“You gonna eat that or what?” I whisper to Kwame, who sits next to me at the round table in the Tivoli Room at the Essex Hotel in Midtown Manhattan. Kwame pushes his untouched cheesecake in front of me, and I dig in as our client’s CEO stands in the front of the room next to the projector and hits the small device in his hand.
“Now, I’m really excited about this slide,” he says. I remember making the slide—wasn’t quite as exciting, since I had no fuckin’ clue what Polytetrahydrofuran was when I was creating lollipop charts on its end markets. “With our best-in-class NXT additive packages and exposure to high growth…” continues the CEO as I zone out.
The tables in the back of the room are full of bankers. To my left, Kwame checks his LinkedIn views on his iPhone. To my right is an analyst from Citigroup, who is scrolling through his fantasy baseball lineup. To his right is an associate from Citigroup, who is taking notes that no one will ever look at. Masters and Steve had to leave early to meet with another client.
The table to my right is occupied by the JP Morgan IPO team. How do I know? The six of them wear matching fleece vests that, when the collar is up, reveal “JPM IPO team” embroidered in white. The banker who threw a fit because his gluten-free meal took an extra fifteen minutes to be served whispers into the ear of his colleague before they share a chuckle, then both pretend to read the prospectus.
Bankers attend these roadshow presentations to fill out the room, usher the management team from the urinal to the sink, and swing our dicks around when presented with the opportunity. In the front tables, listening closely with paper and pen in hand, are the potential investors—a smattering of hedge fund managers, mutual funds guys, and really anyone who drops a business card in the glass jar at the check-in desk. Security isn’t tight, despite the CONFIDENTIAL warning stamped on every document. In fact, as I polish off my third piece of strawberry cheesecake and wash it down with some fresh-brew coffee, I think how one could enjoy free, sumptuous meals and bone up on the laminate industry if one simply knew the location of the roadshow presentation.
A collective chuckle returns my attention to the projector, where a clip from The Graduate plays, in which Dustin Hoffman’s character is brought outside by some douche dial-tone and told with a finger in his face, “There’s a great future in plastics.” The company’s CEO thought the clip might be a nice way to add levity to the presentation. I remember not really understanding the scene when I first saw the movie freshman year in college, then laughing at the scene when I watched the movie fifty times senior year—fuckin’ Mr. McGuire.
Not as funny these days.
The key to a successful IPO is marketing to long-term investors. This helps ensure the stock doesn’t tank immediately after going public. Ideally, management (and bankers) convinces these investors the stock is a solid long-term investment, which reminds me of the old investor adage: “Be right and sit tight.” Not to be confused with the investment banker adage: “Be wrong and blow Dodge.”
“With that,” says the CEO, clicking the slide-switching device, “I’ll hand the floor over to our CFO—” The screen goes black. The CEO walks to the computer and futzes with the mouse. “Looks like the computer died. Guess we won’t get to the financials section.” Boy, is he lucky, ’cause the EBITDA adjustments for this company are something else—we’ll get there.
“Think we might as well open it up to some Q&A then,” says the CEO as he returns to center stage, scanning the first few tables.
“Shoot,” says the CEO, pointing at a bespectacled guy whose arm pops up.
“Can you talk a little bit about how you view the vitality index in conjunction with the new product roll-outs you’ve discussed, specifically in the additive segment, where you project over seventy percent of your NTM revenue will be generated?” He turns slightly after concluding his question as if to gauge how impressed everyone is. No one looks at him.
Like most of his peers in the industry, the CEO uses a wily combination of folksy charm and intricate knowledge of the industry to sound knowledgeable and to answer some questions with eye-popping detail when in the company’s interest, while parrying other questions and diverting his answers toward the company’s outperformance in some other category. I learned early on there’s no point in really listening, since I can’t tell the difference between the two. “Great question, and glad you asked it,” says the CEO after most questions.
But not all.
“Is there a question here?” asks the CEO after a well-heeled hedgie with slicked-back hair concludes a monologue outlining some correlation between feedstock prices in Europe, utilization rates in the US, and the price of raw materials in Asia. It’s like the kid in high school who reels off esoteric information in class, spewing a bunch of jargon just to show how much he knows, but never realizing that this is why he has no friends.
“Let me rephrase,” says the hedgie, after which he repeats the same statement except inverts the sentence and instills some intonation at the end to make it sound like a question.
The presentation ends as it began—a smattering of light applause from those at the first few tables, while those in the back tables scroll through their BlackBerries, oblivious until front-row people stand.
There are handshakes, side conversations, and judging eyes throughout the room as I walk to the buffet table to snag a few chocolate-chip cookies for the road.
“Bill Keenan,” says a man’s voice behind me accompanied by the weight of a hand on my right shoulder. I turn around and see an MD from Morgan Stanley who I met during the recruiting process.
“Brendan,” I say, remembering his name since it was the same as one of my favorite NHL players when I was a kid, and our conversations during recruiting revolved around hockey. “How are things?”
“Won our semi-final game last night at the Piers,” he says. “Finals this weekend.” Brendan took his men’s-league hockey games as seriously as his job. During recruiting, he invited me to play with his team. The game started at 11:15 p.m. at Chelsea Piers on a Tuesday. I wanted a job, but not that badly.
“Any goals?” I say, vaguely remembering him telling me that he was a “playmaker.”
“Two assists…plus-three rating,” he says shrugging with humility. Brendan is one of the few senior bankers I met during the recruiting process whose ego wasn’t on full display at every event. He seemed like a decent enough guy. “You know, I saw your name on the WGL and remember receiving some emails from you over the last couple weeks on this deal. Quite a transaction, huh?”
“Definitely an interesting situation with the restructuring and Chapter Eleven they recently went through,” I say.
“Very unusual dynamic with the OTC situation,” he says, lobbing it back to me. We both avert our eyes and scan the room, then, with just a moment of brief eye contact, we communicate to one another that we’ve reached that threshold of how much we really know about what’s going on.
“Well, look. You have my email. Let me know how things progress at DB, and if there’s anything I can do. And of course, we could use a ringer in the finals this weekend.” Brendan does a stickhandling motion, after which we shake hands. He disappears in the crowd of suits now mingling in the banquet hall, while I wrap two more fresh-baked cookies in a napkin and pocket them.
* * *
The roadshow moves west the next day—Chicago, Dallas, Los Angeles, then to Boston and finally one final presentation back in NYC. No private jet, but Kwame and I do get those seats with extra legroom and are allowed to expense the cost of in-flight Wi-Fi. As the presentations progress, the CEO’s planted jokes are crafted to precision, so much so that by the time we’re in Boston, there are a few people who laugh at them. And it’s uncanny how the computer battery dies right before the presentation moves to the financial sections and explanation of EBITDA adjustments—almost as if on purpose.
The deal prices at the high end of the anticipated range and is oversubscribed, both indications of a receptive and eager investor base, in conjunction with well-executed marketing. The company goes public a few weeks after Labor Day and initially trades at a premium to its peers. But after the initial buzz wears off, the stock tanks as the initial IPO investors take profits, and more sophisticated investors analyze the stock and short it, driving its valuation down. Much of the decline can be traced to the adjusted EBITDA the company (and bankers) used to market the company.
Appendix II of Prospectus—page 18
Appendix IV of Prospectus—page 20
Appendix III of Consolidated Financial Statements—page F21
“Change in vacation policy” doesn’t tell us much. So we head to the footnote the lawyers buried in another appendix in the prospectus. Footnote four literally provides no further detail on the adjustment, aside from redirecting us to yet another footnote in a separate document. So we now sift through the appendices of the financial statement, where we find our answer: the company has reduced its expenses by no longer allowing employees to carry over vacation days—quick and easy way to bump the adjusted EBITDA figure right before going public. The adjustment is never questioned through the entire deal. And while the stock appears to trade down on an EV/EBITDA multiple relative to peers, if you don’t give the company credit for that “change in vacation policy” add-back, it trades in-line with peers. But while the company’s management must scramble to please shareholders, we bankers have already collected our fee.
So we bank on.