The story of one owner who, shunned by Wall Street, took his company public by himself.
The story of one owner who, shunned by Wall Street, took his company public by himself.
The IPO of the Year
Shunned by the Street, Robert Kopstein did the unthinkable: he took his company public himself
In contrast to Netscape Communications' much-ballyhooed initial public offering in 1995, Optical Cable Corp.'s 1996 IPO went virtually unnoticed by Wall Street. Optical Cable's IPO resulted in a similar outcome: a founding stockholder became a paper billionaire. But in this case, the 10th digit came and went so fast that its beneficiary, an electrical engineer named Robert Kopstein, had scant time to celebrate. The next day the market took away what it had bestowed only the day before--in spectacular fashion even by 1996's stupefying standards.
Until his company's April 2, 1996, offering (as OCCF on Nasdaq), Kopstein, the chief executive officer of Optical Cable, had been the sole shareholder in the company, a fiber-optic cable manufacturer he'd costarted (with partners, whom he later bought out) in Roanoke, Va., in 1983. After selling 670,000 newly issued shares, he still retained 93% of the company, or $90 million worth. You might think that he'd have been content with that achievement: professionals expect a small company going public to sell more of itself than a mere 7%--generally, they told Kopstein, closer to 25%. But Kopstein's accomplishments didn't stop there. Seven weeks later, to his and everyone else's astonishment, the price of the stock soared to $136 (not adjusted for two splits), a spectacular increment that pushed Optical Cable's market value past $1.4 billion and Kopstein's portion to $1.3 billion. By the close of the next day his net worth had retreated to $800 million, give or take. After two two-for-one stock splits, in May and June, Optical Cable's stock settled back to around $46 (not adjusted for the splits) and closed up 360% for the year. Had all that drama unfolded under the banner of a prominent investment banker, Optical Cable's IPO would doubtlessly have been hailed as the hottest of the year.
None of it did, however. The flotation was pulled off by a total novice--Kopstein himself--and in virtually every review of that record year, the then-46-year-old upstart was airbrushed out of existence. When a stock gains 1,200% in six weeks and splits twice in 21 days, it's usually a matter for investigation. No such cloud hung over Optical Cable, which came to market boasting a history of steady growth and legitimate net sales of $36.4 million. What's more, the company reported net income of $8.2 million--$8.2 million more than Netscape.
If Kopstein had committed any offense, it was snubbing the good old boys: his deal didn't employ the services of the investment-banking crowd. But not for lack of trying. Kopstein's initial initial-public-offering urge had struck in 1992, when his company's net sales were at $19.8 million. He intended to raise only $15 million, enough to expand the factory facilities, hire outside salespeople, pay down some debt, and set aside stock for employee options. So, starting with San Francisco's Montgomery Securities (which, he says, advised him to wait until the company was bigger), he called on prominent investment bankers who specialized in technology. "People told me that if you're in high tech, be sure to get a company that has good research people who can tell the story of what you're really about," says Kopstein.
The half a dozen underwriters with whom he met over the years--including those from such prominent houses as Robinson Humphrey and Dean Witter--couldn't be bothered. One demurred on the grounds that while its researchers were familiar with most things electronic, they knew nothing about optical fiber. Another was simply too busy. A third felt the deal was too trifling to bother with. "For anyone looking to do a small offering," Kopstein says, recalling his disillusionment after the last underwriter, Rodman & Renshaw, in New York City, turned him down, "there was scant interest."
In the fall of 1995 Kopstein at last persuaded an investment banker, Unterberg Harris, of New York City, to handle the proposed underwriting of 1.5 million shares of Optical Cable. The firm printed up preliminary offering prospectuses showing itself as the lead underwriter on the left side of the cover (as protocol dictates), and another investment banker, Piper Jaffray, in Minneapolis, as a coparticipant, on the right. Unterberg Harris prepped Kopstein for personal appearances on the dog-and-pony circuit. But before the road show ended, Kopstein pulled the plug. The price Unterberg Harris was about to settle for was disappointingly below the $10 a share Kopstein thought his company was worth.
"I didn't realize that when there are two names on a prospectus, there's a big difference in who's responsible for what," he says of the setup. "I thought I'd hired a team of horses to pull us to the finish line. But," he says, "the job just didn't get done."
Through a contact, he offered the now-dormant deal to A. G. Edwards and Sons Inc., in St. Louis. Its head of corporate finance, Spencer Burke, said he'd have to wait at least six months before the financial community would again pay attention to the company. But he added, "You're too strong-minded a man to be held back by what people think. Why not do it yourself?"
For a practical answer, Kopstein consulted his company's lawyers, McGuire Woods Battle & Boothe, in Richmond, Va. And counsel "did everything it could to dissuade me," he says. The lawyers advised that on occasion regional banks conducted their own small best-efforts offerings over an extended period of time, but that what Kopstein had proposed was unheard of. "I don't want to wait six months," Kopstein insisted. "I want to do it quickly, and I want to do it right."
For a neophyte financier, those imperatives are at odds. "I didn't realize there were so many barriers put there to keep this type of offering from happening," he says. Luckily, two major barriers had already been cleared: registering the offering statement with the Securities and Exchange Commission and preparing the instrument that exhaustively describes the deal to potential buyers. Kopstein simply adapted the terms of the earlier "red herring" (so called for the patches of red ink that identify the publication as being preliminary and subject to change). Normally, the placement of all offered shares would be guaranteed by underwriters; Optical Cable's self-underwriting was an arrangement in which whatever number of shares the public bought would constitute the flotation, and the receipts from them, less expenses from the IPO, would flow entirely to the company.
Kopstein's first task was to get as many prospectuses as possible into the hands of as many prospective buyers as possible. He opened a site on the Internet posting his intentions, and then he booked tombstone ads--stark announcements that, by SEC edict, invite a reader only to send for a descriptive prospectus--in major newspapers. In the states that allowed it, at any rate: in some states those descriptions didn't meet local Blue Sky laws, the often-antiquated statutes (so named because they refer to schemes that are worth no more than a patch of blue sky) that define how securities can be offered to an innocent populace. To qualify in California, for example, he would have had to change his company's bylaws and reprint the prospectuses accordingly. In some instances, Kopstein chose not to bother. (He never did get registered in California.) But just in case, he distributed 10,000 prospectuses to his Roanoke neighbors and then assigned a cadre of employees to man the phones "like a bunch of telemarketers." Over four weeks they booked orders for 670,000 shares from some 850 buyers. Kopstein wanted to keep trying and sell another half a million shares. But the earlier buyers were getting restless. They wanted the stock to start trading in the open market.
Easier said than done, Kopstein discovered. Lacking underwriters, Optical Cable also lacked market makers. For a company's stock to qualify for a National Market listing on Nasdaq, not only must that stock meet certain performance minimums (see " So You Want to Go Public" ), but the company also must have two third-party dealers to handle outside orders to buy and sell its shares. For most of the IPO universe, a company's underwriters ipso facto become its market makers as well as its research analysts in the financial community.
It so happened that at this time David Adam, a former Wall Streeter turned financial freelancer, spotted a tombstone ad and phoned in to ask if there was anything he could help out with. Kopstein didn't hesitate. "Sure," he said, "find me a couple of market makers." Adam called around to his buddies, but "they wouldn't touch Kopstein. They saw him as a guy trying to out-finesse Wall Street. Those fellows get nice fees and warrants and stock options and 'green shoes,' but Bob would have none of it. Everybody said, in effect, 'We don't go down there and tell him how to make cable.' " It took more than 40 calls for Adam to unearth two firms willing to handle Optical Cable's stock.
Underwriters rely on mutual funds and other institutional investors to commit to the lion's share of an issue and establish its final price. But as a peddler of unknown merit selling a comparatively scant number of shares in a business unfamiliar to institutional investors, Kopstein reached just one such buyer, Newby & Co., a Rockville, Md., investment firm, which subscribed to 150,000 shares for some retirement-fund clients. Kopstein blames the absence of other institutional interest on people's unfamiliarity with his unusual line of business.
"What made it difficult for us where it wouldn't have been for others is that there was no other company doing the same type of thing. When all you have to do is pull up a set of comparable figures and see where you fit in, selling yourself is easier. But if institutions don't have a peg by which to judge whether you're better or worse than other companies, they sit back to see how the market receives the offering," he says.
Kopstein tagged Optical Cable shares at $10 to yield a modest (for a fast-growth technology issue) price-to-earnings ratio of 17. "I wanted to get a reasonable amount of shares out there and see how the market accepted the price," he says. "When we needed more money in the future, we could go back out at whatever price the market thought the stock ought to be valued."
The market was even more positive about the stock than Kopstein was. The offering price more than doubled within five weeks, passing $22 on May 9. A week after that, it was $35; in six days more, $79. "Maybe buyers from California," the befuddled Kopstein conjectured, "were sending in orders for stock they weren't allowed to buy on the offering."
As the share price inexplicably jumped some 30% a day, Kopstein got a call--not from the SEC but from CNBC. The financial-news cable network invited him on the air. On May 23, just after 8:30 a.m., greenhorn Kopstein got skewered by the squawk box. "The interviewers kept shooting arrows. They wanted to know more about what the stock was doing than what the company was doing." Kopstein guilelessly confessed ignorance to the machinations of the stock market and seized the moment to educate millions of viewers about Optical Cable--the job at which he insists the underwriters he'd hired had failed. The billionaire for a day was astounded by the response. "Right after I got off the air, the stock went through the roof. People called and E-mailed, saying that the company of a CEO who could stand up like that while they tried to fill him full of holes--that company was going to have a fantastic future."
Despite the exhilarating ride, Kopstein admits he wouldn't take the solo route again. Toting up the start-at-5-a.m. days he devoted to the IPO in addition to running the company, he says that leaving out the middlemen "cost at least as much as if I'd used an underwriter to do the deal." Nonetheless, acknowledges A. G. Edwards's Burke, "what he did is incredible. For most CEOs of most companies, it would be too much of a challenge." But not impossible. "If you have a good company and good advisers--and a lot of gumption--there's bound to be somebody who wants to own your stock."
Robert A. Mamis is a senior writer at Inc.
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