Inc. spent weeks interviewing dozens of the deal's central and peripheral players, as well as others who closely followed the attempted IPO. Those interviews make one thing clear: that in undertaking a public offering, a company steps into a world where the forces at work can far overshadow its own interests. Executives taking their company public might think the proceedings are all about them; in fact, they could be said to have little more than a bit part in a much larger set of machinations. And inside this high-stakes world, as Wired seems to have found to its everlasting humiliation, no one is there solely to take care of you.
In 1992 founders Louis Rossetto and Jane Metcalfe set out to create, as their business plan put it, "a radically different kind of computer magazine." In that, they succeeded spectacularly. With its wild design, strident attitude, and groundbreaking content, by 1996 Wired magazine had captured a circulation of 325,000, a whopping 95 advertising pages per issue, and the attention of the media world. Wired was on fire.
The goal, initially, was to turn a profit by the third year of operations. But driven by the conceit that Wired's "branded content with attitude" could be readily expanded across multiple media, Rossetto ranged far outside his native magazine medium into a host of ambitious spin-offs. Chief among them: HotWired, the magazine's on-line cousin, which won accolades for its stunningly original design but was losing money--and lots of it; HardWired, the company's similarly unprofitable book-publishing arm; and Netizen, the television program it started developing for MSNBC.
The result: instead of the "exceedingly lean" staff of 22 envisioned in the business plan, the company employed 338 people by the beginning of 1996, and 1995 expenses outpaced revenues by some $7.9 million. In the name of brand building, the drive toward profitability seemed to be suspended indefinitely.
Ah, but there was good news from the financial markets! The market for initial public offerings, it seemed, was heating up to a historic high, and companies that were losing lots of money could raise lots more of it from the public.
On November 29, 1995, computer-animation company Pixar had gone public to the tune of a $1.5-billion market capitalization. The following April, Internet search engine Yahoo!, which had never come close to turning a profit, rang up a $848-million market cap on its first day of trading.
The sudden craze for such financially flimsy new-media stocks seemed to confirm everything Wired magazine had been proselytizing in its pages: that the digital revolution was fast upon us, sweeping away all rules and preconceptions before it. And as the market rose to a fevered crescendo the volume of investment banks clamoring to take Wired Ventures itself public rose proportionally. "It would have been crazy for Wired not to try to go public," says a former Wired executive, echoing the sentiment fast becoming prevalent within the company at the time. "All this money was showering down, and not to hold your hands out to catch some would have been ridiculous."
In early 1996 the company's officers sat down with a five-year business plan to determine how much capital they'd need to finance their ever-lengthening roster of projects. "It was a sizable number," recalls Rex Ishibashi, who was then the company's chief financial officer. "We all kind of looked at each other and said,...'This begs the question, Do we need to go public?' "
The decision to go forward happened quickly. By the spring of 1996, Wired Ventures was holding a "bake-off"--the ritual of selecting an underwriting team from the various investment-bank suitors. One of the keenest wooers was San Francisco-based Robertson Stephens & Co. The bank was aggressive, Internet savvy, and oriented toward smaller companies; its chairman, Sandy Robertson, had visited Wired a year earlier to express his enthusiasm for Rossetto's creation. But Wired instead tapped Wall Street's most hallowed name, Goldman, Sachs & Co., as its lead underwriter, consigning Robertson Stephens to the supporting role of comanager--a decision many at Wired Ventures would later come to regret. "There was a general buzz of, 'Man, Goldman rules,' " recalls one Wired insider, noting that Goldman had just steered Yahoo!'s headline-grabbing IPO. "This was a slam dunk."
The underwriting team chosen, attention now turned to a second crucial decision: how to value Wired Ventures. The answer to that question would, in turn, determine the price at which Goldman would sell Wired's stock to its investor clients (for a tidy 7% commission).
In setting an offering price, an artful balance must be struck. If it's set too low, the stock could rocket through the roof in the so-called aftermarket--the public market that develops once shares start changing hands. In that scenario, investors privileged enough to get in at the offering price make out like bandits, but the company that's going public captures only a small fraction of the proceeds it might have gotten. If, on the other hand, the price is set too high, the company takes home a hefty sack of money, but its stock could quickly sink below the offering price in the aftermarket, generating negative publicity and angry investors.
For years underwriters had balanced the countervailing imperatives by hewing to a general rule of thumb: value the deal so that the stock will jump about 15% on the first day of trading. But now, with the IPO market at a frothy whir, a 15% spike was considered a sleepy deal indeed. It was much better to set the price low and let the stock leap, say, 50% in the aftermarket, or even double. "The companies that do the best in the long run leave some money on the table as a reward for the investment bank's best customers," explains Richard Shaffer, editor of VentureFinance. "It's almost always a mistake to try to get the last possible dollar."
