Reprise: Thoughts on the Expected Bazaarvoice IPO

Several people are privy to the actual timetable. However, I am not one of those people.

As a former Wall St. Securities analyst, tech company CFO, and current portfolio manager/trader, here is some free advice.

1) Get to know as many bankers on the Street as you can – before you go into seclusion.

It’s likely that you have spoken the several investment bankers employed by the bulge bracket firms; all of which are salivating over the prospect of leading your IPO – as they will stand to make a very nice commission of 7% of the proceeds. They will have produced a “Comparables” page in their respective pitch books to give you an idea of the valuation that Bazaarvoice can expect when you file your S-1 with the SEC. You may have already decided, at the Board level, who will be the lead IPO manager. One or more of these people may even have been your classmates at Wharton, so those meetings will have been quite friendly and you will have had a chance to catch up with old friends and classmates. However, talking to the 3 or 4 bulge bracket investment bankers that have pitched their services as lead IPO manager is not talking to the Street. These people will also try to convince you to stop talking to their competitors on the Street – why would they want to risk losing their placement on the cover.

The Street is made up of a lot of people, all of which are trying to make money – for themselves. They will tell you that they are looking out for your best interests, and how they will do a great job of managing your IPO process. However, at the end of the day, you know as well as I do, that they are looking out for their own best interests. Understand their motivations, and use that information to your own advantage, as well as to the advantage of your shareholders.

Being nice to the bankers today – even though you didn’t choose them as your lead banker – may be very important to you and Bazaarvoice in the future. That banker may think of you, first, when he is looking to introduce a company with technology that is interesting to you, or you may want to be introduced to the company with whom you are interested. If that banker is representing a target, they can have some influence in the decision to sell to you, instead of your competitor.

Be nice to everyone.

2) Don’t be arrogant about the valuation process. Get the deal done.

Undoubtedly, it is in your best interests to have the company valuation at the highest number possible. Your investment bankers will council you to be modest and “leave money on the table” as their clients (Institutional PMs) want to own the stock, but won’t own the stock if the valuation is too high. There is some truth to that. Remember the Wall St. adage: Bulls make money, bears make money, and hogs get slaughtered. Don’t be a hog.

I’m aware of a technology company with revenues of approximately $120mm, and was close to being profitable, but was not. During the summer of 2008, they went through the IPO exercise, and selected their lead manager. However the CEO was unwilling to pull the trigger on the IPO until he had the company valued at $1 billion (about 8.3x current revenues) – which was a very rich valuation even prior to the credit crisis driven market meltdown which occurred later that year. Where is that company today? Still private, and today they are staring in the face of $300mm valuation (or about 2x current revenues). They don’t have a large cash position, and they don’t have the currency of a public stock, so they can’t acquire interesting companies and technologies easily. Moreover, they are quickly becoming irrelevant in their space as larger competitors have been using their respective balance sheets to win customer deals. This company is snatching defeat from the jaws of victory.

Get your deal done.

3) Who is covering the stock?

So, the deal is done, and the IPO was successful. Now you are waiting for those “Buy” recommendation research reports from the 3 lead IPO managers. Those will occur after the 30 days IPO quiet period has expired.

What about the research reports of the 15 other analysts that you didn’t meet with and didn’t respond to in the several months prior to the IPO? These analysts are employed by smaller boutiques and since you didn’t court them during the important relationship building pre-IPO phase, you will be starting from scratch. Many of them actually know your space quite well, understand how retailers operate, as well as have some interesting ideas about the direction of the next generation of social networking applications. They work for the smaller boutiques because they didn’t go to well-known B-school; which doesn’t mean that they are less insightful about technology than their counterparts at the bulge bracket firms. It just means that they work harder and get paid less.

Of course, you will be precluded from meeting with them in the few months immediately preceding the filing of your S-1 with the SEC, and during the S-1 comment period, as the SEC tends to look rather unfavorably on those conversations thinking that you were guilty of promoting your “stock” before the actual “stock” is issued and sold to the public. That would be a major “no-no”.

However, if the IPO filing is still at least 6 months away, (after the summer), then start building up your personal rolodex with analysts. Also, make sure that your CFO is building their own rolodex.

4) Investor Relations (IR)

If you haven’t hired an IR person yet, then do so ASAP. The most important thing that the IR person will do is to act as the main conduit between you, the CFO, and the Street. If they are any good, they can be trusted to handle about 90% of the interactions with the Street. They will be constantly building a pipeline of new analysts that will cover the stock, and a pipeline of new institutional portfolio managers that will own the stock. This person will know the company as well as you do, and can effectively communicate the story of the company to the Street. This person will free up a lot of your time to run the company and enable its growth – which contributes to shareholder value.

This person should also know more about how the market operates than you, and has probably worked previously for an investment bank as an analyst. As a bonus, this person should also be very comfortable speaking the language of financial statements since the Street is full of analysts and hedge fund managers that are very comfortable dissecting financial statements. Think back to your Wharton days. If the IR person can’t hold a detailed conversation with the CFO, how do you expect that person to hold a detailed conversation with the Street.

In addition, this IR person should be building a knowledge base of key events about competitors and the industry that will be shared and discussed with the executive management team.  Think of this person as the focal point of market intelligence and competitor intelligence.  A good IR person will often times get the first phone call from an analyst looking to check on something that they just discovered.

In addition, a good IR person will also have built a knowledge base of companies (and the people) who have built complementary technology and services.  This can be used as the basis of forming an acquisition strategy.

Whatever you do, don’t hire an IR person that thinks of the job as an executive concierge service for setting up meetings between the Street and yourself.  Don’t hire an IR person that simply thinks of the job as a platform for “Communications”.  Most companies do this, and it is a huge mistake.  The job requires a lot more initiative than it sounds.  Have faith that the role of IR can actually add value to the way the company is viewed by the Street (building up some “positive word of mouth”).

Exxon typically has their top operational managers spend up to two years in IR interacting with the Street on a daily basis.  This does free up the time of executive managers to actually run the company, and teaches those managers how to interact with the Street – though those managers still don’t understand how the Street works.

…of course, then there will be a follow-on offering.  Guess who should be a key contributor in organizing this process.

5) Don’t avoid the PMs that are short the stock

Stocks are pieces of paper that don’t (in the short run), reflect the true value of the company. If the stock price rises dramatically after the IPO, and hence, the market multiples rise appreciably, your stock will be targeted by short sellers.

Whatever you do, don’t treat them like ants at a picnic.

The Street is made up of many people, almost all of whom actually do think independently – at least the good ones do. Treat everyone as your friend since a good hedge fund manager is never wedded to any position (long or short), and are not out to destroy your company by shorting your stock and spreading false rumors. Clearly, there are some that do that, but as long as the company continues to deliver shareholder value, they will be wrong, and will suffer a loss on the short position. Let the hedge fund managers, who are long the stock, work for you – by bidding up the price of the stock, and forcing the short sellers to cover.

Here is a fantastic example, currently being discussed in the press and in the investment community, of the WRONG thing to do.

A couple of weeks ago, a hedge fund manager attended the analyst/investor meeting for First Solar.

This is the Bloomberg story about the incident, published on Dec 21, 2009.

When management/IR found out he was at the meeting, they kicked him out. In reply, the hedge fund manager published a letter, asking to be reimbursed for the $9 cab fare he paid going back to his office.

The larger point is as follows: a good hedge fund manager is just as likely to be long your stock as he is to be short your stock. It’s all about how the current market valuation relates to the underlying business.

Remember that hedge fund managers are smart and know how to dissect a business in seconds by asking only a few questions. If they are short your stock, they have already done an enormous amount of work, and have spoken to many of your suppliers, customers, former employees, and others.

More importantly, they will rarely ask you a direct question about your own company. They will be polite and be respectful as they listen to your presentations. Hedge fund managers will save the direct questions about your operational results for your competitors – which they will be only too happy to answer. If you can determine whether a hedge fund manager is short your stock – after you are finished speaking with them – then they have done a poor job of interviewing you.

Here is the letter from the hedge fund manager to First Solar management. Notice that management has made him persona non grata. He was there to gather information in order to determine whether his short position was valid, or whether he should cover his short, and perhaps even hold the stock long. In fact, management increased their guidance during that meeting, so that hedge fund manager may have become an ally. However, that opportunity has been lost.

“The harm I suffered at your hands, other than the embarrassment of having to explain my departure to colleagues, was minimal. My investors did incur a $9.00 taxi cab expense because I was forced to hurry back to my office to hear the webcast of the event, and I believe it would be fair for you to reimburse them. After all, you did invite me and, if you wished to rescind the invitation, it would have been common courtesy to do so BEFORE I traveled to the event.

More than the $9.00, though, I’d appreciate an explanation. I am negative on your stock, I do currently hold a short position, and I have communicated some of my thoughts on the challenges your company faces to other investors with whom I am friendly. Perhaps in your mind this is sufficient reason to bar me from your event. Just the very thought of having someone in the audience who disagrees with your outlook may be too distasteful for you to tolerate.

I’m sure it goes without saying that that’s not the way most successful management teams operate. Generally, they welcome the opportunity to provide their viewpoint to analysts who disagree with them, because they believe their case to be persuasive. And, if they don’t succeed, it doesn’t matter, because in the end the stock will follow the company’s results.

Managements who go out of their way to stifle dissenting viewpoints fall into one of two camps: 1) Those who are actively attempting to deceive investors, and therefore find it threatening to have analysts around who may see through the ruse; or 2) Those who truly believe that their company will succeed, but are simply offended by the audacity of analysts who disagree. In my experience, it is worthwhile to short both groups; the first because the truth eventually emerges, and the second because managements who cannot bear to hear dissent from analysts are also not open to new information from within their industry, and are likely to become road kill at the expense of more nimble competitors. Mr. Meyerhoff, who spent six years as the CFO of Form Factor, a company once as arrogant as First Solar, but in recent years humbled by industry transitions they failed to predict (or, at least, failed to adequately signal to investors), should understand this as well as anyone.

Of course, arrogance and intransigence work both ways. I have also seen analysts who become so wedded to a point of view (positive or negative) that they are physically unable to listen to information which contradicts their beliefs. I believe the term for this is “cognitive dissonance.” I hope I never fall into this category. That is exactly the reason I planned to attend your event: to hear management’s point of view and see whether there was anything in it which required me to rethink my position. Nothing that I heard on your webcast or read in the transcript had that effect.

But I remain open, and to that end I issue the following invitation: If there is anything that you are aware of that I have written or said which you believe to be false or misleading, please tell me what that is. I will, promptly, and without editing, include your perspective in written materials which I periodically send to the same group of industry colleagues who received my earlier views. This should, presumably, undo any harm you feel I’ve caused your firm by disseminating information which you believe to be inaccurate.

I believe my offer is more than fair, and I look forward to your response. You may forward the $9.00 to the address below”.

One of the best books ever written about a management team that was behaving very badly, was David Einhorn’s book, Fooling Some of the People All Of The Time.  Read it, and understand the grief that will occur from behaving badly.

I’m sure that you have heard the following story from your CMO, Sam Decker. At the Capital Factory Demo day last August, the keynote speaker was Mike Maples, Jr. During his presentation, Mike was in the process of thanking the entrepreneurs that “allowed him” (his words), into their deals. As he was thanking those entrepreneurs, Mike choked up, but was able to hold back his tears, as he told everyone in the room how grateful he was that he was a part of their early stage funding. I’ve been in the market a long time, and I’ve met with thousands of PMs, VCs, executive management teams, and others who spend more time preening and puffing up their own feathers. In all my years in the financial services industry and the technology industry, I have never run across someone that introduced their presentation by thanking the people that got them to where they are, and then…choke up with tears as they were thanking those people.

That was the kind of humility that I will always remember.

In summary, the IPO signals the beginning of a marathon, and introduces an entirely new set of customers and investors. Try to spend as much time making Bazaarvoice one of the “Top 10 Best Companies to Cover” as you do making Bazaarvoice one of the “Top 10 Companies to Work For.”

I don’t know of anyone else who does this – so you will blaze an entirely new trail.