Here are some excerpts from Geerlings and Wade's diary of their magical mystery tour:
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· Phil and Huib on a plane to London, Monday. Underwriters think it's a good opportunity; since most of the product mix is imported, there's a European connection. All week we meet with fund managers who invest in emerging U.S. companies. Back to Boston on Saturday.
· Sunday night: Bill and Phil set out to see America. (Huib stays home to run the company.) First stop: Milwaukee. Monday morning, hop into a car for a meeting. Half a dozen companies like us present deals like ours. Guy in the audience yawns and walks out. Our goose is cooked! Later, bored guy buys our stock; others who listened intently don't. Proves you can't read the audience.
· Drive to Chicago that night; next day, lunch with seven investors, do two one-on-one meetings, and then drive to airport for Minneapolis flight. Tuesday, breakfast in Minneapolis with six investors, then back to airport for Denver. Lunch in Denver with three investors. Back to airport for San Diego. Grueling. Three cities in a day, and we say the same thing over and over. Plane to San Francisco. It's only Wednesday.
· Next Monday. Now home, ought to get easier. It doesn't. Five one-on-ones before lunch, then a big lunch. In Boston the rule is, land the big Fidelity fund first; then, reassured, others will fall in line. Good sign: Fidelity takes lots of prospectuses. Doesn't buy in the end. Take plane to New York.
· Tuesday: four one-on-ones followed by a big lunch. Wednesday, on to Philly. Two breakfast meetings, then a train to Wilmington for lunch. Lots of eats. Drive to Baltimore for an afternoon meeting. To Boston, and it's over.
* * *
"Our mission wasn't to convince them ours was a great investment," a frustrated Herp says, after having followed the SEC's explicit instructions not to. "Our role was only to talk about the company. All the while, the fund managers are thinking, 'Why do I need another stock? I already own 100 different companies, and it's hard enough keeping up with them.' So they tell you, 'Call us next week when the stock is ready to be priced, and we'll let you know.' You find out how well you've done only when it comes together on the last day."
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Setting the Price, Getting a Haircut
In a Wall Street office on Thursday, June 16, 1994, Wade and Geerlings found out. Based largely on what fund managers had bid on the tour, 1.4 million GEER shares were priced at $8 -- disappointingly, less than the $9 to $11 estimated a few weeks back in the preliminary prospectus, and well below the $12 the going-public discussions had begun with back in March.
With the overall stock market in a slump and IPO excitement ebbing, G&W had, as the Street puts it, just taken a haircut. Wade recalls Needham's stern lecture: " 'Everything is coming out below range, and you're no different.' The message was 'That's what we can get for you -- take it or leave it.' " Though shorn like Marine Corps recruits, Wade and Geerlings took it.
"Pricing," reflects Bob Detwiler, "is an art, a balancing act between how much the company gets for its stock and how much the public pays. The company wants to maximize its return but doesn't want unhappy shareholders. You try to price an IPO so it will go to a slight premium the first day." To Fechtor, Detwiler's officer in the trenches, Joel Johnson, pricing is more of a game: "The underwriter tries to build up such demand that an institutional investor won't have confidence in a low bid. If he says, 'We'll pay $7,' but I have enough buyers at $8, I tell the $7 bidder to walk."
You also hope no one's going to "flip" it. "Some funds buy stock just to turn around and dump it for a quick profit," Detwiler says. "You strive for a broad base of serious investors who are potential buyers later as well. Let's say they wanted half a million shares and you give them only 250,000 shares; it's possible they'll be back in the aftermarket, buying stock. That's the best way of placing a deal."
Against the backdrop of a tumbling stock market, G&W shares were not that much in demand. "When there's heavy selling," says Herp, "investors say, 'Why would I want to buy your company? I'm selling everything else.' We were right at the wire." At the pricing session, bids from some fund managers stubbornly clustered around $7. But it was Fechtor, Detwiler to the rescue! "Because we could add the buying of our retail investors to Needham's institutions, we were able to close the deal at $8, rather than having to drop the price." Institutions bidding less than $8 were blanked out, as Johnson had promised.
It was their loss.
* * *
The Payoff
Only six months later, in mid-December of a chilly year for IPOs, GEER reached $16. The company's sales growth had remained so strong throughout 1994 that it slid seamlessly into the #70 slot on the 1995 Inc. 100 list.
Private-company owners who still wonder whether going public is worth it should note that, on the day of G&W's offering, despite its relative modesty, the personal net worth of founders Huib E. Geerlings and Phillip D. Wade were solidified from spongy S-corporation holdings of the night before into a solid $8.4 million and $6.7 million, respectively, including $744,000 each in hard cash. And the company itself took in $8.5 million in new funds that not even Silverado Savings & Loan would have advanced against assets of $5 million. But there was a trade-off: in sharing their business with investors eager for a part of it, the founders went from owning 80% of their company to less than 48%.
Such is the price of instant wealth.
FIGURES
Income Statement (in $ thousands) 1989 1990 1991 1992 1993 1994(1st Q)
Sales $479 $1,277 $2,841 $6,429 $12,428 $4,223
Cost of sales 294 711 1,390 3,511 6,898 2,201
Gross profit 185 556 1,451 2,918 5,530 2,022
Selling, general, & administrative expenses 253 497 1,423 2,637 4,954 1,602
Income (loss) from operations (68) 69 28 281 576 420
Net income (loss) (72) 65 11 239 491 365
Pro forma net income* 325 241
*Represents net income as if company had been taxed as a C corporation.
BALANCE-SHEET DATA (in $ thousands) 1989 1990 1991 1992 1993 1994(1st Q)
Working capital $52 $125 $28 $215 $1,207 $1,386
Total assets 206 339 1,364 1,959 4,766 5,153
Long-term debt -- 6 19 5 940 945
Stockholders' equity 66 133 145 359 546 697 n
