Anyone who’s current on technology or business news has seen an article this week like How Wall Street Hustled LinkedIn or Did Bankers Scam LinkedIn Out of Over $130 Million? which discuss the possibility that the LinkedIn IPO partners – Morgan Stanley, Merrill Lynch and JPMorgan Chase – may have deliberately underpriced the stock in order to score a sweet deal on it for themselves and their favoured investors. Such is the way of Wall Street, it seems.
By chance, today I came across a reprint of Fortune magazine’s 1986 cover story about the tale of Microsoft’s IPO. It’s interesting in itself, but what’s particularly striking is how coolly and calmly Gates and his people negotiated with their IPO partner, Goldman Sachs, to ensure the same little scheme didn’t work on them.
Of course, I could be attributing malice to LinkedIn’s partner banks when the cause for the underpricing could simply be ignorance – how exactly does one justify valuing a social networking company at $9 billion with earnings of $15.4 million last year?
Gates thinks other entrepreneurs might learn from Microsoft’s (MSFT) experience in crafting what some analysts called ”the deal of the year,” so he invited FORTUNE along for a rare inside view of the arduous five-month process. Companies hardly ever allow such a close look at an offering because they fear that the Securities and Exchange Commission might charge them with touting their stock.
Answers emerged to a host of fascinating questions, from how a company picks investment bankers to how the offering price is set. One surprising fact stands out from Microsoft’s revelations: Instead of deferring to the priesthood of Wall Street underwriters, it took charge of the process from the start.
Gates asked Martin to leave while he conferred with Shirley and Gaudette. This was a different Gates from the one who two months before thought $20 too high. ”These guys who happen to be in good with Goldman and get some stock will make an instant profit of $4,” he said. ”Why are we handing millions of the company’s money to Goldman’s favorite clients?” Gaudette stressed that unless Microsoft left some money on the table the institutional investors would stay away. The three decided on a range of $21 to $22 a share, and Gaudette put in a conference call to Goldman and Alex. Brown.
Eric Dobkin, 43, the partner in charge of common stock offerings at Goldman Sachs, felt queasy about Microsoft’s counterproposal. For an hour he tussled with Gaudette, using every argument he could muster. Coming out $1 too high would drive off some high-quality investors. Just a few significant defections could lead other investors to think the offering was losing its luster. Dobkin raised the specter of Sun Microsystems, a maker of high-powered microcomputers for engineers that had gone public three days earlier in a deal co-managed by Alex. Brown. Because of overpricing and bad luck — competitors had recently announced new products — Sun’s shares had dropped from $16 at the offering to $14.50 on the market. Dobkin warned that the market for software stocks was turning iffy.
Gaudette loved it. ”They’re in pain!” he crowed to Shirley. ”They’re used to dictating, but they’re not running the show now and they can’t stand it.” Getting back on the phone, Gaudette crooned: ”Eric, I don’t mean to upset you, but I can’t deny what’s in my head. I keep thinking of all that pent-up demand from individual investors, which you haven’t factored in. And I keep thinking we may never see you again, but you go back to the institutional investors all the time. They’re your customers. I don’t know whose interests you’re trying to serve, but if you’re playing both sides of the street, then we’ve just become adversaries.”
As negotiations dragged on, Shirley became impatient. Eshelman, the securities lawyer from Shidler McBroom, was waiting in San Francisco to get a price range so he could send an amended prospectus off to the SEC. Finally Gaudette told Dobkin, ”I’ve listened to your prayers. Now you’re repeating yourself, and it’s bullshit.” The two compromised on a range of $20 to $22, with two provisos: Goldman would tell investors that the target price was $21 and nothing less, and Dobkin would report Monday on which investors had dropped out.
Monday’s news was mixed. Six big investors in Boston were threatening to ”uncircle” — to remove their names from Goldman Sachs’s list. Chicago and Baltimore were fraying at the edges — T. Rowe Price, for instance, said it might drop out above $20 — while the West Coast stood firm. The market had closed flat, worrying Goldman’s salesmen. But their spirits revived the next day as the Dow surged 43 points. Gaudette, now confident that he and Dobkin could agree on a final offering price, flew with Neukom to San Francisco to pick up Martin, and the three boarded a red-eye flight for New York.
Sleepless but freshly showered and shaved, Gaudette reached Goldman Sachs’s offices at 11 o’clock on Wednesday, March 12. Neukom walked over from Sullivan & Cromwell, where the other lawyers were preparing the last revision of the prospectus. After lunch the two Microsoft officers went to Dobkin’s office and patched Shirley and Marquardt into a speakerphone.
The conferees had no trouble agreeing on a final price of $21. The market had risen another 14 points by noon. The reception for a $15 offering that morning by Oracle Systems, another software company, seemed a favorable omen: The stock had opened at $19.25. About half the potential dropouts, including T. Rowe Price, had decided to stay in.