San Jose Mercury takes a page from FBNers:How bogus Web site cooks up
IPO frenzy BY DAN GILLMOR
Mercury News Technology Columnist
ONLY in America, and only in this era of financial froth, could an
Internet company like eTattler.com get started and sell shares to the
public. Despite the fact that this operation has a nearly immoral
business concept and a bizarre business model, the public has
bought into it.
My confidential source at the bogus eTattler, which bills itself as a
Web auction site for salacious information on celebrities, politicians
and other public figures, has leaked another internal memo. This one
describes the days just preceding the company's initial public
offering, or IPO, and what happened immediately afterward. It's
fairly bizarre, to say the least -- but then again, this is an Internet
company.
Here's the latest from eTattler:
CONFIDENTIAL MEMORANDUM
June 10, 1999
To: eTattler.com Board of Directors, Partners,
Senior Management
From: Dan G.
Subject: IPO: Now what?
I'm almost dizzy from exhaustion after finishing
the eTattler investor road show and then this
week's IPO, but I did want to bring everyone up to
date on our situation. It could be better, but I
suppose it could be worse, too -- and my weariness
is tempered by the knowledge that we insiders still
own shares that are worth a great deal of money.
The days leading up to Tuesday's offering were
incredibly busy. Even though I'd studied the
process of going public, and talked with other
people who'd been part of companies that did IPOs,
I still wasn't entirely prepared.
As you know, everyone wants to be able to buy
shares at the official opening price. This is
because most Internet stocks soar in value their
first day on the market. Often, people who own
those shares sell their holdings in the open market
the first day for a big profit. This is called ''flipping.''
People keep asking me why we'd agree to let the stock go out at a price
lower than the public would buy. The reason is simple: We needed the
publicity we'd get by having our price spike up the first day. Yes, we
might raise more capital if we priced the offering higher, but the public
buzz is at least as important as raising actual money to run the company
-- especially since few of us plan to own our shares very long.
There was a wrinkle in our case, however. You'll recall that we decided
to bypass the institutional investors and court the general public out of
the gate, largely because the big investors who did sufficient due
diligence (i.e. they read the prospectus) said at first that they didn't
want any part of eTattler. We focused on the so-called ''retail
investor'' -- day traders and other average folks who wanted to get in on
the Internet stock boom before it was too late.
But the pre-IPO buzz about eTattler got louder and louder in the weeks
immediately preceding the offering, largely because of the way we
manipulated the media during that period. (We gave our marketing folks
and PR firm some extra options for their great work on this.)
As a result, less than a week before the actual offering, we began
getting calls from institutional investors who decided they wanted in on
the deal after all. The problem was that they'd all badmouthed the
company publicly.
Our investment bank, Weeke & Chernem Securities Inc., had predicted this
might happen and was ready. We cooked up a letter of confidentiality in
which we (eTattler.com and W&C) promised not to disclose the
institutions' ownership stakes prior to the deal. This allowed them to
satisfy their greed while not being identified as investors in a company
they'd trashed. From our perspective, we also won, because we had so few
shares going on the market in the offering that the general public would
find the supply even tighter than anticipated and, presumably, would bid
up the price as a result.
The ''Friends and Family shares'' situation was a total mess. As seems to
happen in these circumstances, we all started hearing from so-called
friends who claimed to have gone to kindergarten with us, not to mention
people we'd never even met, and family so distant that we couldn't figure
out exactly how we were related. (I made sure that my wine dealer got a
hundred shares at the offering price -- and he had the gall to complain
that I didn't give him enough.)
The Pricing Committee -- members of our Board plus people from the bank
-- met frequently during the month preceding the IPO, to try to come up
with an offering price as well as pick the right day to do the offering.
We wanted to avoid a day when another Internet company was going for an
IPO, and we didn't want to ''go out'' on a day when other market
conditions might be so volatile as to hurt us. We settled, finally, on
Tuesday of this week.
Then, on Monday, we got an offer out of the blue from a major media
company that wanted to buy eTattler. The price was lower than we'd been
offered just a few months earlier, but I argued we should take the money
and run, given the fundamental problems with the business model that I
still don't see how we can solve. (Apparently, the CEO of the other
company had heard -- incorrectly, though we didn't tell him this -- that
our Info Offered/Media Companies section had some extremely interesting
material about him and his company.) I was overruled by the board, which
may be regretting its decision about now.
Also on Monday, Weeke & Chernem ''accidentally'' posted on its Web site a
favorable analyst report touting eTattler.com stock. They removed the
report almost instantly, with an explanation that it was meant to be
posted after the company went public (and it was, on Tuesday). But
someone (ha, ha) made sure that copies of the report made their way into
Internet stock chat rooms and forums, and the buzz got even louder.
(Let's hope the SEC doesn't get hinky about this.)
I didn't sleep a wink Monday night, and I doubt anyone else at eTattler
did, either. When I got to the office the next morning I discovered that
one of our programmers had written a little Java applet that displayed
eTattler's stock price every 15 seconds and had installed it on every
computer in the office. (I almost fired him on the spot. This guy has
been telling me for months that he'd get the auction servers up and
running ''real soon now,'' and hasn't managed to do it yet.) Needless to
say, nobody did any work that day.
I have to admit, that first day was an amazing high for all of us. The
first trade was at 78 percent over the official offering price, and it
went up from there. An hour before the market closed eTattler was selling
almost 230 percent above the offering price. We all felt rich. I'd sent
out an e-mail to the staff on Monday saying it was premature to be
counting the proverbial chickens, but that didn't seem to help. On
Wednesday morning I saw no fewer than 11 new BMWs in the parking lot.
Sure enough, the price of eTattler shares fell. Actually, it started
falling in the after-hours market Tuesday night, but on Wednesday the
price dropped by 50 percent. That meant it closed higher than the
offering price, but lower than the first public trade the day before.
Today, as I write this memo, the price has caved in again. We're now 25
percent below the offering price, though at least it's been holding at
this level for the past hour and a half.
I'm not too unhappy, since we insiders are still showing a huge profit on
our founders' shares. Our 18-day lockup period means we can sell in just
over two weeks, and I can't imagine the shares will be worthless by then.
As a matter of fact, we're working now on ways to boost the share price
so that we can capture our profits as, well, profitably as possible when
the lockup expires. I have a few ideas, but I'd like to hear yours, too.
Get back to me as soon as possible.
mercurycenter.com |
