One of the underwriters McKim favored that March was Kidder, Peabody & Co., a prestigious New York City broker with an investment banking arm. Kidder wanted exclusive "left-side-of-the-page" status as sole manager of the deal, as opposed to being part of a team of two or more comanagers that prominent IPOs often use. McKim didn't like the idea of putting all his eggs in one basket. Kidder countered that it had a cadre of environmental-services experts who would be able to market CLHB's stock and talk it up strongly in the aftermarket, and at first McKim agreed.
Another problem arose, however: McKim determined that some of Kidder's corporate customers were competitors of his in the industry (indeed, at that time McKim was negotiating with one of Kidder's customers). Kidder didn't acknowledge a conflict, inasmuch as a given investment bank often services more than one company in the same industry. But McKim appraised the relationship as chancy. "We felt it would be difficult for them to take sides with the big players and at the same time push Clean Harbors." In August, a lesser light -- Robertson, Colman & Stephens of San Francisco, a specialist in emerging growth companies -- was brought in as a comanager. A month later, Kidder, Peabody withdrew. "A smaller firm was right for us," McKim concluded, "because we were a small firm as well.'
The same logic didn't hold when it came to a CPA. Before the task of compiling financials for the registration got underway, McKim had ditched the accounting firm that had brought him this far, and switched to one of the Big Eight. With someone like Arthur Andersen & Co. signing off on it, the offering would take on substance in the eyes of investors. CLHB's next audit was an eye-opener -- for McKim. Not only were the fees "much higher," he was to discover, "but the scrutiny of our books was far greater than we had been used to." Not that it was all Arthur Andersen's doing. The rules of an IPO seeking more than $7.5 million in public funds oblige the corporation to audit and report on any significant acquisitions made in the previous three years. CLHB had acquired two subsidiaries of a large corporation in that time, but they were so minor that they had been spun off without audits. The new auditors had to go back and reconstruct pro forma figures as best they could. That painstaking process, McKim calculates, cost an extra $150,000 in pre-IPO accounting fees, and held up the offering a precious two months.
Ordinarily, such a lag would not have resulted in the 40% fleecing that Wall Street laid on CLHB in November. At worst, in the span of several weeks a bull market might roll over into the beginnings of a bear market, and demand for IPOs would slack slowly enough for investment bankers to fine-tune downward adjustments as it faded. That way, no one gets a haircut; a trim around the edges, maybe.
* * *
With few exceptions, an intent to sell securities to the public has to be registered with the Securities and Exchange Commission. The SEC screens the application and usually finds a few things that have to be cleared up for the protection of investors. For example, unlike CLHB's, whose issue entirely comprised authorized but unissued stock, offerings that consist wholly or mainly of prior stockholders have been ruled ineligible for various reasons. The avidly watchdoggish SEC will give the go-ahead only after everything is deemed kosher.
CLHB had so many contracts, each of which had to be described at length, that the completed document it filed with the SEC in September was close to a foot and a half thick. Since public investors are unlikely to peruse any tome that barely fits under an airplane seat, the essential information is distilled into a 60-page-or-so brochure called the offering prospectus. (The exhibits themselves are stored in the attic of the SEC.) In it, every situation that has a bearing on the business, however remote or embarrassing, is described. The results of gathering such minutiae -- a process known as due diligence -- can make surprisingly florid reading.
Airing typical corporate laundry in its own prospectus, CLHB confessed that it had provided the executive vice-president and his family with two cars for personal purposes, and also had provided him with certain sums in connection with the education expenses of a family member. Then there was the matter of one plane and two helicopters that CLHB was leasing from a certain B & A Leasing Corp., to which CLHB had made sizable loans. Explaining away a modest fleet of aircraft probably would not have needed such copious detail as appears in CLHB's prospectus, had not a major B & A stockholder been one Alan S. McKim.
By simply studying the information required of every prospectus, not only can everyone in the western hemisphere, including salaried employees, calculate how much richer the founder is becoming with each uptick in his company's stock, they also can note how much he and fellow executives are paid. "It's discouraging for others to see the higher salaries," McKim frets. "I certainly didn't like my salary out there." If employees become surly, they can be mollified with stock options or other diversions, but the required table of upper-management compensation also has the potential of turning key officers into expensive fodder in industry infighting. 'Hello, Mr. Jones? I see you're making only $70,000 over at Purified Waters; we have a similar position here at Sanitary Landfills, and we can offer you twice that." No wonder McKim considered doing his IPO in London instead. Here, he complains, "You end up showing your competitors exactly what your business is.'
While the SEC reviews the prospectus's contents -- over a period of time that can range from a few weeks to a few months -- the underwriter prints a preliminary version known as a "red herring" (probably because large red letters on the cover page warn readers of the contents' changeable status). Bearing the underwriter's guess as to what the price of the offered securities will be, the humble herring is disseminated to prospective investors. In one endless night at a Boston financial printer appointed with beds and big-screen TV, McKim camped out with a battery of accountants and lawyers -- CLHB's counsel, of course, on the clock even as they napped. "It was very tedious," McKim recalls. "Every single word had to be checked and analyzed. If we wanted to say that the business believes it is the largest company in New England providing a full range of environmental services, the lawyers would worry that certain phrases could be misinterpreted and get us into trouble." It falls to attorneys to forge the subtleties of prospectus prose, but a CEO has to be present, says McKim, "to make sure what they say is the way it is." And the CEO had better be right, because the burden of accuracy falls on his company. The nit-picking so rattled McKim that he decided to visit his wife and kids sometime around 3:00 a.m. "You guys can make the changes," he counseled the attorneys. "I'm gone.'
