On Oct. 7, Webvan delayed its IPO, agreeing with the SEC to have a
cooling-off period. Rumors were that the company violated the so-called
“quiet period,” which prevents companies from making statements that tend
to hype an offering.
But yesterday, the company refiled its prospectus. Interestingly enough,
the new prospectus has a Risk Factor that warns “you should rely only on
the information set forth in this prospectus and not rely on recent
publicity or on projections.”
The SEC had problems with the following: a)
loss projections were leaked to the press ($302 million in losses on $518.2
million in revenues in 2001) and b), the CEO of Webvan, George Shaheen,
gave an interview to Forbes, which tended to — well — hype the IPO.
Actually, the quiet period is somewhat of a mystery. Ask attorneys what it
means and you get many answers. Perhaps the biggest problem is that it is
rarely enforced — that is, until recently.
Then again, when the quiet period was crafted, the Net did not exist. Of
course, with the Net, there has been a surge in publicity surrounding IPOs.
And publicity translates into sizeable first-day gains for IPOs.
Underwriters have been very smart in generating publicity by announcing
blockbuster deals prior to the IPO. Examples include PlanetRx.com, which
got an investment from Express Scripts, one of the largest pharmacy
benefit-management companies.
There was also MP3.com, which announced
investments from Cox Media. Such deals make it easier to sell the IPO
during the roadshow (the road show is when executives give presentations to
institutional investors around the country).
Another popular strategy is for the CEO to do a CNBC or CNN interview on
the day of the IPO. Some companies even place banner ad buys on IPO sites.
So, finally, the SEC stepped in. And, they decided to strike at a
high-profile IPO, Webvan. The company has Goldman Sachs as the underwriter.
The venture capitalists included SOFTBANK, Sequoia and Benchmark. The
founder is Louis Borders, the founder of Borders Group.
The company made some high-profile moves before its IPO, as well. Perhaps
the biggest was hiring George Shaheen as its CEO. He was the CEO of
Andersen Consulting.
Basically, the SEC is setting an example. It is warning companies to keep
a low-profile.
So, we are likely not to see any more CNBC spots; no interviews with
BusinessWeek. Actually, I would not be surprised if companies forgo the
pre-IPO blockbuster announcements.
In other words, there will be lots of silence before IPOs. And all things
being equal, this should reduce the first day premiums.
But this presents a very interesting investment opportunity. Here’s how it
works: The IPO comes out, but there is not as much publicity. The stock
are trends down. Why? Because the quiet period lasts 25 days after the IPO.
So the silence will last this long. But once this expires, the hype will
be unleashed, as the company will announce major deals. What’s more, the
research departments of the underwriters will also release their research
reports, which will add lots of firepower to the stock.
In a way, the first-day pop will be pushed to the point after the quiet
period expires, which gives investors time to buy the stock (which is
normally not the case with IPOs).
Of course, this is only a theory. But underwriters never want to
antagonize the SEC. So I think it’s reasonable that underwriters will
become much more conservative and thus give investors a new investment
strategy.
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