DJ When DOV Cried: How A Small Deal Rattled The IPO Market
By Raymond Hennessey Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Most companies like drug maker DOV Pharmaceutical Inc. (DOVP) stay below investors' radar screens.
With trading so thin the shares don't even change hands some days and not a single stock rating from a Wall Street firm, it hardly seems worth notice.
Yet, DOV has become a flash point for some of the issues that have addled the markets this year, thanks to an initial public offering that included accounting revisions, accusations of improper corporate disclosure, infighting among Wall Street deal makers, and ties between investment bankers and stock analysts.
Though the offering was completed more than six months ago, the deal continues to resonate on Wall Street, with shareholder lawsuits looming, unresolved disputes that could find underwriting firms suing one another, and a company unable to shake the shadow of one of the IPO market's most contentious deals.
Most people involved in the offering declined to speak on the record for this story, citing the litigation swirling around the deal or policies that prevent them from discussing specifics of stock offerings. But on condition of anonymity, several painted a picture of a deal where a molehill of an action led to a mountain still haunting underwriters.
The saga happened quietly enough. DOV, a drug maker based in Hackensack, N.J., was on its way to selling 5 million shares in an IPO led jointly by Canadian Imperial Bank of Commerce's CIBC World Markets Corp. and Lehman Brothers Holdings Inc. (LEH), with CIBC holding the important role of sole book-runner. Officials at CIBC declined to comment on the deal.
Little made DOV stand out. It was a money-losing biotech company looking to fund drug development. Like several other biotech deals at the time, investors weren't exactly forming lines to buy shares, but there was enough interest to make bankers believe the offering could price. CIBC bankers and brokers gauged support, and the deal was scheduled to price after the close of trading on April 24.
Then, there was a hitch. The Securities and Exchange Commission told the company to change the way DOV accounted for an investment in a Bermuda-based joint venture it owned with Irish drug maker Elan Corp. (ELN), which itself has since become the subject of an unrelated investigation into its accounting by the SEC. DOV's change in accounting caused a one-time adjustment that widened the loss at the venture, known as DOV Bermuda Ltd., in 1999 to $11.9 million from $10.2 million. It actually helped the parent company's bottom line, causing a one-time narrowing of its net loss for 1999 of $136,000.
Company officials and bankers said that, after consultation with the SEC, they decided the change wasn't "material." As a result, they refiled offering documents with the SEC reflecting the change, but didn't take the next step, known as recirculation, where potential investors are given new copies of the filing. Instead, some potential buyers would be told verbally of the change, and the deal would price on the evening of the 24th, the same time that the new SEC filing was made.
The offering was priced low, with the shares selling for $13 each, below price estimates of $15 to $17 a share. The shares sold off when they opened for trading on the Nasdaq Stock Market on April 25.
Soon, word started circulating that there had been a revision to estimates. In fact, one banker whose firm was granted shares to allocate in the offering said he didn't even know a change had been made until an investor called him asking why he hadn't been informed. CIBC Takes Charge
For CIBC, much was on the line. DOV was a coup for the firm, since it had originally shared the book-running role with Lehman Brothers, which meant both firms took part in all the decisions on the IPO.
By April, though, CIBC became the sole book-runner. According to several people familiar with the transaction, CIBC snatched the deal when the biotechnology analyst for Lehman, Rachel Leheny, went on maternity leave, and a junior biotech analyst, Michael Wood, left the firm. As a result, CIBC was able to successfully argue that its analyst would have a better profile during the road show process used to market an IPO.
Lehman remained a joint lead manager, ostensibly meaning it would share the same large number of shares and have a chance to get a similar economic benefit as CIBC, but it wouldn't have a role in making the big decisions on how the deal was marketed.
That in and of itself likely caused tension.
"It's a mess," said Bruce Foerster, managing director for capital markets at South Beach Capital in Miami, which wasn't involved in the DOV offering. "It's the worst of all worlds."
Amid this tension, investors and some underwriters at other firms began to question whether CIBC had indeed made the right decision in not giving better disclosure about DOV's accounting revision. But CIBC held firm, saying that, since the changes had been made in a filing with the SEC, albeit at the last minute, the proper disclosures had been made, according to several people involved in the deal.
Disgruntled investors and bankers also were told that the revisions were so small - and benefitted DOV - so they weren't material in the first place. There may be some truth to that, given that biotechnology IPOs normally don't yet have steady revenue streams, so investors usually don't put too much emphasis on historical results, focusing rather on the promise of future performance.
Yet, CIBC's arguments didn't seem to matter. Traders, investors and IPO analysts weren't as upset with the changes as they were with the manner in which they were made. The changes were tucked away in tables deep in the SEC filing and came so late that many people didn't even notice them.
In normal environments, it might not have mattered. Yet, DOV came to market at a time of increased scrutiny of accounting in the wake of Enron Corp.'s (ENRNQ) collapse, and in an atmosphere where the rules for corporate disclosure were evolving quickly, with the focus on forcing companies to talk more openly about their businesses.
It didn't help that investors had shown just moderate interest in the deal in the first place.
"It wasn't the tightest book," said one banker.
As a result, investors who may have been on the fence to begin with, but decided to take the risk, could use the revisions as an excuse to bail out.
And they did. By the end of the first day of trading April 25, the IPO market had a lemon on its hands. The shares lost 33% of their value - the worst debut for a new stock in more than two years.
It got worse. Several customers called CIBC and the other firms who had sold the shares demanding their money back, according to people involved in the offering. Most of the calls went to CIBC, which had distributed the lion's share of stock, leaving other firms with much smaller allocations to make.
(MORE) DOW JONES NEWS 11-12-02 |
