IPO Investors Lose on Buy-Out
By Jerry Knight
Washington Post Staff Writer
Monday, July 24, 2000; Page F07
Within 48 hours after executives of CareerBuilder Inc. agreed to sell the company to two big newspaper chains for $8 a share last week, irate stockholders filed a lawsuit.
It's a wonder it took them so long.
The instant analysis of CareerBuilder's buyout was guaranteed to make some shareholders pick up the phone and scream for a lawyer.
CareerBuilder, an online employment service based in Reston, went public only 14 months ago at $13 a share. Investors who bought stock in the initial public offering and still own it stand to lose $5 a share in the buyout.
If that wasn't enough to make someone call for class action counsel, another detail of the deal did it.
While IPO investors will lose on the buyout, CareerBuilder executives, venture capital investors and other insiders stand to make big profits. They paid an average of $2.62 a share for the 18.3 million shares they owned at the time of the IPO, the stock offering documents show.
Here's the math: 18.3 million times $5.38 a share profit means a $98 million gain for the insiders. The IPO investors bought 4.4 million shares; a loss of $5 each comes to $22 million.
That's an actual loss of market value on the IPO stock, though probably not an actual loss for very many of the IPO buyers. It's a good guess that most of them bailed out of CareerBuilder long ago.
The total cash gain for insiders will also be less than the above calculation shows. CareerBuilder founder and Chairman Robert McGovern, who owns 3.35 million shares, will convert an undisclosed part of his holdings into a stake in the new online employment venture being built by Tribune Co. and Knight Ridder Inc.
Whatever the gains and losses turn out to be, the disparity is enough to generate a lawsuit over the conflict of interest between the public shareholders and the corporate insiders.
The legal issues are going to be decided by the Delaware Chancery Court, where the case was filed. Neither CareerBuilder executives nor the lawyers for Caroline Teitelbaum, the stockholder who is the plaintiff in the lawsuit, would discuss the case. But the economic issues and the business decisions involved are another matter, one with implications for investors in many other Washington companies.
CareerBuilder is the third local high-tech firm of late to agree to a buyout at a price that's well below the initial public offering price of its stock. Shareholders of OneMain.com Inc. of Reston and Hagler Bailly Inc. of Arlington are in the same boat. Hagler Bailly, a consulting firm that went public at $14 a share in July 1997, has accepted a $5.32-a-share offer from PA Consulting Group Inc., a British firm.
OneMain.com, an Internet service provider, went public at $22 a share in March of last year and is selling itself to Earthlink Inc. for a combination of cash and stock worth about $12 a share.
That's an ominous pattern for Washington investors in many of the region's technology fledglings.
There are about a dozen other local Internet companies whose stocks have fallen below their IPO price. All of them are ripe candidates for acquisition because they are small players in industries that are rapidly consolidating and their stocks are selling for bargain-basement prices.
The stock market, that mysterious arbiter of values, has played a ruthless role in pricing the stocks of CareerBuilder, OneMain.com and Hagler Bailly. The fall in value of their shares is far more extreme than any flaws in their businesses.
All three are solid, well-managed companies. They have rational business plans. They're not like VarsityBooks.com, whose founders fantasized about becoming the Amazon.com of college texts, or Value America Inc., whose online department store required a bigger advertising budget than any brick-and-mortar retailer.
All three have had problems delivering the revenue and profits investors were hoping for, but their biggest fault is that they operate in sectors of business that are out of favor with Wall Street.
Out of favor to the point of irrationality. CareerBuilder's stock fell to $2.40 a share a few weeks ago. The company's stock market value was about $50 million. At that point, CareerBuilder had $60 million in cash in the bank. Thus the market was saying that--except for its cash--CareerBuilder was worthless.
Not exactly. Not when CareerBuilder's Web site ranked second in traffic among all the online employment services and third in revenue. The company was attracting 2.1 million viewers a month, generating $5 million a quarter in revenue, losing half as much money as it had a year earlier.
Wall Street's negative valuation on CareerBuilder clearly did not make sense to the dealmakers working for two of the nation's biggest newspaper chains, Tribune of Chicago and Knight-Ridder.
"They called us when the stock was $2," McGovern said in a telephone interview Friday. "It's a completely different stock market for dot-coms than it was a year ago. I never expected to be trading at $2 a share. Not when we had been making the high end of analysts' expectations for five quarters in a row."
The publishers made an unsolicited offer of $8 a share. It was an offer McGovern did not particularly want to accept, but, he says, one that he couldn't refuse.
"This is a four-times premium over our recent low," he said. "The real issue became: I'm at $2 now, do I take $8? Is that in the best interest of the shareholders? Or do I take a chance we get back to $13?
"We ultimately concluded that $8 is a lot better then $2 and is probably the best we are going to get for the shareholders in this new dot-com stock market."
McGovern said he removed himself from the decision and turned the Tribune-Knight Ridder offer over to a committee of outside board members, who decided to take it.
If CareerBuilder had turned down the offer, some shareholder might well have sued over that, too.
The legal and economic question of whether taking the $8 was the right thing to do is further complicated by the makeup of the company's board of directors and the committee that reviewed the offer.
Like a lot of young high-tech companies, CareerBuilder doesn't really have an independent, outside board. The board members who aren't company executives are venture capitalists and other investors who own big stakes in the company--lots of shares purchased early for a lot less money than the public investors paid later in the IPO.
McGovern makes a persuasive case that $8 is the best price shareholders were likely to get any time soon. But the decision-makers and the decision-making process, and the economic benefits of the transaction, all leave the perception that insiders benefited at the expense of public shareholders.
The perceived conflict of interest--also an issue for OneMain.com--could bode ill for the process of raising capital, making it more difficult for the next generation of entrepreneurs to go public.
Investors may not be so willing to put their money into IPOs if they fear that insiders will sell them out at a price that makes a profit for early investors but not the public shareholders.
The decision to sell CareerBuilder certainly does not encourage investors to think long term. It's only been a year and a half since the company went public. Early in the life of America Online Inc., there were times when AOL stock was depressed and the founders might have been tempted to sell out. What a blunder that would have been.
Nor does the CareerBuilder buyout give investors any reason for remaining loyal to a company and hanging on when its stock price starts to slip.
CareerBuilder stock hit its peak about six weeks after its IPO. In hindsight it is clear that the smartest investors are the ones who dumped it the minute it reversed directly. Once the stock fell below its IPO price, it never came back. That's another lesson for IPO investors: Cut your losses as quickly as possible.
Jerry Knight's e-mail is knightj@washpost.com |
