|No Bitter Aftertaste From This Stock Offering |
By JEFF SOMMER
New York Times
February n18, 2012
JIM KOCH is well known among beer aficionados for creating the full-bodied brew called Samuel Adams Boston Lager and for helping to foster the craft brew movement in the United States.
He is less well known for playing an important role in another niche revolution — one that has the potential to be at least as significant.
What could be better for the quality of life in America than good beer? That’s a high hurdle, I’m the first to admit, but bear with me.
Consider that in 1995, when it was time to take the Boston Beer Company public, Mr. Koch moved his loyal customers to the front of the line, and made sure that they could buy shares at the most favorable price. He wanted to help beer guys, not Wall Street guys. He did this not as a philanthropist but as a die-hard capitalist, believing that his fledgling beer company would be better off in the long run if he democratized its initial public offering.
“It’s good for a company if its shares are in the hands of the people who really believe in it — and for us that means the people who really love Sam Adams beer,” he said in a telephone interview.
Unlike the founders of many consumer-oriented companies that are ready for initial public offerings — Facebook is a prominent current example — Mr. Koch decided that his I.P.O. would be consumer-oriented. A graduate of Harvard and of the Boston Consulting Group — and a dropout from a joint Harvard business-law graduate program in which Mitt Romney was a classmate — he examined how traditional I.P.O.’s actually worked. He concluded that he could do better if he harnessed the same innovative energy that he used to build his business.
As Mr. Koch saw it, when an I.P.O. is controlled by investment banks, it is structured “to reward the banks and their favored institutional investors” and not the fledgling business or its customers. He realized that he “wasn’t comfortable letting Wall Street underwriters control the process, set the price and allocate the shares to their favored clients at a favorable price.”
Instead, he said: “I wanted to take care of my Sam Adams drinkers. They were the people who were really important to me and who were going to continue to be.”
So he improvised, hanging fliers on six-packs of beer that very carefully informed customers that they might be able to buy $500 worth of shares in an eventual public offering. “We were limited to what you could manage to say on a six-pack, and also by what the lawyers would let us say,” he recalls.
“The laws and regulations were set up to make this kind of thing very difficult,” he says. “But I had a strong feeling that we should do this.”
He sold shares at two prices. Some went to his customers, who, in a startling reversal, got a better deal than Wall Street insiders: $15 a share for the customers, versus $20 for those who bought at the opening price in a public offering run by Goldman Sachs.
Mr. Koch recalls the horrified reaction of one irate fund manager. “So I’m going to buy shares for $20 while you’re selling them to these cat-and-dog investors for $15?”, the man sputtered. “I always get the lower price. You’ve turned things upside down.”
Mr. Koch says that when he asked the manager whether he drank much beer, the man replied: “Not really, I’m mostly a wine drinker.” To which Mr. Koch responded: “That proves my point. I care about beer drinkers, not wine-drinking fund managers. You don’t really matter to me.”
Securities and Exchange Commission rules required Mr. Koch to indicate in advance how many shares he would sell directly to customers, he says. He came up with an estimate of 30,000 buyers — but it was only a guess, and it turned out to be way too low. Instead, he says, more than 100,000 would-be shareholders sent in checks. He used a lottery to select 30,000, sending the rest of the checks back. “If I’d had any idea how much interest there would be, I could have sold all the shares directly to customers,” he says now. “But I just didn’t know. Nobody had done this before.”
To help sell stock directly to customers, Mr. Koch brought in a like-minded banker, William R. Hambrecht, a prominent Silicon Valley venture capitalist who was determined to improve the I.P.O. process. “I thought Jim was really onto something,” Mr. Hambrecht recalled in a telephone interview. “It got me thinking that we ought to be able to come up with a better way to do this.”
Based on that experience, Mr. Hambrecht says, he went on to develop the model for modified Dutch auction I.P.O.’s. These were made famous by Google in 2004 and adapted by Morningstar in 2005 and later by other companies. In structure, they are descending price auctions, aimed at determining the highest bid that would clear a market open to all investors and not just insiders.
Eric Schmidt, executive chairman of Google, declined to comment for this column, but he has written that despite some problems, its auction was an essential part of Google’s stated goal to “do no evil.”
In a phone interview, Joe Mansueto, founder of Morningstar, called his company’s auction-based I.P.O. “a terrific success.” He pursued it, he said, because “it just squared very nicely with the ethos of Morningstar to help investors of all stripes and not just institutional investors.”
He added that “it seemed funny to use the traditional book-building process that lets the underwriter,” who is “biased” toward its best customers, decide who gets the inside price. “Making sure that all investors have equal access to shares was the better method, the right method for us,” he said.
While there have been some ups and downs, shares in all three of these companies have proved excellent long-term investments, and their I.P.O.’s helped to reinforce the companies’ image as unusually consumer-friendly.
Most of those customer-shareholders have retained their investments in the beer company, Mr. Koch says. “It’s helped to give us stability and a lot of support,” he said. Those $15 shares are now worth more than $100 each.
Both Mr. Koch and Mr. Mansueto say they are surprised that Facebook hasn’t indicated that it will embrace a more democratic public offering, though it could still do so.
“It’s not easy to go up against Wall Street,” said Mr. Mansueto, who said his own background, as a graduate of the University of Chicago business school and founder of an investor services company, gave him the ability to do it. “Most people have I.P.O.’s only once in their life, and they tend to trust the professionals, the Wall Street bankers, the way they’d instinctively trust a dentist or a doctor,” he said. “You have to have a lot of self-confidence and a lot of expertise to go against that advice.”
Matthew Rhodes-Kropf, a professor at Harvard Business School, says I.P.O. auctions are still relatively rare because of those factors, and because they are not in the fundamental interest of most banks. “Wall Street will always hate I.P.O. auctions,” he says, “because Wall Street is all about insider access, and these auctions take it away.”
Mr. Hambrecht is still running I.P.O. auctions, even though, he says, “it’s a little like tilting at windmills.” It doesn’t matter, he says: “I believe it’s the right thing to do.”