A close-up look at the changes a company had to make before it could go public.
What's the difference between the company you run now and the one you'll take public?
Imagine for a moment you're Bing Yeh. You've spent six years building up this wildly successful little semiconductor company, Silicon Storage Technology Inc. The products are based largely on your clever engineering ideas, and you're the one who's bringing in the bulk of the business and managing the outsourcing deals in the Far East. It's your show.
But now someone else -- everyone else, it seems -- is telling you how to run your business. Deepen your management team, you're urged. Broaden that board of directors to include outsiders. And do something about that primitive accounting system you're using. You nod as you carry out such commands, because, well, you have to admit that the financial records have not been well organized. But still you have your doubts about where all of this is leading. Catching you gazing distractedly out of the window during yet another marathon meeting, a colleague will later claim, "I could tell he was sensing that his company was becoming a different kind of company."
It was indeed. In mid-1995 Silicon Storage Technology (SST), which had posted all of $4 million in revenues the year before, was on its way to going public.
Bing Yeh, who had come to this country from Taiwan two decades earlier with just $20 in his pocket, had read widely about the process before deciding that SST would take the public plunge. He knew only too well the stories, or at least the part of them that always gets told: the preopening jitters, the swarm of press and analysts, the sudden accumulation of unimaginable paper wealth. But what he didn't know was what exactly SST would have to endure between deciding to go public in July 1995 and that opening bell on November 22. The journey is different for every company, save for one aspect: the invading army of accountants, lawyers, valuation consultants, and underwriters whose mission becomes to excavate every filing cabinet, looking for blunt answers to some very sharp questions.
They act with only one goal in mind, and they will not stop until they've achieved it: the makeover. For some companies, getting ready for prime time can mean dumping treasured members of management, junking juicy perks, and subduing marginal personality traits. (See "Now Let's Talk About You," [Article link].) But for many, like SST, it's just the tremendous pressure of making so many changes so fast -- from improving incoherent record keeping to scripting a solid company biography -- that leaves them wondering, for a time, why they ever wanted to go public in the first place.
At SST, which is based in Sunnyvale, Calif., that unavoidable sense of vertigo was heightened by an intimidating fact: Yeh, who is 44, wanted to go public in about half the time an initial public offering typically takes. He had perfectly good reasons. For one, the market for technology stocks was hotter than July. For another, Yeh worried about the fallout from the company's $5.3-million joint venture with Quantum Corp., a nearby disk-drive maker. By the terms of their deal, Quantum could soon end up owning a 25% chunk of SST at a very cheap price. Furthermore, rival SanDisk Corp. had already begun planning a public offering.
Having made the decision to speed the process up, Yeh worried mainly about what kind of reception SST would get on Wall Street. Nobody had heard of it, after all. And the company's skimpy financial track record wasn't likely to impress that starchy crowd: May was the first month that little snowdrops of earnings had begun to peep through. "The concern," says Yeh, "was whether the third quarter would be a good number." It was worth worrying about, to be sure.
But once the maestros of makeover took their places, Bing Yeh would have more pressing matters to deal with.* * *
If Yeh was unusually concerned about losing control over shaping SST, it may have been because he just about gave away his first product. Back in 1974, when he was a physics graduate student at National Taiwan University, Yeh and some friends, while subcontracting for another company, devised an electronic toll-taking system for the price of $125. Then they watched as the company turned around and sold the technology for about $10,000. Per customer.
Since then, Yeh, who held a series of engineering jobs in Silicon Valley, had wanted to start another business. But he found it was nearly impossible to raise money from anyone but venture capitalists, who demanded harsh terms. In 1989 he finally established SST with a partner, Ching Jenq. Six months later they filed early patents for a technology they called Superflash. But after their first misguided product push -- credit-card-size plug-in cards that added memory to computers -- they parted ways. By 1992 Yeh had decided that SST would devote its 10 employees and risk its $700,000 revenue stream (resulting from technology-licensing deals) to memory components. Two years later, in December 1994, publicity about the new Windows 95 operating system fired the imagination of the industry's engineers: they saw that the Superflash technology had the potential to enable Windows 95 to work smoothly in just about every IBM-compatible personal computer. Yeh then set about selling some of Taiwan's top motherboard makers on the chip.
By early 1995, SST's overseas production lines -- the company contracts out its chip making to facilities in Japan, Taiwan, and Singapore -- were roaring to life. "You could see that SST had a solution. Now the growth was very certain, and the investment risk was substantially reduced," says James Davidson, managing director at Hambrecht & Quist LLC, the San Francisco underwriter that had long been flirting with SST. Years earlier Mel Phelps, Hambrecht & Quist's advising director, had heard about the company and, upon visiting, found himself meeting a former colleague; he had once worked with Yeh. Phelps alerted Hambrecht & Quest's principals. "We were very interested that SST had a technology advantage," says principal Kenneth Hao. "When companies like that start to spike upward, they really go."
Hambrecht & Quist is arguably Silicon Valley's premier high-tech investment house, but Yeh still threw the underwriting job open to four other candidates, all big New York banks with Goliath leverage in public markets. By midsummer Hambrecht & Quist had won what underwriters call the "bake-off" -- the marketing tussle to see who ends up as lead underwriter. Yeh awarded the comanager job to Donaldson, Lufkin & Jenrette Securities Corp. Most companies going public for the first time take from 60 to 90 days to go from filing registration statements with the Securities and Exchange Commission to closing an IPO, but Yeh decided that SST was to do it in less than 45 days.
The schedule looked doubly intimidating against the backdrop of SST's phenomenal growth. Revenues were notching up by the day. At the start of 1994 there had been about 40 employees on the payroll; by 1996 that number was to top 100. The pressure on SST's flimsy organization worried the underwriters. "Bing was wearing 10 hats instead of the 7 a person normally wears in that situation," says Davidson. Hambrecht & Quist had also spotted SST's dependency on one very narrow revenue source: one part of one kind of motherboard. The underwriter had noticed, too, that there were no big brand-name customers, such as Hewlett-Packard Co. or AT&T Corp. None of that could be fixed quickly, of course. But Hambrecht & Quist did hand Yeh a laundry list of requirements for going public. Among the most pressing: SST had to show plump operating margins, hire a full-time chief financial officer, and find new applications for the Superflash chip.
When Yeh brought his lawyers and accountants in on his IPO plans, early in August 1995, they were stunned -- to say the least. Mark Tanoury, counsel at local law firm Cooley Godward Castro Huddleson & Tatum, remembers the meeting he attended with Yeh and Charles Noreen Jr., a Coopers & Lybrand partner. "Yeah, but what's the real schedule?" he recalls asking Yeh. This is the real schedule, the CEO replied. From then on, any talk of schedule slippage got dark looks from Yeh. As the makeover took shape, "the question always was, What's that going to do to the day we go effective?" says Tanoury.
The answer, as far as Yeh was concerned, was always the same: nothing at all. There was no time for surprises.* * *
Jan Praisner and Bing Yeh had met only the day before, but when Praisner arrived on September 6, 1995, she was giving orders as if she owned the company. She started off by giving Yeh a clear warning: If you disappoint the Street, she told him, and if your stock price drops, you will get sued by shareholders. And when that happens, she said, you walk over to your desk, get out your checkbook, and write a check for $7 million. "It got his attention," she recalls.
Praisner was one of those surprises that Yeh hadn't counted on in the makeover process. Acceding to Hambrecht & Quist's wishes, he had gone out and taken on makeover job number one: hiring a chief financial officer. The one he eventually chose -- the CFO of Micromodule Systems Inc. and a veteran of the IPO process -- was indeed named Praisner. Michael Praisner, to be precise. But he couldn't start right away, and his concern over SST's drum-tight schedule led him to suggest an unorthodox solution: why not let his wife, Jan, an experienced CFO who had just left her company, step in until he could join the team?
Yeh agreed; not that he had much choice if he wanted to stay on schedule. The so-called all-hands meeting -- when the whole IPO team, including Yeh, the company counsel, the underwriters, and the accountants, assembles to plot the process and assign duties -- was scheduled for September 1. If Yeh couldn't at that time present reasonable prospects for a CFO, the underwriters could bail or at least pull the plug on an IPO in 1995.
Having joined the effort, Jan Praisner pronounced SST's record keeping chaotic. "The accounting records were not in what I'd call a management-reporting format," she says. Line items like cost of sales were segmented by department. Some financials were on disk, some were on spreadsheets, and others had gone AWOL.
But Jan Praisner's most immediate task was to prep executives for a pivotal presentation to the underwriters on September 11, as well as scare up due-diligence documentation for Hambrecht & Quist's law firm, Wilson Sonsini Goodrich & Rosati. Her dramatic declaration to Yeh was her way of saying that if she needed to get her hands on, for example, a lease agreement, everyone had best cooperate. Her basic MO was to lay siege. "I was camping outside Bing's door," she says. "I probably drove him crazy. I'd say, 'I've got to have this by noon.' At 12:01, I'd show up. He'd say, 'I need three more hours.' I'd tell him, 'I'll be back in 2 hours, 59 minutes.' " Yeh cooperated, pushing back with questions about things he didn't understand. "We had no experience in this, so we just followed her," he says.
That approach served SST's managers particularly well at the meeting with the underwriters. Hambrecht & Quist needs to feel confident in the management team, Jan Praisner had warned the engineers, outlining points they would need to make -- succinctly -- in their presentations. Yeh was to explain SST's competitive advantage. Yah-Wen Hu, vice-president of technology development, and Isao Nojima, vice-president of memory design, had to describe the products in detail: their evolution, their future, exactly how they were manufactured. "It went very well," recalls Praisner, now CFO at OnStream Networks Inc., in Santa Clara, Calif.
No one could have guessed that SST's managers had barely finished one dry run before show time.* * *
Friday the 13th -- October 13 -- was only hours away, and with it, a deadline of supreme importance. The nine-month audited financials had to be in to the underwriters that day. Without them, the underwriters couldn't ship the required documentation to the SEC on the set date, and the SEC wouldn't be able to reply in time.
So what was SST's controller, Catherine Zerboni, doing, racing in and telling Michael Praisner that the allocation report hadn't been run?
The allocation report is a small but vital link in the paperwork chain. It apportions to different departments the expenses for executives who've been wearing different hats. The employee who ran that computer program had gone home at 9:30 p.m. Michael Praisner and his team -- he was still trying to understand the company and close the August and September books in a week -- plugged in their best guesstimates and got the report cranked out minutes after the programmer walked in the following morning.
The offices where Praisner and crew had settled in for seemingly endless late-nighters were buried in files, folders, and spreadsheets. One or two of the underwriters were practically living at SST; the same story was true for Coopers & Lybrand's auditors. Zerboni, whom Praisner had just hired away from Coopers, remembers phoning the lawyers at Cooley Godward at 11:30 p.m. and having one of them answer.
Praisner had started living out of his car trunk, in which he had set up Pendaflex hanging files. To him had fallen makeover job number two: the reassembly of the company's records, vital for the due-diligence portion of the IPO. "A lot of my job was getting the monthly information into quarterly information," he explains.
There was so much information to be retrieved and sorted: breakdowns of pricing trends, historic and projected; breakdowns by distribution, by customer, by product segment. Jan Praisner had begun playing hunter-gatherer early in September, sending to the underwriters' counsel copies of everything from patent documents to employment agreements and officer-compensation records. Yeh concedes that the company's accounting system could not even calculate quarterly figures, never mind do the obligatory earnings-per-share projections. Not only that, but the books had been closing way late -- in 20 days or longer, not within the week, as Wall Street would demand.
But at least there were professional audits; in fact, they'd been done every year since 1990, albeit months after the close of the fiscal year, when the auditors' rates were cheaper. And there were records. Yeh, a stickler for having everything in writing, had models for everything: Organizational models. New-product-development models. Revenue-projection models. His penchant for reducing everything to a mathematical model gave the underwriters tremendous confidence that he knew his company inside out. There were other plus points: SST's accounting practices were distinctly conservative. And Yeh had personally signed every check for more than $200, a helpful control mechanism.
The harrowing pace had paid off. The registration statement was filed in mid-September, only three weeks after the first all-hands meeting. On October 5, the underwriters had sent the SEC a first filing, containing June numbers -- shaving more than a week off the typical IPO schedule. The nine-month audit was wrapped up on cue on October 13, opening the door for the second filing, using audited September financials to be shipped to the SEC a few days later. On October 17, out went the preliminary prospectus -- known as the red herring -- to start warming up the underwriters' sales forces. SST's records were starting to conform to patterns that the Street would recognize. And the computer system was getting an upgrade.
In the outside world, SanDisk did its IPO on November 13. Its stock was launched at $10 a share and shot above $30 almost immediately. SST's public debut, running about two weeks behind SanDisk's, was meeting a cooling technology market. Employees' expectations ran high, however. Says memory-design director Ping Wang, "We were hoping we'd be like SanDisk."* * *
Unfortunately, nobody had told House Speaker Newt Gingrich (or Bill Clinton, for that matter) that SST was preparing to go public. So when federal government departments shut down for a week during October, hearts in Sunnyvale nearly shut down, too, for fear that the SEC -- the one department SST desperately needed -- would soon close. Cooley Godward lawyers were on the phone almost every day with the agency, whose reviewers must get copies of the preliminary prospectus in enough time to comment on them. SST held up its end of the deal. Now if those reviewers were proclaimed nonessential workers, there wouldn't be enough doors to slam at SST. "If we were delayed, our IPO would have gotten into Thanksgiving," says Yeh. When the holiday season was under way, SST could bet it wouldn't get as much time from fund managers.
The company lucked out: Congress authorized the temporary funding that put federal workers back at their desks. Now all the SEC had to do was respond in time.
At root, a prospectus is a sales document aimed at investors. (In SST's case, the prospectus also helped recruit more engineering talent.) But it has to be faithful to the facts. That leads to tensions between underwriters and lawyers; drafting sessions can end in shouting matches. In SST's case, there were plenty of debates over syntax -- but no donnybrook. The writing of the document embodied makeover job number three: the creating of a company biography that would formally chart SST's history and give it a story to tell. (For more on the importance of having a story, see "Why Every Company Needs a Story," [Article link].)
Prospectus crafting ran well into October. All the major themes were developed in the first three weeks -- the summary, risk factors, use of proceeds, management's discussion and analysis, and so on. Cooley Godward played quarterback, integrating the drafts. Hambrecht & Quist associate Glover Lawrence drafted the introduction and the text on industry background in the business section. Michael Praisner did a first draft of the management discussion and analysis section; David Sweetman, SST's vice-president of quality and customer support, tackled the portion on the advantages of SST's products.
SST's red herring showed two skyrocketing revenue quarters -- reaching $2 million and $7.2 million -- and the only quarter of profitability to date. The final prospectus, distributed about five weeks later, included third-quarter figures too; the $12.5-million revenue number would be just what veteran fund managers would be expecting from a fast-growing chip company. Plus, there was now another fatter net income number to include -- $2.3 million for the quarter ended September 30, up from $733,000 for the previous quarter.
As they worked on the document, the IPO team also began makeover job number four: preparing for the road-show performance designed to persuade fund managers that they'd never seen an investment opportunity like this one. There were more records to be scared up, and there were glitches -- mismatches between Coopers & Lybrand's numbers and Praisner's calculations. Then there was the shtick itself. Yeh was a road-show neophyte; Praisner hadn't been on board for long. The advice from the underwriters: hone your act in front of Europe's kinder, gentler fund managers before hitting New York City and Boston.
Yeh and Praisner needn't have worried about their performance. Or perhaps it's as well that they did, because U.S. investors, for all their reputed rudeness, were receptive. SST opened at its prospectus price of $9 a share on NASDAQ on November 22, 1995, closing that day at $13. All told, the IPO grossed more than $40 million, at the high end of what Yeh had hoped for. SST's out-of-pocket costs, not including underwriters' commissions, ran to nearly $1 million.
The biggest cost, of course, may well have been the drain on everyone's energies. During the road show, the team routinely gabbed about the well-deserved vacations they ought to take. Yeh, the others decided, should go to Paris with his wife. However, once he got back to his newly public business, Yeh returned to his ambitious goals: there's a billion-dollar business here just begging to be built, he proclaimed. Can he possibly do it? "He's done a very, very good job of delegating real authority, both inside and outside the company, in order to realize the goal he's set for himself," observes James Davidson of Hambrecht & Quist. As Yeh demonstrated during the IPO process, he is willing to listen, to change what needs to be changed, to act swiftly. He understands that SST is no longer a start-up whose survival depends solely on his ability to nurture it.
In the end, he himself may have undergone the most significant makeover of all.
Hambrecht & Quist Principal
THE UNDERWRITER serves as a master of ceremonies. Underwriters set the timetable, ensure that the company has a compelling and consistent story to tell Wall Street, assemble the investment bankers who sell and price the stock, and organize the road show.
THE COMPANY'S attorney serves as chief liaison with the SEC. The lawyer helps the company write its prospectus and scrutinizes all the company's agreements, like stock-option plans and equipment leases. In addition, the lawyer acts as a negotiator with the underwriter, assisting in the valuation process.
THE CHIEF EXECUTIVE OFFICER hires a chief financial officer, selects all the principal players in the offering, makes sure the staff is available for and committed to the IPO process, and participates in everything from writing the prospectus to pricing the deal. The CEO also stars in the road show.
THE CHIEF FINANCIAL OFFICER's main job is to get disparate monthly financials into quarterly reports. The CFO also makes sure the books close in a timely manner and hires a controller to handle the finances after the IPO. And the CFO develops and defends the financial projections the underwriter wants.
Charles Noreen Jr.
THE ACCOUNTANT audits the financial statements included in the SEC registration statement and works with the CFO to get the company's numbers into shape. The accountant also verifies financial data sent to the underwriters and helps answer questions from the SEC.* * *