My IPO Rebellion

With Facebook filing to go public last week, I've been remembering a lot about what it was like to work in the IPO market in the early 90's. For those who don't know, I worked for a firm that was a dominant player in the IPO market at the time (ranked #2 in the US in 1993 by USA Today for an average 53% return on our IPO's). You would think that having a hot hand in the IPO market would make your life easier, and in many ways it does, but it's not all rainbows and puppies.

I was actually lured to this firm from the firm I started at with the promise of access to the new firms IPO's. The pitch went something like this: "Eddie, you're busting your ass over there for no money, and for what? The firm brings, what, three or four companies a year? We've got 20 on the schedule this year. Do you know how easy it is to make money when you've got a hot IPO every month?" I bought it hook, line, and sinker.

I'm here to tell you - if it's your job to sell IPO shares, your work life can be a nightmare. How can that be, you ask, when people are knocking each other over to buy shares of Facebook? Well, that's how. No matter how you divvy up your personal allocation, you're gonna have customers who are pissed at you. Either they didn't get any, or they didn't get as much as they wanted, you can bet your ass that your phone is going to be blowing up both before the deal and after.

And that's not all - you're also gonna be on the dangle to your firm even more than you were before. Because they were good enough to "give" you the stock to place. Now you owe them, and you can bet your ass they're gonna collect the next time they book a shitty deal that no one wants just to bank the underwriting fees.

This is the trick bag in which I found myself. Of the 20 deals my firm promised were on the schedule for the next year, only eight of them were IPO's. You see, I wasn't paying attention when they recruited me. Either that or I only heard what I wanted to hear. Because they claim to have told me there were 20 "new issues" on the docket, and I just assumed they were IPO's. And you know what happens when you assume.

The other 12 deals were secondary and tertiary offerings for portfolio companies that were already circling the drain. In one instance, a company called Xerographic Laser Imaging Corp (which was a fancy way of saying, "We make laser printers in our garage") had come back to the well so many times that they were about to issue a "Z-series" of warrants. You know you're screwed when you run out of letters in the alphabet.

But the way the game was played was that if you wanted any of the hot deals, you had to bury your book in the crappy ones. On top of that, IPO allocation was highly subjective - so you could have booked a huge amount of the last deal that dropped 30% on the open but if you'd pissed the boss off this week you wouldn't get any of the hot deal that could help you save face.

I remember one deal in particular. We'd worked three or four dubious secondaries leading up to the IPO for Maxim Group - a carpet manufacturer out of Georgia of all things. For some reason, the Street was horny for this deal and it looked like it would double and maybe even triple on the open. I'd been working my ass off getting the other deals booked, and promising all the clients who helped me out that I'd make it up to them with shares of Maxim.

When it came time to get my allocation of Maxim Group, I walked into my boss's office and he smiled at me and said, "I got you 60 shares priced at $12".

Fuh...what???

You read that right. I got $720 worth of IPO stock to place with all my clients. To his credit, my boss was at least apologetic and explained that our office (#2 out of 18 in the firm at the time) got a minuscule allocation. Basically, all the guys at the top of the firm were keeping the stock for their buddies, to the extent that they were even willing to screw the top offices.

Maxim doubled on the open.

As you can probably imagine, my clients were neither pleased nor understanding. Many of them refused to take my calls after that, and the flurry of ACATs I received in the following weeks at least assured me I wouldn't have to face them again.

The next time my boss came to me with a deal, another crappy secondary, I didn't say a word. I took my 10,000 share allocation and sat on it. When it came time to turn in my Indications of Interest, I handed him a blank sheet. He looked at me and I said, "What do you want me to do? Nobody was interested."

This was akin to mutiny at the firm. To refuse to book a shitty deal would surely get you excluded from the next good one. And my boss told me as much. To which I replied, "You mean like that $720 worth of Maxim I got? Somehow I'll survive."

There were a couple of guys in the office who had voluntarily become IPO pariahs, no doubt for the same reasons I was doing it. The difference was they had a lot more seniority than me. For a junior guy to tell the firm that he thought their deals were shit was unheard of.

It happened again a few weeks later. I got an allocation and ignored it. This time they turned up the heat. I got pulled into the regional MD's office and he let me have it with both barrels.

"You little shit stain! You think you know how to value a company better than we do? You don't know shit and you'd better start doing what the fuck you're told. Next time you refuse to book a deal we'll just fire your fucking ass and take your book. Now GTFO!"

I knew then it was time to start looking for a new home, and fast.

I left the firm less than 60 days later for a far more laid back competitor. They only brought a few deals a year, the deals were generally pretty good, and they didn't care whether you participated or not. One of those deals was Swisher Hygiene (SWSH - yeah, they're still around). They were basically a commercial restroom sanitation company and I remember one of my buddies quipped, "Well, most of our deals end up in the toilet. At least this one is starting there." Next time you're taking a leak, check out the urinal mat - odds are it's Swisher.

Anyway, I wasn't destined to last long at this firm. I'd brought too many of my bad habits with me, and when I chose to participate in one of their deals I gave all the stock to one of my DvP clients who promptly blew out of it on the open and helped crater the deal. My new boss came to me with a perplexed look on his face and I just said, "Let me save you some time. I'll clean out my office."

So the next time you find yourself wishing you could participate in the Facebook IPO, at least recognize that the guys who are doling it out are probably being force fed a bunch of shit for the privilege.

There's no such thing as a free lunch in this business.