The Tough Go Shopping

In a volatile market, it takes a little more ingenuity to take a company public.

Even the engineers were grinning when Steve Nill joined Sonus Networks Inc., a Westford, Massachusetts-based voice network infrastructure producer, as its first CFO in September 1999. “At first I just thought everyone was really friendly. Then I realized the grins were because they knew my arrival meant their options would finally turn into cash,” says Nill half-jokingly. He, too, was looking forward to leading his second initial public offering, having done his first shortly after joining multimedia server provider VideoServer (now Ezenia Inc.) in 1994, after six years as Lotus Development Corp.’s corporate controller.

Too bad the IPO was planned for this past spring. At the S-1 filing on March 10 everything seemed fine, but the precipitous April Nasdaq drop forced Sonus management to postpone the road show. Worse, the critical last day of presentations in front of the biggest investors was scheduled for May 23, the day Nasdaq lost 200 points. “Investors kept saying to us, ‘You’ve got a great story — so why are you doing the offering now?’” recalls Nill.

No one ever said taking a company public was easy. In fact, “the IPO market is never in equilibrium; it’s always too hot or too cold,” says Jay Ritter, a professor at the
University of Florida who studies the behavior of IPO markets. But the unprecedented volatility facing the 400 new issues that braved the market this past year made it tougher than ever to plan a smooth debut — and called for some extra ingenuity by issuers.

In Writing, Please

Sonus ultimately survived its May 25 debut spectacularly, opening at $9 above its offered $23 price, closing at a rich $50.50, and, unlike 60 percent of last year’s offerings, trading above its IPO price as late as December, at about $36, even after a 3-for-1 split in October. One of the reasons for its success, Nill says, is that he had started the underwriter selection process by polling institutional investors, the ultimate stock buyers. Knowing them to be selective about underwriters, and ever more wary of sell-side analysts’ potential biases, he wanted to find out “who they listened to, and how they distinguished one offering from another,” he says.

Feedback from fund managers led to a list of about a dozen banks, with which Nill met informally for several months prior to the formal selection process, or “beauty contest.” But to ensure that the “right” banks were right for Sonus, Nill asked them to respond to a written request for proposal. The RFP required answers to more than 20 specific questions about positioning, valuation, aftermarket support, and trading. Nill had developed the RFP for his first IPO with the idea of adding some objectivity to a process he had heard venture capitalists and others describe as vague and subjective. “Probably any of the banks could have gotten the deal done, but in the end, you want to establish a relationship with a firm that can help your business grow,” says Nill.

According to investment bankers, Nill’s technique is unusual — most beauty contest discussions are verbal and much less detailed. “If I didn’t already have the highest regard for Steve, that would have convinced me,” says Ryan Limaye, a Menlo Park, California-based Goldman Sachs banker who worked on the Sonus offering. “We inferred from [the RFP] that Sonus was doing a very thorough investigation and evaluation of the firms.” He says the format was useful, both in helping the bank better target its presentation to Sonus and in making the competition more productive. “Some CFOs try to invite 20 or 30 firms to compete for the business, but short takes with lots of firms don’t really let you differentiate,” he adds.

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