Neoforma.com IPO Takes Off
While many stocks were sold off on Monday, the initial public offering of Neoforma.com (NASDAQ: NEOF) performed like a typical high-flying, shot-from-a-cannon, business-to-business IPO . . .
E-Commerce Times, January 25, 2000
What an odd thing to hear someone say!...
This rite of passage is among the most revered of experiences in the start-up world. It is a kind of fraternity initiation ceremony. Just before a company goes public, the management team ventures out on a grueling two-week trek to the financial centers across the U.S. and Europe.
The purpose of this trip is to drum up interest in a company’s upcoming initial stock offering and to create buzz. At the same time, the team tries to get an idea of how many shares of the company’s stock are going to trade hands on the first day of sales. This assessment of the level of interest helps determine what the offering price should be on the day of the IPO.
An investment bank’s reputation rests on its ability to realize high returns to its clients. The bank’s objective, during an IPO, is to ensure that their clients benefit from as large a portion of a stock’s first-day gain as possible. So, the initial offering price is often set at a level lower than they think the stock will bring on the market. That way, the investors who get to buy the first shares of the company stock can benefit from large gains with little risk. The banker gets a substantial amount of control in allocating who gets to buy those shares. This is how friends are made in the IPO game.
Actually, there are several investment bankers on a typical deal. Once a lead banker, who gets control over the largest percentage of shares, is selected, several other bankers line up to scrabble over the remaining shares.
Who gets to play depends on who convinces the company and the lead banker that they will be able to sell the most company shares for the highest price.
The fighting between the bankers can get very nasty. Each one is fighting for their reputation on every deal. The order in which they are listed on the official offering document updates their relative status in the industry. Being at or near the top of a single deal that produces huge returns can upset the status quo, leading to defections of current star employees or buzzy companies in the pipeline.
Of course, buying stocks is nothing more, or less, than gambling. Bankers are bookies. Their objective is to beat the odds in any, mostly legal, way they can. Their clients are paying them to do that. And everyone knows that the house always slants the rules to come out ahead. There would be no house otherwise.
By definition, stock purchasers are betting that someone else will lose. There can be no gain without loss. All financial advisors are trying to beat the odds with their own system.
A stock’s actual value is only a small percent of a fraction of a fraction of the company’s physical assets—minus its outstanding debts and obligations. In other words, pretty near zero, in most cases.
The rest of a stock’s value is speculation about whether this horse is going to come out ahead of that one. They are betting that a particular company will do its very best to get ahead of the other companies on the track. And everyone buying stock should know this, and most do.
So, it was Bob and Frank’s responsibility to get the interest so high that Neoforma’s share of the kitty was worth the hassle.
Everyone in the company was getting daily email updates from Bob and Frank. They humorously summed up the multitude of presentations they gave each day. Here are several of Bob’s observations:
On a side note, when checking into the hotel late tonight, Frank and I checked in together. He got his room and then I got mine.
As we were walking away, the receptionist said, “Mr. Zollars, I upgraded you to a suite.” Frank’s response was, “Okay, I know where I stand.” As he tried to get into his room, the key didn’t work and he had to go all the way back to the lobby! The good news is when he got there, after significant groveling, the receptionist upgraded him too!
First, the surfboard saga. As many of you know, it is customary for a company going public to provide a banner which is hung in the lead underwriter’s trading area. Never a company to do the usual, average thing, we thought providing a surfboard with the Neoforma and Merrill Lynch logos would be a memorable “banner.” Our Executive Vice President of Surfboards, Dave Juszczyk, arranged for a 12' 8" tandem surfboard to be prepared with the appropriate artwork. Through an incredible effort, which we will let Dave tell us about at an upcoming NeoLunch, the surfboard was shipped to New York last week. Tuesday morning the Merrill folks were beginning to worry that the board would not arrive in time. After tracking down the Emery air bill, the board was located in New Jersey.
Problem 1: No truck large enough to hold the surfboard was scheduled to get to Manhattan in time. The Merrill folks begged and pleaded and finally Emery was able to arrange delivery to the Merrill loading dock mid-Tuesday.
Problem 2: The board was packed so well, the receiving people couldn’t open it using conventional means. One of our bankers, let’s call him Andrew, made the trek to the sixth sub-basement of Merrill’s Manhattan headquarters to personally supervise the efforts of a handyman to open the crate. Under the watchful eyes of many curious onlookers, the board was unpacked, safe and sound.
Problem 3: How do you get a 12' 8" surfboard from the sixth sub-basement to the fifth floor of an office building? The ever-intrepid Andrew, continuing to uncover parts of the Merrill facility he never knew existed, was able to see the board safely transported to the appropriate location using a marvelous technology he referred to as a “freight elevator.” You will all be proud to know that the Neoforma/Merrill Lynch surfboard is now hanging prominently in the Merrill capital markets area and has been the subject of much attention.
One of the things Frank and I discovered is that we are at polar opposites with our hair. Frank went through an 18-hour day and his hair never moved (aka The Helmet/Helmut). My hair (or what’s left of it) was never in the same position over each of these eight presentations. Not sure what this means, other than when you’re really tired, you notice weird things.
We did four presentations in Philadelphia and surrounding suburbs. The presentation is starting to settle into a groove and by the end of the day on Friday we have now given it about sixteen times — only sixty or so left to go. One of the things that happens after hearing the same thing so many times is that you begin to pick up funny little nuances in the presentation. The problem with this of course is that the “funny little thing” starts to sound hilarious when you have to suppress your laughter. Andrew and I had a brief episode during the last presentation and almost took Bob down with us. Fortunately, we managed to control ourselves sufficiently so that I don’t believe the potential investors to whom we were presenting realized that anything was going on.
As Frank mentioned yesterday, you can tell we’re getting a little tired; i.e., I tried to leave the plane without unbuckling my seatbelt, and today Frank had a heck of a time pronouncing “sophisticated” . . . it came out kind of like ssssssssssssppppppppppppttttttttttttttttt . . . a little Daffy Duck–like . . . a couple of times. The investors didn’t seem to notice, but because he did it twice, the Merrill guys and I were really just trying like heck not to break into laughter.
They were getting a strong reception. Many conservative investors were telling them that this was the best story they had ever heard. Large pre-orders for the stock were already coming in. That was good to hear, because there were many articles in the press expressing doubt that the IPO boom was going to continue into the new millennium. We were the first scheduled IPO of 2000. We were the infantry, sent into the field to test the firepower ahead.
Continued in Part 2