By SARA FISHER
Staff Reporter
In today’s mad-happy climate of initial public offerings, it really pays to know the right people. Former President George Bush can vouch for that.
When Bush was asked to give a speech to executives of Global Crossing Ltd. more than a year ago, he agreed to accept company stock options in lieu of a customary $80,000 speaking fee. When Global Crossing stock reached its peak earlier this year, Bush’s options were valued at $15 million.
Bush isn’t the only person to make a killing off Global Crossing stock. A variety of insiders and associates also have seen huge gains including the rabbi and housekeeper of founder Gary Winnick.
How? From a universal practice informally called “friends and family.”
Very little is actually public about an initial public offering. At the moment the stock is made available on the open market, only a select group is allowed to buy it at the offering price. These include the IPO’s underwriters, institutional investors, money managers, and the preferred clients of major brokerages.
That’s where the “friends and family” process comes in.
When a company prepares to go public, the executive team draws up a list of those they wish to reward with shares at the offering price. Usually, 5 percent of the stock to be offered is set aside for friends and family a standard way to repay angel investors, hard-working employees and even supportive parents.
Only after all these people have been allowed to buy their shares are ordinary investors invited in. The momentum these trades bring is usually enough to jack up the price on the first day of trading, enriching a lucky few.
But for company executives, the list-making process is a major headache.
“The friends and family list is like Super Bowl tickets,” said Steve Hansen, chief financial officer with Marina del Rey-based GeoCities, which is now being acquired by Yahoo!. “For every one person you make happy, you tick off 10 others. And if the team loses, you’re still in trouble. You just can’t win.”
On top of the normal jockeying for a place on the list, some people go to extreme lengths. Hansen said total strangers trying to pass themselves off as his friends called the company’s underwriter, saying he had put them down for 500 shares.
An executive at another local company that recently went through an IPO said self-styled entrepreneurs contacted people on the “friends and family” list, offering to front them money to buy their allocated shares (which although discounted can still represent a serious expenditure), then split the profits.
Pasadena-based Ticketmaster Online-CitySearch sidestepped some headaches by splitting the “friends and family” shares equally among employees.
“(CEO Charles Conn and I) decided that every employee helped build the company, and we wanted everyone to help own it,” said Brad Ramberg, who was chief financial officer and is now CFO of Pasadena-based Idealab! “That said, (the underwriter) had to bring in three extra people to handle the paperwork nightmare that our decision caused.”
GeoCities took a more traditional route, splitting shares among its employees, vendors, preferred customers, board members and assorted friends.
“(CEO) Tom Evans and I finally had to sit down, decide what was best for the business, then essentially dared anyone to challenge us,” Hansen said. “It still was somewhat of an iterative process. You lay out the list, listen to the grumbles, then tweak it accordingly.”
When stock in Santa Monica-based eToys nearly tripled on its first day of trading earlier this month, many of the friends and family profited on paper handsomely. Industry rumor has it that Chief Executive Toby Lenk’s golf pro got in on the ground floor, but eToys executives are still in a quiet period and would not comment.
“Toby plays things very close to the vest,” said one associate. “I don’t see him openly talking about his housekeeper the way Winnick did. We may never know who made it to the list.”
There are no hard-and-fast rules about publicly disclosing those on the list, according to the Securities and Exchange Commission. Nor is there a set limit for what percentage of stock may be offered to friends and family.
Distributing 5 percent of shares to friends and family has become the de facto norm. If the percentage escalates to the point that it represents a “sizeable” portion of the IPO, a company is recommended to file documents with the SEC reflecting that. There are no legal requirements to do so, but a company opens itself up to class-action lawsuits from investors if it chooses not to.
Of course, a downside of the friends and family process is the possibility that the stock could go down.
“People forget that there are no guarantees that the stock will go up and that they’ll make their investment back,” said Tom Taulli, an IPO analyst. “There’s also no guarantee that just because you’re on the friends and family list, it’s a good company to begin with.”
Being excluded from the initial friends and family list also doesn’t mean that would-be investors have entirely missed the boat. Hansen told one grumbling individual that at one point, the company’s stock dipped below that of the IPO price.
If the investor had played his cards right, he could have saved money by not being on the list.
