Friday, October 9, 2009

Going public

This is the book by Michael Malone on MIPS Computer and the Entrepreneurial Dream. It is an account of how the company went public interspersed with vignettes about the executives who made it possible. Some may see going public as the culmination of a dream to build something and to share it with the world but it can also be seen as a tale of greed - by "entrepreneurs" who want to cash in as quickly as possible, investment bankers who want to earn the fees and "venture capitalists" who want to get in on the IPO and then get out as quickly as the can so that regular investors suffer the downside of the wonders of the modern capitalist market system.

... assuming an opening price of $15 per share, MIPS's management team would see at least $7.2 million in new wealth and conceivably $15 million or more. Not bad for a team whose average tenure with the company was less than two years. (pg. 109)

Chapter 10 on how to read a prospectus with a skeptical view is probably the best part of the book. Chapter 9 on the prospectus writing process was also a good read.

... a comparatively mild "Certain Transactions" section - just a few signing bonuses and bridge loans ... None of the juicy stuff sometimes encountered in prospectuses of wilder, less disciplined start ups - company yachts, divorce settlements, questionable payoffs to litigous former employees, stock options to mistresses, company "garderners" who work at executives' houses. (pg. 112)

Some also somewhat surprising factoid on why the IPO had to be priced at double digits (and resulted in a reverse stock split prior to the IPO):
... Wall Street institutional investors and the like who buy 90 to 95 percent of all stock, simply don't like single digit stocks and avoid purchasing them. Many, in fact, actually have prohibitions against buying single digit stocks. (pg. 22)

Pros and cons of being a public company (the cons not being enough to deter the process of going public):
The top four most troubling consequences of going public, the CEOs said, were the cost and time of dealing with Wall Street and shareholders, the emphasis on short-term results and ever increasing expectations, the lack of secrecy, and constant outside criticism. The upside was enhanced credibility, visibility, more options for future financing, better employee morale, and improved recruiting. ... "I feel like a squirrel in a carousel," ... "I just keep on running." (pg. 196)

"There has to be something that holds a company together beyond making a lot of money; otherwise the company will begin to deteriorate as everyone begins to say, 'Now that I'm rich, I can do whatever I want to do.' You take an engineer who is making $80,000 to $100,000 a year and give him a million dollars and he's liable to say, 'Well now that I can make $100,000 a year on interest without working, I don't have to put up with this shit.' ... "(pg. 256)

On the seeming arbitrariness of the SEC delay in approving the prospectus as related by CFO Ludvigson:
... more companies were going public during this period when the SEC was coming down hard on MIPS. "I saw the prospectus of a company that went public about the same time we planned to. Well, I'm reading this thing and I see the chairman of the company was part of a divorce trial in which a restraining order was issued against him, which he violated and got thrown into either a jail or a mental institution for six days. There are three pages of lawsuits ranging from not paying their suppliers to not paying their taxes, from defaulting on bank loans to tax infringement. The company has only $57,000 in cash. Fifty-one percent of their revenue is going to a Bahamanian corporation owned by one of the board members. Ann all the directors issue themselves eleventh hour stock options before the IPO at like 1 cent a share.

"And these guys go public! ... here's this bizarre little company and they make it through the review process. Meanwhile, we don't have a single lawsuit, no debt and the SEC is busting our chops." (pg. 201-202)

Also an interesting anecdote on how Frank Quattrone (at Morgan Stanley at the time and was the lead investment bank) almost derailed the IPO by giving a supposedly off the record interview during the mandated "quiet" period on page 211.

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