Monday, March 25, 2013

Taking BBE Public (2)


With the approval of our shareholders, Alice, our President, and Mary Jo, our CFO, started a round of meetings with several investment banks to see who might be willing to help Best Blogs Ever, Inc. (BBE) with its initial public offering (IPO).  After meetings with 10 local and regional investment companies, they arranged for our Board of Directors to meet with USA Investment Company and Stock Traders, Inc., two investment companies who were willing to discuss an IPO for BBE.

Our first meeting was with Matt and Steve from USA Investment Company (USA).  They explained that USA was strictly an underwriting securities firm.  They sell new securities to institutions and wealthy investing groups in what is known as the primary market.  The primary market is also called the new issue market.  USA does not have retail brokers who act as agents in the purchase and sale of securities for individual investorsAs underwriters, they would review BBE's financial statements and determine what price BBE's stock might command in the public market.  They would then offer to buy BBE's stock at a price lower than the anticipated opening price to the public.  This profit is their compensation for handling the IPO.  Once a discounted price is agreed upon, USA would purchase all of the shares to be issued by BBE at the lower price and then resell those shares to its stable of investors at the higher price.  Although publicly traded, the shares would be initially owned by the underwriter, not the investing public.

Our next meeting was with James and Meredith from Stock Traders, Inc. (STI).  Unlike USA,  STI has a cadre of retail stock brokers, who act as agents for retail individual investors buying and selling stocks which are publicly traded on stock exchanges.  While STI does not act as an underwriter for private companies with their IPOs, it has worked in the past with underwriting firms to sell the shares purchased by the investment company to individual investors.  STI works in the secondary market.

Underwriters take a big risk if they agree to purchase a new public company's shares.  If the shares can not be sold at or above the price the underwriter agrees to pay the issuer, it faces potentially large losses.  If the underwriter does not think that all of the shares the company wishes to issue can be sold or if the overall market conditions are not conducive to the sale of new issues of stock, it may offer to underwrite the stock on a best efforts basis.  Instead of purchasing all of the newly issued shares at a discounted purchase price and making a profit on the sale of those shares at a higher price, an underwriter will do everything it can to sell the shares, but is not legally obligated to buy the entire issue.  It will put forth a full marketing effort to sell the issue, but if the shares can't be sold, the investment company is not on the hook for the unsold shares.  Since there is no profit opportunity in this sort of underwriting, the issuing company must pay a commission to the underwriter on each share sold.

We will learn more about the IPO process in the next blog.

Comments are always welcome.

Monday, March 18, 2013

Taking BBE Public (1)


After winning the proxy fight against Gobble, we scheduled a special shareholders' meeting to discuss our proposal to take the company public.  Every shareholder, including a representative from Gobble, was present for the question and answer session.  We found, to our surprise, a fair amount of misunderstanding as to what going public meant.  One of the early questions was which stock exchange would sell the company stock.  Mary Jo, our CFO, explained that stock exchanges do not buy and sell shares of stock; they provide a market for people to "exchange" cash for shares.  A stock exchange provides the same service to stock investors that a race track provides to horse players.  An exchange and a race track each provide a place to trade stocks or to bet on the ponies respectively. 

She went on to explain that different exchanges have different requirements for a company to have its stock listed on the exchange for trading.  In addition to governance requirements, exchanges also have minimum requirements for income levels, number of shares held by the public, number of shareholders,  trading prices and market value of publicly held shares. Two of the most widely recognized exchanges are the  New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation (NASDAQ).  The NASDAQ was the first electronic stock market.  Any company listed on the NYSE must have a minimum annual pre-tax income of not less than $2,000,000 with not less than 1,100,000 of publicly traded shares held by not less than 400 shareholders. Those publicly held shares must have a minimum trading price of $4.00 per share and a market value of all such shares of at least $100,000,000 (although the combined shares' market value is reduced to $40,000,000 in the instance of an initial public offering (IPO).  The listing requirements of the NASDAQ are similar to those of the NYSE.  Many of the largest public companies are listed on either the NYSE or the NASDAQ.  Going to the other end of the spectrum, very small companies list on either the Over the Counter Market or the US Pink Sheets.  The Over the Counter Market is formally known as the Over the Counter Bulletin Board (OTC).  The other exchange for small companies is the US Pink Sheets, so named because years ago the lists of broker-dealers who traded unlisted shares of small companies were printed on pink paper.

Another shareholder asked if we would be using our bank to handle the process.  Mary Jo explained the difference between a commercial bank and an investment bank.  A commercial bank is authorized by the government to take deposits and lend the money to borrowers.  It has nothing to do with stocks.  An investment bank, on the other hand, has nothing to do with deposits, bank accounts and loans.  It is involved only with investments, but is also regulated by the government.  Some of the larger institutions engage in both activities, but they are the exceptions.  Although engaging in both types of financial activity was once prohibited, this barrier, the Glass-Steagall Act, was removed in 1999 in the US.  Some say that allowing institutions to engage in both businesses led to the 2008 financial crisis, when credit froze on a world wide basis, leading to bank failures and a deep global recession.

The last question was at what price we intended to offer the stock.  Mary Jo said, "We do not know what the stock price will be."  The price is set by the investment bank which helps BBE go public after a great deal of study of BBE's financials and what the investment bankers think the investing public will pay for its shares.  An informal poll of the shareholders showed that they were almost unanimous in their approval of taking the company public.  With this show of support, we start the process of locating an investment company to work with us.

Comments are always welcome.

Monday, March 11, 2013

Unwanted Attention (2)


Daniel's announcement that Venture Funds, Inc. (VFI) had agreed to sell both its common and preferred stock in BBE to Gobble, Inc. came as quite a shock to us.  We had assumed that when Gobble's tender offer to our shareholders had not garnered the necessary number of voting shares to gain control of BBE, it would have given up its efforts to acquire us.  It seems that such is not the case.  Gobble's purchase of a minority interest in the common shares reminded Mary Jo, our CFO, of the fabled Trojan Horse.  Gobble would now be on the inside of our company, entitled to all of the financial information normally provided to shareholders.  Although we could easily continue to pay the annual dividend on the preferred shares Gobble was buying from VFI, it would be an uncomfortable situation.  Those preferred shares could be converted into common shares if BBE failed to pay the annual $1,200 dividend for a three year period.  If those non-voting preferred shares became 6,000 voting common shares, Gobble would have a majority of the votes and could elect a new Board of Directors.  They could then could force a merger of the companies.  Although their tender offer had failed, Gobble was not giving up its fight to acquire BBE.

No amount of argument could dissuade VFI from its very profitable sale to Gobble.  We were faced with the reality that the fox was now in the hen house.  Not unexpectedly, Gobble mounted an effort to persuade the shareholders to throw in with it at the next annual shareholder meeting.  They launched a proxy fight in the weeks before the meeting.  Each shareholder has one vote for each share of stock he or she owns.  If a shareholder can not attend the shareholders' meeting but still wished to vote, the votes could be cast by an individual authorized to vote them in the shareholder's absence.  Such a written authorization to vote shares is called a proxy.  If Gobble was able to convince enough shareholders to give it their proxies and vote in a new slate of Directors, Gobble could gain control of BBE without owning a majority of the voting shares.

We had to face the fact that, as word of the $55 paid by Gobble for each of VFI's common shares spread among our shareholders, the idea of receiving such a profit on their own stock would appeal to many of our long time shareholders.  We had only one alternative to offer our shareholders against Gobble's efforts: take BBE public.  Our argument was that turning BBE into a publicly traded company would offer shareholders the opportunity to sell their long held shares at a price which might be higher than the one that Gobble had offered them earlier.  We warned them that if Gobble did gain control of the Board of Directors and forced a merger, the price our shareholders might receive could be less than the tender offer or what was paid to VFI.

On the day of the shareholder meeting, we prevailed.  Gobble did not receive enough proxies to gain a majority of the votes.  We now had to undertake the task of going public.

We will examine that process in the next blog.

Comments are always welcome.

Monday, March 4, 2013

Unwanted Attention (1)


As the years passed, Best Blogs Ever, Inc. (BBE) continued to grow.  We added more blogs resulting in more revenue and income.  Our subscriber base grew at a rate of 10% per year and in our last year of operations, our revenues topped $3,000,000 and our earned income exceeded $1,500,000.  We had increased our dividend each year, and we had every indication that our shareholders were very happy with their investment.  Our success had not gone unnoticed in the blogosphere.

We received a letter from one of the largest internet companies, Gobble Corporation, asking if we had any interest in merging with them.  Gobble was a publicly traded company and had a history of acquiring small internet companies.  They have a blogging division and thought that BBE would be a nice fit.  Our Board authorized Alice, our President, to explore the concept with them.  After several meetings, she presented their proposal of $45 per share of common stock to the Board.  Mary Jo, our Chief Financial Officer, had analyzed the numbers and reported that the offer, although seemingly generous, was actually a low ball offer.  We shared this information with our shareholders, and the majority of them indicated that we should terminate the discussions.  BBE would remain independent.  Several of the shareholders, however, had wanted to continue negotiations with the goal of getting a higher number.

When we told Gobble that we did not want to merge with them, they indicated that they were not going to drop the matter.  A few weeks later each of our shareholders received a letter offering to buy their shares.  The price offered was $50 per share, a little over10% more than Gobble had initially offered to pay in their talks with Alice.  This type of direct offer to shareholders is called a tender offer.  Gobble offered to pay $50 per share to each shareholder if a majority of the shareholders accepted the tender offer by a certain date.  The offer was conditioned on Gobble acquiring enough shares in BBE to elect their own people to the Board of Directors and, in effect, gain control of the company.  Their people on the Board would then vote to merge BBE with Gobble.  As the date for acceptance of their offer neared, each side strongly lobbied the shareholders regarding Gobble's tender offer.

After the expiration of the tender offer date, we learned that only Venture Funds, Inc. (VFI) had accepted the offer.  You may remember that VFI is the venture fund which made the $70,000 investment in BBE in its early years.  They had paid $2.50 per share for 4,000 shares of common stock ($10,000) and $60,000 for 600 shares of $100 par value cumulative, convertible preferred stock.  VFI would have had a huge profit on its common shares and continued to hold its preferred shares with its 2% annual dividend.  Here is a link to the earlier blog describing VFI's investment.

Since it had not been able to gain control of our company, we assumed this would be the end of Gobble's attempt to acquire BBE.  We were very surprised when Daniel, one of the VFI representatives who worked with us, reported that VFI had agreed to sell Gobble not only their common shares, but also their preferred shares.

We will pick up from here in the next blog.

Comments are always welcome.