While going public can yield a huge payoff for many companies, it can be a disastrous undertaking for others. Here's why Wired magazine's IPO proved a stunning failure.
At a time when the market couldn't invest in IPOs fast enough, scores of companies tried to go public and failed--with some disastrous consequences
If it hadn't been for the stress of the IPO falling through, I don't know whether I'd have had that heart attack," says David CotÉ, reflecting on the experience that nearly killed his company--and, he thinks, might have nearly killed him.
It's been about a year since his software company, Young Minds Inc., based in Redlands, Calif., was forced to scuttle its initial public offering, through which the perennially cash-strapped company had hoped to raise $13.2 million. The deal's failure was traumatic enough, but the ensuing fallout has been a veritable shop of horrors.
"We were out of money for almost four months after the IPO fell through," says CotÉ, 54. After falling four weeks behind on payroll, CotÉ laid off 24 of his 67 employees. And as part of a last-ditch bid to avoid bankruptcy, he and his two business partners signed over the rights to second mortgages on their homes to a lender. "We were trying to do the IPO to overcome our cash shortage," broods chairman Andrew Young. "Instead, this just exacerbated it."
Seldom are the consequences of a failed IPO as swift and severe as they were for Young Minds. But Young Minds' failure is not unique. According to information provided by IPO Reporter, in just the past two years nearly 100 companies--lured by the riches of a superheated IPO market and often rushed to market by investment banks eager to cash in on the bonanza--have endured the same humiliating letdown.
"We ramped up our overhead so we could handle the explosive growth of a company that goes public," recounts Thomas DeJordy, owner of Cafe La France, a Rhode Island-based restaurant chain that was supposed to do its IPO in 1996. In anticipation DeJordy hired a chief financial officer and a head of investor relations. He created a training department to churn out managers for the new restaurants he planned to open. To pay for it all, the company took on expensive bridge financing.
When his $5-million offering fell through for the second time, last May (hint: it doesn't help when, in your prospectus, your accountants doubt your company's ability "to continue as a going concern"), DeJordy was short of cash to pay off the bridge financiers. Instead, he had to compensate them with a sizable chunk of the company's equity.
Then there's Eric Kriss. His health-care-services company, MediVision, chose the spectacularly inopportune date of October 19, 1987--Black Tuesday--to file its prospectus with the Securities and Exchange Commission. The IPO was swiftly canceled. Nearly a decade later, Kriss was poised to take a second company, MediQual Systems Inc., public. But during the road show, the stock of the leading competitors collapsed. The upshot: cancellation number two.
Some failed IPOs, like Kriss's, are victims of bad timing. Others are victims of bad judgment, bad advice, or just plain bad luck. But in nearly all the cases Inc. examined, CEOs found that a failed initial public offering affects their company in ways they never anticipated. In just embarking on an IPO, CEOs accustomed to wielding control over their company's destiny swiftly lose that grip. Perhaps no other failure illustrates the cruel vicissitudes of the IPO process better than that of Wired Ventures Inc.
It should have been a slam-dunk IPO. Wired Ventures, publisher of Wired magazine, had everything in its favor: buzz about the company, top-drawer advisers, and a marketplace that couldn't pump money into new media fast enough. But instead Wired's IPO failed spectacularly.
How did it go so wrong?
In late 1996 a Wired writer was dining at a fashionable San Francisco restaurant when he discovered that seated at the next table were members of the Goldman Sachs team that had been brought in to underwrite Wired Ventures' IPO. The Wired staffer, still lamenting the nice sum he'd hoped to make on the IPO with his stock options, was struck by the levity of the Goldman Sachs team. "It hurt," the former Wired staffer recalls now, "because those were the people who were supposed to take care of us."
More than a year after its "IPO event," as Wired's officers insist on delicately calling the much-ballyhooed calamity, the company and its employees are still smarting. Though its flagship magazine has finally eked its way to profitability, the company has been buffeted by successive rounds of layoffs, including the November 20 axing of 33 people. Other talented staffers, their stock options still worth little more than the paper they're printed on, have headed for the exits. Louis Rossetto, the company's headstrong and mercurial cofounder, has stepped down as the magazine's editor-in-chief and publisher. At press time, a search was under way to replace him as chief executive as well.
The "old media" that Wired magazine regularly rails against in its articles have greeted the company's precipitous comedown with no little schadenfreude. The blistering consensus: that in shopping itself at far too rich a valuation and pretending to be more than it was, Wired Ventures fell victim to its own greed and famous arrogance.
But for all the company's overweening hubris, for all its executives' wealth-maximizing instincts, that assessment leaves a glaring question unanswered. Wired Ventures didn't do this alone: it put together a battery of top-drawer underwriters and other advisers to take it public. What could this team of professionals possibly have been thinking?
