title: “Step Right Up” ShowToc: true date: “2023-01-03” author: “James Hernandez”
And never have there been more hot IPOs than now. In fact, according to Securities Data Co., six of the 10 hottest IPOs in the past 25 years have gone public since the start of 1995. Make that 14 of the 25 hottest IPOs, as measured by the percentage increase in their first day of trading. In case you’re interested, in about half the cases, the S&P has so far been a better investment than buying these stocks the day after the offering. I suspect the S&P will come out well ahead in a couple of years, after the bloom fades from more IPO roses.
New-media issues are especially hot these days-and especially risky. One reason, in my humble opinion, is that companies are dishing up what I consider pre-offering hype that would have been unthinkable a few years ago. This hype helps whip investors into a frenzy in which they stampede to buy these stocks, regardless of price. Since brokers reserve hot issues for their biggest and best customers, most of us have to buy after trading starts, rather than getting shares in the offering.
Under the securities laws, a company is forbidden to promote its stock in advance of an offering. The idea, of course, is to stop the unscrupulous from peddling overpriced trash to the unwary. “When a company is selling its securities, it must not use any medium to hype its offering,” said Abbie Arms, associate director of the Securities and Exchange Commission’s division of corporation finance. But as Jay Ritter, a visiting finance professor at MIT, asks, “What is hype, and what is legitimate marketing?” The answer: it depends.
Pixar Animation Studios, best known for its work on Disney’s cartoon feature “Toy Story,” and Yahoo!, which catalogs sites on the Internet, are two prime examples of where the hype-marketing line is blurred. We media types swoon over companies like these, because we love media stories, and it’s more fun writing about twentysomething paper zillionaires than writing about stuff like the gross national product. We tempt these folks. It’s got to be hard to resist taking a bite of that juicy publicity apple. And these new-media companies promote themselves endlessly, even without a stock issue to tempt them. How else do you get people to pay attention to your Web crawler or Internet browser or whatever when the world is full of competing products? When a company is getting ready to go public, where does proper promotion of the product end and improper promotion of the company start? Especially with “concept companies,” where you buy into an idea, not an established business.
Consider Yahoo! As luck would have it, company founders Jerry Yang and David Filo are the cover boys on the current issue of Wired magazine. Wired, enormously influential among Internet types, began arriving in subscribers’ mailboxes in early April. Yahoo! went public on April 12. The cover story itself doesn’t hype Yahoo!’s stock; it deals with how knowledge is organized, and how Yahoo! and its competitors go about labeling Web sites. But having two beaming Chief Yahoos on the cover is an implied seal of approval.
Yahoo!, through a spokesman, said that it wouldn’t talk to me. People familiar with Yahoo!’s thinking argue that the Wired interviews took place months ago, and didn’t involve financial topics. At the time, they say, Yahoo! didn’t know when or if the article would appear, or have a specific timetable for selling stock to the public. Fine. But the Yahoos posed for the cover picture on March 7, according to Wired’s photo editor, Erica Ackerberg. That was the same day that Yahoo! filed its stock-offering documents with the SEC. By then, obviously, Yang and Filo knew they were posing for a likely cover, and that Yahoo! was likely to go public very soon.
I’m not saying that Yang and Filo violated any securities laws. Yahoo! has good lawyers, and the SEC could have taken action if it thought Yahoo! was over the line. But it leaves a bad taste in my mouth. And remember that going public was more than just making paper profits for Filo and Yang. They each got $12.5 million in cash by selling stock to a big Japanese company, Softbank, as part of the offering.
Then there’s Pixar, which was part and parcel of a different kind of hype: Disney’s endless promotion for “Toy Story.” Pixar did the animation for the movie, the first one to consist entirely of computer-generated images. A marvelous piece of technology. Pixar went public on Nov. 29, when “Toy Story” was promoting itself on every street corner. The promotion, of course, included prominent mention of Pixar’s great graphics. The Pixar publicity included a major piece in NEWSWEEK.
Lawrence Levy, Pixar’s chief financial officer, argues this was part of Pixar’s regular business and didn’t violate any securities laws. “in the course of promoting the film ‘Toy Story,’ there was no promotion of the company Pixar,” Levy said in an interview. “The SEC watched us very closely. We turned down lots of opportunities to promote Pixar the company during that period.” But why did the company sell stock when “Toy Story” fever was at its peak? “We wanted to wait for a while after the release of the film,” Levy said, “but people were advising us that the new-issues market might not last. We wanted to eliminate the risk of that market closing to us.”
The SEC, as usual, wouldn’t discuss its dealings with Yahoo! or Pixar. It normally doesn’t discuss individual companies unless it has publicly brought action against them. The SEC’s definition of improper promotion has evolved in some ways that only a lawyer can understand. For instance, in 1992 the SEC wouldn’t let the New York Stock Exchange start trading in Coleman Co., an initial public offering floated by financier Ronald Perelman. The SEC made Coleman wait a few hours because a Wall Street Journal story contained some Coleman projections that weren’t in the prospectus. However the SEC doesn’t stop companies from verbally disclosing financial projections in private sessions known as road shows. Go figure.
The moral: even if a company makes a product you use and like, that doesn’t necessarily make its stock a good investment. Ignore the hype. Paying too high a price for even a good company is the road to ruin, not the road to riches.
