The right-side-of-the-page position doesn't always get filled readily. Enter Sheldon M. Fechtor and Robert R. Detwiler, principals of Fechtor, Detwiler & Co. Since 1989 the pair had been seeking to expand their local stock-brokerage firm into investment banking. "Getting the first client is the hardest," Detwiler observes -- as he had been observing for several years running. "We may be the nicest investment bankers in the world, but a public offering is a key event in the life of a company, and no one wants to experiment with an unproven underwriter. If you were giving birth, would you choose an obstetrician who'd never delivered before?"
Then, in early 1994, one of Fechtor, Detwiler's salespeople, an oenophile, happened to be comparing wine notes with a customer and, like a cork, the name Geerlings & Wade bobbed up. When Fechtor, Detwiler first approached G&W, it was vetoed because Needham wanted to have a better name next to it. But the two weeks' quest for a better name was expensive. "Lawyers' clocks are ticking, and everyone gets ready to go," Wade says, "and then you don't go." Fechtor, Detwiler was looking better by the minute and finally took up permanent residence on the right side of the page.
No matter what the positions on the cover are, says Detwiler, to the company being brought public, a comanaged arrangement is a no-lose situation. "Instead of one market maker, you get two; instead of one firm providing research, you get two." And in Fechtor, Detwiler's case, instead of only a big-block institutional market, you also get a retail market -- a multitude of individual shareholders whose lesser but more frequent dealings not only help boost the IPO's price but expand activity in the aftermarket. To such buyers, Fechtor, Detwiler's 40 brokers sold a solid third of the offering.
"That helped pull it together," Wade acknowledges. "The fact that there was so much retail interest impressed the institutions that there was more liquidity in the deal than is usual for a small-cap, small-float offering." Detwiler's assessment: "A regional retail firm just may have rewritten the role of comanager."
Then again, not every regional retail firm gets handed a roster of national leads. G&W used its direct-marketing muscle and mailed an announcement to some 40,000 customers, describing the company's intention of going public. If you want to buy shares, it instructed, contact Fechtor, Detwiler -- and more than 3,000 did. But, Detwiler warns, there's a risk in a company's selling its stock to its customers: if the price of the stock goes down, resentful customers tend to take it out on your product. Still, when one Fechtor, Detwiler representative came to the office at 7:30 a.m. and had four G&W-generated leads signed up by 8, he had a more visceral reaction: "This is brokers' heaven."
* * *
A Glitch and a Red Herring
Even as 1994 progressed and the IPO market noticeably cooled, the happy team of Geerlings & Wade, Needham, and Fechtor, Detwiler pushed ahead with drafting the registration statement, a document that details the terms of the IPO as well as the company's management, history, and financial condition. Wade and Herp put in two months of 16-hour-a-day drudgery, Wade recalls, not to mention "having to run the company in the remaining hours, because a down quarter now would kill everything." The final statement was ready early in May for Securities and Exchange Commission filing -- almost.
"All the i' s were dotted, the statement was printed, and we were ready to board a plane to Washington," Wade recounts, "and we hadn't gotten approval from NASDAQ for listing." An 11th-hour phone call determined that NASDAQ had rejected GEER stock for listing on its National Market System (NMS); instead, trading was to take place in its Small Cap market, an IPO's Siberia. The reason, said NASDAQ, was that G&W's fiscal-year financials didn't meet NMS criteria regarding minimum assets and income.
G&W had assumed, inasmuch as the company's assets and income did qualify if assessed over the most recent 12 months, that NASDAQ would rubber-stamp an exemption. NASDAQ rubber-stamped a rejection instead and then turned a bureaucratically deaf ear to G&W's plight. "If we're unable to qualify, the deal's off," Herp fretted at the time. "Needham says there's no way we can sell to institutional investors if we're not traded in the NMS; it's tough enough to try to sell to institutions, given the small size of the deal, the float, and the liquidity. But to have to tell them you're in the Small Cap system -- forget it." Finally, NASDAQ relented. G&W filed on May 5.
Then came a stretch of 45 days or so in which the SEC critiqued the document. A company waiting out that hiatus is allowed to simultaneously print and distribute the document in uncompleted form, a publication known as the "red herring." The 60-page-or-so preliminary prospectus gets its name from the red-ink Subject to Completion stamp it bears -- a warning that the government insists is critical to protect a gullible populace from being sold a bill of goods. (But not, it seems, from being sold genuine goods: Geerlings & Wade exploited its red herring's high-income demographics to promote a choice vintage at the bottom of each page.)
When an IPO's coterie of lawyers and accountants has patched in the stipulated corrections and the SEC is satisfied with the integrity of the disclosures within, the offering is declared "effective" and is eligible to be sold to the public. At that point the stock is priced, after which a new, sanctified edition of the prospectus gets printed and distributed. Prospectus printing alone cost G&W close to $100,000.
* * *
The Road Show
As soon as they had filed with the SEC, Wade, Geerlings, and Herp took off on a whirlwind tour. In a ritual unique to free enterprise, the principals of virtually every private company that's brought public through an underwriting must prove their mettle during a three-week endurance test called the road show. In city after city, the principals flip and reflip colorful charts that portray the stature of their company until, like so many Greek choruses, their patrons judge the worthiness of the performance by indicating how much stock they're willing to buy and at what price.
Because a shaky presentation can chill buyer interest, Geerlings, Wade, and Herp consulted a public-speaking coach. But not voluntarily. "At that point we'd been through this stuff so many times we knew everything backwards. The last thing we needed was coaching," Herp says. A substantial private-investor stockholder thought otherwise, strongly suggesting that the troupe attend the training sessions he'd arranged.
Once the team was on the road, the competition proved intense. "Every place we'd pull up in front of, there would be a line of limousines like ours letting off people like us," Wade recalls. Each vehicle delivered an entourage to present their deals to the same audience of fund managers and other large potential investors.
