As with Engage, the announcement of NaviSite’s directed share program caused a huge response. Both Dell Computers and Microsoft had recently bought minority holdings in the company, and CMGI’s acquisition of AltaVista drew heaps of attention. Demand for NaviSite was high, drawing twice as many subscribers as it could accommodate. It used the lottery after all the first-timers got their shares. Everyone had plenty of time to confirm their bids.
After having been revised upward from $10 to $12, the stock opened its first day at $14 and closed at $34.625. For once, Taylor’s phone was conspicuously quiet. NaviSite had gone off almost without a hitch.
‘These programs took a tremendous amount of bandwidth from our IR and PR departments,’ Taylor confesses. ‘We suffered through them but in the end we’re really proud because we improved the process. If I think back on my career, this has definitely been the highlight.’
Taylor says her shareholders have now come to expect directed share programs for future CMGI spin-offs, which is a great benefit. ‘It makes them pay attention to what’s going on here. They keep going to our web site looking for press releases and in the meantime they’re learning more about the company.’ Finally, she’s getting that traffic to the internet that she had been hoping for all along.
