WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK. FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON
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 15, 2013
Monday, April 8, 2013
Taking BBE Public (4)
WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK. FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON
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.
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)
WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK. FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON
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.
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.
Monday, March 25, 2013
Taking BBE Public (2)
WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK. FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON
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 investors. As 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.
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 investors. As 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)
WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK. FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON
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.
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)
WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK. FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON
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.
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)
WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK. FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON
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.
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.
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