The step-by-step account of how G&W, a small, low-tech consumer-product marketer became an unlikely dream IPO -- and made its two founders rich overnight.
The step-by-step account of how one small, low-tech consumer-product marketer became an unlikely dream IPO -- and made its two founders rich overnight
After two record-setting years, the action in initial public offerings cooled considerably in 1994. But the climate wasn't so nippy that two accounting buddies who had quit auditing eight years back to go into business together couldn't consummate an IPO that made them multimillionaires.
Nor did the chill prevent a couple of investment bankers who were new to IPOs from sponsoring an offering that doubled in price within six months.
Coincidentally, it was one and the same tortuous, grueling, frustrating, time-consuming, confidence-shaking deal. In other words, a typical small-company public debut.
The fates rewarded all concerned when Geerlings & Wade (G&W) went public, on June 17, 1994, with 1.4 million shares of stock at $8 each. But not before those fates had toyed with the company a bit.
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The Company: A Wine Seller
Chairman Huib E. Geerlings, then 31, and chief executive Phillip D. Wade, then 28, founded G&W in 1986 on a wine-by-mail concept whose success placed the business well up in the Inc. 500 rankings of the fastest-growing private companies in 1992 (#336), 1993 (#161), and 1994 (#82).
G&W owes its fast growth partly to the marriage of two salutary trends: a booming mail-order market in consumer goods and a countrywide rise in the consumption of premium wines. G&W's concept was to simplify the wine-choosing process by eliminating the "intimidation factor." Marketing focused on offering a modest array of moderately priced wines and sending out mailing pieces that, through straightforward write-ups, educated the potential consumer on how to appreciate them.
As with all successful direct marketers, Geerlings & Wade's advantage comes in the way it keeps painstaking control of its data. Selective mailings are directed to discrete segments of customers according to their purchasing history, and returns are carefully analyzed before the next mailing goes out. About 40% of customers on the mailing list have been buying for four years. The company keeps its prices attractive by scouring vineyards here and in Europe and sourcing directly from producers. In some instances, G&W sells the wares under its own private labels. A sophisticated inventory-control system speeds up delivery.
The company's merchandising and buying strategies have paid off handsomely. Geerlings & Wade's distribution expanded a state at a time as its regulatory counsel answered to each state's alcohol-selling statutes. By fiscal year 1992 the company's sales had reached $6.4 million, and its market continued to evolve. Though such numbers are traditionally considered too meager to support a major IPO effort, in 1993 the new-issue window was begging for growth companies to pass through it. The two founders figured they could put easy new capital -- not to mention the chance to cash in old S-corporation chips -- to good use. That spring Huib Geerlings and Phil Wade agreed the time was ripe for an IPO.
But how would they go about it?
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Left Side, Right Side: Putting Together a Team
For starters Wade sought recommendations for underwriters from the Boston-area network of accountants and corporate lawyers the company had been cultivating, while Geerlings concentrated on product development and market expansion. Each quarter Wade and the company's just-hired financial officer William Herp cranked out missives to 15 or 20 candidates, describing their unique approach to wine selling. "The investment-banking community is one you really can't pursue," Wade says. "You keep sending out your numbers and your story, and if they're interested, they'll let you know." Despite the company's five-year sales-growth rate of 1,476%, the switchboard at Geerlings & Wade didn't really light up.
A couple of respondents, however, proposed that little G&W call again when it got bigger. "These firms," says Wade, referring to the list of prominent underwriters he'd assembled, "want to take you public at a high valuation. The larger the transaction, the more money they make. Since it requires as much effort to do a $10-million deal as a $100-million deal, if they have an opportunity to do a $100-million deal, that's the one they'll do. Besides, they have tremendous egos and pecking orders, and a reputation for doing big deals sets them off."
The owners debated waiting: if the market value of their offering was overly scrawny, it wouldn't stir up enough buying interest to create a liquid market for the stock, and that would deter institutional buyers. But they didn't debate long. In November 1993 Vermont Teddy Bear (#88 on the 1995 Inc. 100), a local direct marketer with about the same revenues as G&W, went public with an $8.5-million offering. On its first day of trading alone, the interest of hundreds of anonymous buyers pushed its stock up by 67.5%.
Wade and Geerlings were convinced. Theirs was an IPO waiting to happen.
As luck would have it, Wade received a cold call from Needham & Co., a New York City investment-banking firm itself only 10 years old but with 83 IPOs under its belt. Needham's founder had heard about the company at a wine-enhanced dinner hosted by a G&W customer. Not yet among the country's premier investment bankers, Needham nonetheless was a more substantial name than Wade had dared hope for.
"Part of Needham's reason for calling," he says, "was that they were mostly in high tech and wanted to move some of their banking into the retail sector. The direct-marketing business, and our product in particular, is simple; wine is easy to talk about with stock analysts and mutual-fund managers. Doing a deal with us fit well into what they were planning, so they were maybe willing to do it sooner than someone else might have been." By Saint Patrick's Day 1994, Needham and Geerlings & Wade were a team.
Though the use of a solo underwriter was common in the past, it's a rare offering nowadays that's handled by a lone arranger. With Wade's input, Needham sought a comanager to help out. On a Wall Street prospectus, however, "co" doesn't mean "equal." The firm whose name gets printed on the left side, the lead manager, is regarded as investment banking's aristocracy; the name printed on the right is considered a lackey along for the ride. Like a lion carving up the kill, the left-sider appropriates as many shares as it wants for its own firm's handling. The rest are dispersed to an assemblage of dozens of fellow bankers called the "syndicate," who, by agreeing to purchase modest allotments of shares, ensure a positive reception for the IPO. Especially when a "hot" issue is involved, favors done here are paid back later. The comanager, meanwhile, administers to more mundane matters such as arranging the itinerary of the road show.
