An IPO saga
You know that old saying about death and taxes, the two ironclad certainties in life? We might have to add a third about internet-related initial public offerings and how their short-term mega-profits seem etched in stone.
Look at the recent menu of www.internet IPOs. Marketwatch.com nearly quintupled in value to $96 on its first day of trading – an eye-popping rise of 474 percent. Priceline.com leapt 330 percent in its first day of trading, from $16 to $69, and rose to $130 per share by late spring.
Then there's TheStreet.com, which hit the ground running at $70 within hours of trading, over three times the value of its $19 initial asking price. Consider the fact that as of May 30, 1999, 31 of the 53 new online-related issues have doubled in value on their first day of trading, according to Securities Data/Thomson Financial. Roughly half of those have since added gains to their hefty debuts.
While the long-term prospects of the internet IPO crowd are more suspect – Marketwatch.com has fallen over 40 percent and TheStreet.com almost 50 percent since it opened – people are standing in lines longer than the ones for the new Star Wars movie to take a flyer on anything with '.com' attached to its moniker – for now.
It's the brand, stupid
In the case of TheStreet.com, its success was preordained by three of Wall Street's favorite hallmarks: brand name investors, brand name product, and brand name industry. 'Investors seem to view internet IPOs as an upside-down pyramid, with potential moving outward and upward exponentially,' comments David Menlow, president of Millburn, New Jersey-based IPO Financial Network. 'Couple that with the high visibility of founder Jim Cramer, and an influx of high-level, high-profile investments by heavy hitters like The New York Times Co [which purchased a 6 percent piece of the company days before the IPO] and Rupert Murdoch's News Corp [which staked $7.5 mn into the company's IPO] and you're going to command a lot of attention.'
The IPO not only made Cramer and his merry band of editors wealthy, it also provided a much-needed financial boost to the profit-averse company. With 23.6 mn shares outstanding after the deal, TheStreet.com boasted a market capitalization of $1.6 bn. Notably, days after the IPO the company announced new research and portfolio management initiatives funded by the investing public's largesse. Among the new offerings by the company are real-time financial data and analysis reports on over 9,500 publicly traded companies through Market Guide Inc and full-text offering of brokerage reports from Multex Investor Network. 'We've built our reputation by providing top-quality financial news and commentary,' explains Kevin English, chairman and CEO of TheStreet.com, 'and now we want our portfolio of data and tools to be top-rate.'
Cramer & co hope that the new funding will help to stem its historic losses – $16.4 mn in 1998 and $5.8 mn in 1997. The sales side is more encouraging, with TheStreet.com posting revenues of some $4.6 mn in 1998 compared to $589,000 in 1997. For the first three months of 1999, revenues totaled $2 mn, up from $918,000 during the same period in 1998. It's Wall Street's hope that TheStreet.com will become one of those all too rare internet phenomena: a company that actually makes money.
What was the IPO process like for the finance professionals at TheStreet.com? If you ask them, the answer that most give you is 'wearying'.
'The good news is that people here are both gratified and excited that the IPO is over,' says Sean McLaughlin, investor relations spokesperson and a company insider who spent long hours with chief financial officer Paul Kothari preparing the prospectus and gearing up for the IPO. 'For us, going public was a really grueling process that took many months and a lot of hard work. There were lots of late nights drafting the preliminary prospectus and in vetting parts of the prospectus as we went along. For Paul Kothari and Kevin English, it was even more grueling having to go to roadshow after roadshow in order to pump up the public offering.'
McLaughlin adds that even though the IPO process is over, the company is far from finished priming the pump for new investors. 'It's not like we didn't have investors when we were private, because we did,' he says. 'But now we're certainly accountable to a larger pool of investors. When you go public it's just a completely different environment to run a company. There's just a bigger time demand, especially at a growing company, and there's more of a focus on the present than there is on the past or future.'
One of the trickier aspects in lining up shareholders in the company was that, as a financial news provider, TheStreet.com employs a lot of writers and editors (some of whom, like editor-in-chief Dave Kansas, became instant millionaires) who take the conflict of interest issue very seriously. As journalists, it is not considered appropriate to write about the companies whose stock they own. But what about owning shares in your own company and writing objectively, say, about internet stocks or Wall Street research firms? 'We have an investment policy that needs to be followed to the letter,' explains McLaughlin. 'Our editors only can own stock of TheStreet.com and mutual funds. Other employees can own individual stocks but everyone who owns our stock is governed by a six-month holding period. There are definitely some different circumstances when you're a media company that goes public.'
On the days leading up to the IPO, TheStreet.com managers weren't quite sure where to price the stock. Working with lead underwriter Goldman Sachs, with help from Hambrecht & Quist and Thomas Wiesel Partners, the proposed stock price bounced between a range of $11-13 per share and $17-19 per share (in another web-related twist, E*Trade's securities division also pitched in as an underwriter on TheStreet.com's IPO). On May 11, just a few days before the IPO, the higher price won out. That Tuesday, 5.5 mn shares of TheStreet.com went public for $19 per share on the Nasdaq Stock Market under the symbol TSCM.
When it comes to public offerings, underwriters like to price a new issue so that it will jump about 15 percent on its first day, ensuring a quick profit for the fortunate IPO elite. Analysts call the price 'discounting' an IPO and it's all legal, if not exactly ethical; and the bounce helps to give the stock a little more upward momentum in the aftermarket. 'It's not done with the intent of leaving money on the table with concern to the issuer,' explains Michael Essex, head of equity syndication at McDonald & Co. 'It's done because investors are providing the issuer with the capital to grow a business and the investors are then looking to receive something themselves in return.'
Team Goldman may have stretched it a bit, essentially inflating the IPO price by about 35 percent from the $11 per share figure calculated early in May. But things broke TheStreet.com's way right out of the gate, as pent-up pre-demand for the stock drove the price up to a staggering $61 at the opening bell, a 300 percent profit for shareholders before a single trade transpired. The stock soared to $70 before closing the first trading day at $60 per share. The following day, the stock fell to $41, turning editor-in-chief Kansas's paper profits from $9 mn to $6 mn and company founder James Cramer's take from $240 mn on day one to about $160 mn on day two.
The stock managed to hold steady for another few days before heading south in a hurry. By June 1, it had fallen below the $30 mark, to $28.25 where it held steady for the next week or so. Analysts are currently mixed on the prospects for the stock, although the steady rise in paying subscribers (now up to 50,000) and corresponding rise in revenues bode well for the company.
Taking a pass?
No matter what happens to TheStreet.com's stock performance, there is little question that Wall Street is witnessing a marked erosion in support for new internet public offerings. Even the early birds are now walking away hungry from the most recent spate of new web issues and, seemingly, the further along the average internet stock travels, the more wear and tear it is showing.
So maybe I have it wrong after all. Scratch that line about internet stock profits being etched in stone. The only certainties in life these days are death, taxes, and high psychiatric bills from trying to figure these $@*& internet stocks out.