Monday, April 29, 2013

The End Of The BBE Story


During the lock up period, our shareholders waited anxiously to be able to sell some of their shares.  As Matt from USA Investment Company (USA) had predicted, the price of BBE's stock dropped a few points in the early days of trading after the IPOA point is stock market jargon for a $1 swing in the price of a stock (up or down).  USA is a broker-dealer and kept 200,000 shares of BBE stock in its inventory.  In other words, it had not actually sold all 1,000,000 of the shares of stock it had purchased from BBE in the IPO.  It traded shares for its own account in order to keep the price of the stock in a relatively close range of the initial price of $35 per share.  By doing this, USA was providing liquidity for the shares in the market.  It would buy and sell the shares in an effort to make sure that the shares could be freely and easily bought and sold on the NASDAQ in its early days as a public company.  This insured that the IPO would be viewed as a success in the market.  No investment banker wants a new stock it has underwritten to quickly drop in price after it opens for trading. 

After the lock up period, many shareholders wanted to sell some of their stock.  A sale of shares in a new public company by the original shareholders through an investment banker is called a secondary offering.  The goal is to allow shareholders to sell their shares at a pace and in amounts which will not unduly drive the stock price down.  Selling in this manner helps avoid a severe price drop from a flood of shares hitting the market at the same time.  Our investment bankers at USA arrange for sales of stock by our shareholders over time.  Market professionals anticipate this sort of sale, and the price adjusts accordingly as shares hit the market.

A large number of shares held by shareholders which could be sold is called overhang.   Like the price of anything for sale, stock prices are subject to the law of supply and demand.  If a large block of stock comes onto the market all at once, the price of the shares will drop quickly.  If a stock is scarce and shareholders are not in the mood to sell, the supply is small.  Someone who wants to buy shares must pay a higher price to get them.

When I organized BBE with the five other original shareholders, I purchased 100 shares for $1,000.  Over the years, my 100 shares grew to 150,000 shares through stock splits and stock dividends.  Those shares are now worth $5,250,000 at the IPO price of $35 per share.  When I was young and struggling with what to do with my life, my Father told me, "Do what you love, and the money will follow."   How right he was!  When he gave me that advice, the use of computers by individuals was in its infancy.  The Internet was a game changer, and I found my career as a blogger.  I have spent most of my adult life at BBE doing what I loved.  And so, I will close the story of BBE with the tried and true literary conclusion: "and everyone lived happily ever after."

The purpose of this story has been to introduce you to various financial and investment terms you will meet in your investing career.  Hopefully, learning these terms through the story of BBE has not been overly tedious.

Comments are always welcome.

Monday, April 22, 2013

Taking BBE Public (6)


In the months following our shareholders' approval of the initial public offering (IPO) of BBE stock, our corporate officers were very busy, not only running the business, but also devoting a substantial amount of time getting the company ready for its IPO. Carl, our corporate attorney, and Mason, our IPO counsel, revised BBE's Articles of Incorporation and Bylaws to meet SEC requirements.  Among other changes, we increased the number of directors for our Board and recruited several directors from other publicly traded companies.  The new Board members had no other connection with BBE and therefore qualified as independent outside directors under the applicable rules and regulations.  Although we continued to use our regular accounting firm for routine work, we made arrangements with a nationally recognized accounting firm to conduct the necessary audits of past years' operations and issue the opinions required to qualify for our stock to be listed on the NASDAQ stock exchange.

When all of the preliminary corporate housekeeping was done, our investment bankers from USA Investment Company (USA) and Stock Traders, Inc.(STI) worked with Mason to put together the registration statement and prospectus for an IPO sale of 1,500,000 shares of BBE's common stock in a price range of $30 to $40 per share.  The documents were submitted to the SEC.  It took two months to get the registration statement approved by the agency.

When we merged with Blog Topics, Inc. (BTI) several years ago, BBE had authorized a second series of common stock (B shares with reduced voting rights) which were given to the BTI blog writers at no cost to induce them to stay with us after the merger.  Subsequently, we issued the same type of shares to all of our employees.  Based on advice from our underwriters, the B shares are to be converted into A shares so all shares have the original voting rights.  In addition, we reached agreement with Gobble, Inc. and Bob and Mary to convert their preferred shares into common shares after the IPO.   As part of readying BBE for the IPO, the Articles of Incorporation were amended to authorize five million shares of common stock and to merge the two classes of common stock into one class of shares with full voting rights.  The shareholders of BBE owned 13,500 A shares (full voting rights) of common stock.  The employees owned 12,000 shares of B shares (reduced voting rights) of common stock.  With a stock split of 100 to 1, the authorized and issued 25,500 common shares (now one class) increased to 2,550,000 shares.  Each of our shareholders received his or her proportionate share of the increased number of shares.  All shareholders agreed to a 180 day lock up period during which they could not sell any of their shares after the IPO.

As the date of the IPO approached, our underwriters recommended that BBE set the IPO share price at $35 per share (1,500,000 shares could generate proceeds of up to $52,500,000).  USA Investment Company (USA) gave us a firm commitment to buy 1,000,000 shares at a price of $32 per share.  It will earn its fee by selling those shares to its institutional clients at the IPO price of $35 per share.  It will own any shares it either cannot sell or chooses to hold for its own account.  Stock Traders, Inc. will use its best efforts to sell the remaining 500,000 shares to its retail clients at the IPO price of $35 per share.  It will earn a 10% commission on all sales.  STI is not obligated to buy any shares.  It will act only as BBE's agent to sell as many shares as it can.

The offering is a success.  On the day of the IPO all 1,500,000 shares are taken.  BBE receives sale proceeds of  $32,000,000 from USA and $15,750,000 from STI (500,000 shares @ $35 per share less 10% commission) for a total of $47,750,000 in new capital to run the company.  The new shares held by the public represent 37% of the 4,050,000 issued and outstanding shares of BBE.  The original shareholders with their collective 2,550,000 shares still maintain control of the company.

We will conclude our story of BBE in the next blog.

Comments are always welcome.

Monday, April 15, 2013

Taking BBE Public (5)


At the special meeting of the shareholders of our common and preferred stock, Mason, our IPO counsel, Matt of USA Investment Company (USA) and Meredith from Stock Traders, Inc. (STI) each made presentations about going public.

Mason explained the regulatory steps that we needed to take, starting with the filing of the registration statement with the SEC.  He pointed out that BBE would also have to file a copy of the registration statement with our state's Investment Control Board to comply with our state securities law.  State statutes and regulations on securities are commonly referred to as Blue Sky Laws.  Matt and Meredith discussed the roles to be played by their respective companies as the underwriting syndicate for the IPO.  They told the group that the shares would, in all likelihood, be offered on the NASDAQ.  Alice, our President, then went through the corporate changes that needed to be made to our Articles of Incorporation and Bylaws. She explained why BBE's Board must include outside directors to meet SEC and exchange rules on corporate governance.  Mary Jo, our CFO, proposed the names of two large accounting firms to replace our local accountants.   She explained that the number of authorized shares of BBE would have to be increased significantly.  To meet the requirements for trading on the NASDAQ, the IPO would have to be for a minimum of 1,100,000 shares.  Meredith told the shareholders that the first day of trading BBE shares was probably a year away.  All of these presentations went quickly with few questions from the audience.

When the topic of the IPO price for the shares was introduced, hands flew up across the room.  Obviously, the question of what their shares would sell for was foremost in the shareholders' minds.  Their years of patiently holding BBE's stock were culminating in the prospect of cashing in at a large profit.  Whispered talk of becoming millionaires like the early owners of Berkshire Hathaway stock in Omaha, Nebraska could be heard throughout the room. 

Matt and Meredith took the podium together to talk about valuing BBE.  Setting the offering price for the new shares on the NASDAQ is a combination of accounting and art.  Matt said that BBE's financial statements, when analyzed using various common investment metrics, showed that a share of BBE's new common stock should be valued in the market in a range from $35 to $45 per share.  He cautioned that this, however, is not the only factor.  Meredith explained that the art of pricing the shares comes also from the investment companies' years of experience and feel for the state of the market at the time of the IPO.  If the market is sluggish with low daily trading volumes and investors who are more or less indifferent to stocks, the IPO would be difficult.  The IPO price would have to be set well below the accounting value of the shares in order to attract buyers.  A bull market, with steadily increasing stock prices, high daily trading volume and strong investor interest in stocks, would bode well for a successful IPO.  If the market is a bear market with rapidly declining prices in large volume and overall market fear, USA and STI might actually advise the company to postpone the IPO until a more favorable market returns.  There is no way to tell what the market will be when BBE registers for its IPO next year.  Matt then told the group that only the company would sell stock in the IPO.  Shareholders would not participate.  If existing shareholders were to dump their shares on the market in the early days of trading, the price of BBE stock would undoubtedly fall.  To avoid this, the original shareholders must agree not to sell any shares for awhile after the IPO.  This is called the lock up period.  This drained most of the excitement out of the room, but the vote was unanimous to proceed as outlined.

We will continue following the IPO for BBE in the next blog.

Comments are always welcome.

Monday, April 8, 2013

Taking BBE Public (4)


After we retained Mason as our legal adviser for our initial public offering (IPO), he suggested a joint meeting with USA Investment Company (USA) and Stock Traders, Inc. (STI), the two investment companies which had expressed an interest in working with BBE as underwriters of the IPO.  The purpose of the meeting with our Board of Directors was to outline for everyone the process, time line and likely expenses in offering our shares to the public.  This would provide us the information we need to give our shareholders before we take a formal vote on the IPO.

USA is an investment bank which deals exclusively with large investing institutions like pension funds, insurance companies, mutual funds and the like.  STI is a traditional retail stock brokerage company dealing with individual investors.  After some preliminary discussions, Mason and our CFO, Mary Jo, reached agreement with the two companies for an IPO in which both of them would work together as underwriters, in effect, acting as an underwriting syndicate.  USA would work to sell shares of BBE to its institutional clients and STI would offer shares to its retail investors.  USA offered a firm commitment to sell two thirds of the shares to its institutional clients (the number of shares remained to be determined).  STI offered a best efforts commitment to market the remaining third of the shares.  As stated in an earlier blog, USA would buy the BBE shares it agreed to sell at a negotiated price and then resell them to its clients at the publicly offered price, which would be higher.  STI would act as a marketing agent for a commission to generate interest in purchasing BBE's shares among its retail customers.  Unlike USA, it would have no obligation to sell all of its allocation.  USA requested the right to sell more shares than initially agreed upon  if their institutional clients wanted to buy more shares.  We agreed to this over allotment option which is commonly referred to as a "Green Shoe Option."

Mason pointed out that there were several issues which had to be addressed regarding BBE.  As a result of the merger with Blog Topics, Inc. awhile ago, we now have two classes of common stock with different voting rights.  Although some public companies have dual classes of stock, he and the representatives from USA and STI all agreed that BBE must have only one class of common stock before we could proceed with the IPO.  They also suggested that BBE try to redeem the company's two series of preferred shares, one owned by Gobble and the other by Bob and Mary.  The Articles of Incorporation and the Bylaws of BBE would also need amendment to the form of organizational documents typical for publicly traded companies.  The goal is to take BBE public, and therefore the company must have Articles and Bylaws of a public company in all respects.  In fact, the SEC and most exchanges require certain provisions in a public company's governing documents which are not usually found in the Articles of Incorporation and Bylaws of private companies.  Public companies must provide certain protections for shareholders normally not provided by private companies.  SEC rules and regulations require there to be individuals on a public company's Board of Driectors who meet the agency's definition of an independent outside director.  This will require us to  bring new people onto the board if we are to go public.

Along the same lines, they said that we would have to change accountants.  Since starting in business, BBE has always used a small, local accounting firm to prepare its financial statements.  Since BBE is privately held, there was no need for our accountants to audit BBE's books.  As a publicly traded company, BBE will need to have its financial statements audited by a nationally recognized accounting firm.  Mason repeated his earlier advice that if BBE is to be a public company, it has to look and and operate its business like a public company.  Investors expect certain things from companies they choose to invest in.  Annual audited statements and approving opinions from a well known accounting firm are necessary to engender investor confidence in a public company's numbers.

Making all of these changes and going through the regulatory steps necessary to go public will take time, up to a year, before the IPO can happen.  All of this will cost money as well.  We schedule a special shareholder meeting to discuss all of this with our owners.  We invite our preferred stock holders as well.  Mason and the underwriters will make a full presentation at the meeting.

We will continue the story of BBE's going public in the next blog.

Comments are always welcome.

Monday, April 1, 2013

Taking BBE Public (3)


After meeting with the two investment companies, USA Investment Company (USA) and Stock Traders, Inc. (STI), our attorney, Carl, arranged for the Board of Directors to meet with Mason, a securities lawyer, who specializes in representing private companies considering an initial public offering (IPO).  At the meeting, Mason outlined the steps that were necessary to go public.  As securities are heavily regulated by the Securities and Exchange Commission (SEC), it came as no surprise that one of the initial documents (SEC Form S-1) which must be submitted to the SEC is a very long and detailed report on BBE's financial status, assets, liabilities and income statements for the past few years.  The filing with the SEC must also provide a full disclosure of the company's operations, directors, officers and any shareholder with more than 5% of the outstanding stock.  This report is called the registration statement.  Mason made it very clear that the SEC does not approve the shares of BBE as a good investment.  The agency simply reviews the registration statement for content to ensure that potential investors receive full disclosure of all pertinent facts about BBE.  Once the SEC approves the registration statement, the company can move forward.

The registration statement consists of two parts.  Part 1 is the prospectus.  This is the sales document, usually running to 30 pages or more, given to anyone interested in buying shares issued in the IPO.  Underwriters are required to provide investors with copies of the prospectus for a set period of time both before and after an IPO.  Consequently, they are very interested in getting copies of the document to review as soon as possible.  Part 2 contains additional detail about the issuing company.  A preliminary registration statement is produced by the company, its accountants and attorneys.  It is then circulated to the underwriters involved in taking BBE public.  After everyone signs off on the document, it is submitted to the SEC for review.  It is not unusual for the SEC staff to require changes to the form.  Since it is possible that copies of this document could end up in the hands of the investing public, the document, which has not yet been approved by the SEC, must carry a warning, printed in bold, red ink, that it is only preliminary and not an offer to sell the stock.  For this reason, the unapproved version of a prospectus is traditionally referred to as a red herring.  When the SEC finally approves the registration statement and the prospectus contained in it, it is then considered "effective."  The shares can then be offered to the public.

All companies are required to file a prospectus for every issue of equity or debt being offered to the public; however, many large, widely held public companies are allowed to use a short form prospectus since the companies are already well known in the market.  The SEC must approve every prospectus before it can be officially provided to the investing public.  It also works with the company to set a date for the IPO.

Mason then turned to the topic of stock exchanges.  BBE has to apply to an exchange to have  its newly issued shares listed for trading on it.  Each exchange has requirements which a company must meet in order to have its shares listed for trading.  He reviewed the requirements of the New York Stock Exchange (NYSE) and the NASDAQ (National Association of Securities Dealers Automated Quotation).  Although BBE is a relatively small company, it will qualify for listing on the NASDAQ.  Some of the listing requirements include a minimum of 400 round lot shareholders (a round lot is 100 shares) and a minimum of 1,100,000 shares with a minimum bid price of $4 per share.  Depending on the number of shares the company decides to issue and at what price, BBE will need a market value for its publicly traded shares of at least $8 million dollars.  Based on recent financial results and the contemplated terms for its IPO shares previously discussed with USA and STI, BBE should be able to satisfy NASDAQ's minimum requirements.

Based on the recommendation of our regular attorney, Carl, and our meeting with Mason, the Board engages him as our special IPO counsel to represent the company in going public.  We will continue following BBE's progress in the next blog.

Comments are always welcome.