Stock options initial public offering

Here's the story of the birth of a billionaire. As Bro Uttal told Fortune 's editor, Marshall Loeb, at the time see Editor's Letter at the bottom of this page" I stock that a story like this has been published before or is likely to be done again. By Bro Uttal, writer. Going public is one of capitalism's major sacraments, conferring instant superwealth on a few talented and offering entrepreneurs.

Of the more than 1, companies that have undergone this rite of passage in the past five years, few have enjoyed a more fren- zied welcome from investors than Microsoft, the Seattle-based maker of software for personal computers.

The biggest winner was William H. Gates III, the company's co-founder and chairman. A initial prodigy who helped start Microsoft while still in his teens, Gates, at 30, is probably one of the richest Americans. Gates thinks other entrepreneurs might learn from Microsoft's msft experience in crafting what some analysts called ''the deal of the year,'' so he invited FORTUNE along for a rare inside view of the arduous five-month process.

Companies hardly ever allow such a close look at an offering because they fear that the Securities and Exchange Commission might charge them with touting their stock. Answers emerged to a host of fascinating questions, from how a company picks investment bankers to how the offering price is set.

One surprising fact stands out from Microsoft's revelations: Instead of deferring to the priesthood of Wall Street underwriters, it took charge offering the process from the start.

The wonder is that Microsoft waited so long. Microsoft's biggest hits are the PC-DOS and MS-DOS operating systems, the basic software that runs millions of IBM personal computers and clones. The company has also struck it rich with myriad versions of computer languages and a slew of fast-selling applications programs such as spreadsheets and word-processing packages for IBM, Apple, and other personal computers.

The reasons were simple. Unlike its competitors, Microsoft was not dominated by venture capital investors hungry to harvest some stock their gains. The business gushed cash. Public important, Gates values control of his time and his company more than personal wealth. Money has never been paramount to this unmarried scion of a leading Seattle family, whose father is a partner in a top Seattle law firm and whose mother is a regent of the University of Washington and a director of Pacific Northwest Offering.

Gates, initial gawky, washed-out blond, confesses to being a ''wonk,'' a bookish nerd, who focuses singlemindedly on the computer business though he masters all sorts of knowledge with astounding facility. Oddly, Gates is something of a ladies' man and a fiendishly fast driver who has racked up speeding tickets even in the sluggish Mercedes diesel he bought to restrain himself. Options left Harvard after his sophomore year to sell personal computer makers on using a version of the Basic computer language that he had written with Paul Allen, the co-founder of Microsoft.

Intensely competitive and often aloof and sarcastic, Gates threw himself into building a company dedicated to technical excellence. Gates feared that a public offering would distract him and his employees. People get confused because the stock price doesn't reflect your financial performance. And to have a stock trader call up the chief executive and ask him questions is uneconomic -- the ball bearings shouldn't be asking the driver about the grease.

But a public offering was just a question of time. To attract initial and virtuoso programmers, Gates had been selling them shares and granting stock options. ByMicrosoft options, over people would own shares, enough to force the company to register with the SEC. Public registered, the stock in effect would have a public market, but one so narrow that trading would be difficult. Since it would have to register anyway, Microsoft might as well sell enough shares to enough investors to create a liquid market, and Gates had said that might be the year.

Shirley, 48, Microsoft's pipe-smoking president and chief operating officer. In April Gates, Shirley, and David F.

Marquardt, 37, the sole venture capitalist in Microsoft he and his firm had 6. To forestall sticky questions from potential investors, he first wanted to launch two important products, one of them delayed over a year, and to sign a pending agreement with IBM for developing programs. He also stock time to sound out key employees who owned stock or options and might leave once their holdings became salable on the public market.

By the board meeting of October options, held the day after a roller-skating party for Gates's 30th birthday, the chairman had done his soundings and felt more at ease. The board decided it was time to select underwriters and gave the task to Frank Gaudette, 50, the chief financial officer, who had come aboard a year before.

Gaudette was just the man to shepherd Microsoft through Wall Street. He speaks in the pungent tones of New York City, where his late father was a mailman, and prides himself on street smarts.

He had already helped manage offerings for three companies, all suppliers public computer initial and services. Aspiring underwriters, sniffing millions in fees, had been stroking Microsoft for years. They had enticed the company's officers to so-called technology conferences -- bazaars where entrepreneurs, investors, and bankers look each other over. They had called regularly at Microsoft, trying to get close to Gates and Shirley.

Gaudette had been sitting through an average of three sales pitches or get-acquainted dinners a month. Gaudette proposed that since Microsoft was well established, it deserved to have a ''class Wall Street name'' as the lead underwriter. This investment firm would put together the syndicate of underwriters, which eventually was to number It would also allocate the stock among underwriters and investors and pocket giant fees for its trouble. Gaudette suggested a ''technology boutique'' options the offering to enhance Microsoft's appeal to investors who specialize in technology stocks.

Narrowing the field of boutiques was easy. Only four firms were widely known as specialists in financing technology companies: Culling the list of Wall Street names took longer. Microsoft's managers concluded that some big firms, including Merrill Lynch and Shearson Lehman, had not done enough homework in high tech. The board pared the contenders to Goldman Sachs, Morgan Stanley, and Smith Barney. Give us a recommendation in two or three weeks. Early in November, Gaudette called the eight investment bankers who had survived the first cut.

I'll have a decision before Thanksgiving. But remember, it's my decision -- don't try going around me to Bill or Jon. After a whirlwind tour of New York, Baltimore, and San Francisco, Gaudette made his recommendations to Gates and Shirley on November Then he took off for a ten-day vacation in Hawaii, a belated celebration of his 50th birthday in the 50th state. No decision would be announced until his return.

The investment bankers turned options. Theirs is a who-do-you-know business, and options mobilized their clients, many of them Microsoft customers or suppliers, to besiege Gates and Shirley. Gaudette had methodically ranked the investment houses on a scale of 1 to 5 in 19 different categories.

But he also stressed that any candidate could do the deal and that the chemistry between Microsoft and the firms would finally determine the winners. Among the major houses, Gaudette had been most impressed by Goldman Sachs, which tightly links its underwriting group with its stock traders and keeps close tabs on the identity of big institutional buyers. For those reasons, Gaudette thought Goldman would be especially good at maintaining an orderly market as Microsoft employees gradually cashed in their shares.

Stock December optionsafter conferring with Gates and Shirley, Gaudette phoned Eff W. Martin, 37, a vice president in Goldman's San Francisco office who had been calling on Microsoft for two years. Do you think you can find time to come? The private room was large offering the party of eight, and one wall was a sliding partition ideal for eavesdropping. Most of the party were meeting each other for the first time; how well they got along could make or break the deal.

Microsoft's top dogs didn't make things easy. Public, who had heard scare stories about investment bankers from friends like Mitchell Kapor, chairman of Lotus Development, was tired and prepared to be bored. Shirley was caustic, wanting to know exactly what Goldman imagined it could do for Microsoft. For nearly an hour everyone stood in a semicircle as Martin and three colleagues explained their efforts to be tops in financing technology companies.

An Oklahoman by birth and polite to a fault, Martin labored to kindle some rapport. But it was not until talk turned to pricing the company's stock that Gates folded stock arms across his chest and started rocking to and fro, a sure sign of interest. At the end of dinner, Martin, striving to conclude on offering high note, gushed that Microsoft could have the ''most visible initial public offering of -- or ever.

Brown had been cultivating Microsoft longer than any other investment banking house. Three days later the board quickly blessed the selection initial Goldman Sachs offering Alex. The offering formally lumbered into gear on December 17 at an ''all-hands meeting'' at Microsoft. It was the first gathering of the principal players: Some confusion crept in at first. Heavy fog, a Seattle specialty, delayed the arrival of several key people until early afternoon.

One of Microsoft's high priorities was making its prospectus ''jury proof'' -- so carefully phrased that no stockholder could hope to win a lawsuit by claiming he had been misled.

Gaudette was miffed to see that the law firm had sent only an associate, not a partner. The point agenda covered every phase of the offering. The underwriters, as is customary in initial public offerings, would be granted the option to sell more shares. Gates had thought longest about the price. Guided by Goldman, he felt the market would accord a higher price-earnings multiple to Microsoft than to other personal computer software companies like Lotus and Ashton-Tate, which have narrower product lines.

On the other hand, he figured the market would give Microsoft a lower multiple than companies that create software for mainframe computers because they generally have longer track records and more predictable revenues. A host of questions came up at the all-hands meeting. Both Shirley and Gates were concerned that going public would interfere with Microsoft's ability to conduct business. Shirley wondered whether all three of Microsoft's top officers would be needed for initial ''road show,'' meetings public which company representatives would explain the offering to stockbrokers and institutional investors.

Gates tried to escape the tour by saying, facetiously, ''Hey, make the stock cheap enough and you won't need us to sell it!

Microsoft's attorney, William H. Gates -- raised another matter. The company would have to tone down its public utterances, he said, lest it appear to be ''gun jumping,'' or touting the stock.

Press releases could no longer refer to public Microsoft programs as ''industry standards,'' no matter how true the phrase. Neukom would review all the company's official statements, which came to include even a preface Gates was writing for a book on new computer offering. The most tedious part of taking the company public was writing a prospectus. It was a task rife with contradictions.

By law Microsoft's stock could be sold only on the basis of information in this document. If the SEC raised big objections to the preliminary version, Microsoft would have to circulate a heavily amended one, inviting rumors that the options was fishy.

However cheerful or public the prospectus, many investors would fail to read it before buying. Then if the market price promptly fell, they would comb the text for the least hint of misrepresentation in order to sue. Still, stock prospectus could not be too conservative. Like all such documents, it had to be a discreet sales tool, soft-pedaling weaknesses and stressing strengths, all the while concealing as much as possible from competitors.

Even Before Microsoft had picked its underwriters, Robert A. Eshelman, 32, an attorney at Shidler McBroom, had started drafting the prospectus. That task took all of January. Two days a week for the next three weeks, many of the people who had been at the all-hands meeting reconvened at Microsoft's sleek headquarters in a Seattle suburb to edit the prospectus. At the first sessions, on January 8 and 9, the underwriters brought along their security analysts to help conduct public ''due diligence'' examination, grilling the company's managers to uncover skeletons.

Gaudette had met him years before in New York but was bowled over by how much he had changed. Rechlin was 40 pounds lighter and sported shoulder-length hair and a fierce sunburn. For ten hours Gates, Shirley, and other managers exhaustively described their parts of the business and fielded questions. Surprisingly, the Microsoft crew tended to be more conservative and pessimistic than the interrogators. Ballmer, 30, a vice president sometimes described as Gates's alter ego, came up with so many scenarios for Microsoft's demise that one banker cracked: By late January only one major item remained undecided -- a price range for the stock.

His argument was ultraconservative: Forester, head of Goldman Sach's high-technology finance group. Two days later Microsoft registered with the SEC, the underwriters sent out 38, copies of the prospectus, and the lawyers began waiting anxiously for comments from the regulators.

Gates coped with concerns of a different sort. Relatives, friends, and acquaintances of Microsoft's managers -- from Gates's doctor to a high school chum of Gaudette's -- called begging to buy stock at the offering price.

Except for about a dozen people, including Gates's grandmother and his former housekeeper, who wanted small lots for sentimental reasons, Gates turned most of them down. All I'm thinking and dreaming about is selling software, not stock. Rehearsals for public road show dramatized how differently Gates and Gaudette approached the process of going public.

Neukom, Microsoft's in-house attorney, had admonished Gates to say nothing to anybody that deviated public the prospectus or added new information. At Goldman Sachs's New York offices for a February 7 rehearsal, Gates wondered to himself, ''With my mouth taped, what's the point of giving a speech? He became annoyed when one critic commented, ''It's a great first options, but you can put more into it. Gaudette, however, was in his element. He praised and repraised the company's record, studding his talk with cliches and corny jokes.

The road show previewed in Public on February 18, and over stock next ten days played eight cities, including engagements in London and Edinburgh. Halfway through, offering pageant took on an almost festive air. Gates relaxed a bit, having been able to push his products as well as his stock at various ports of call. In London, Eff Martin of Goldman escorted the party to the Royal Observatory at Greenwich, found tickets for the smash musical Les Miserables, and arranged admittance to Annabel's, a popular club.

Gates danced the night away with Ruthann Quindlen, a security analyst for Alex. Every road show meeting attracted a full house, and many big institutional investors indicated they would take as much stock as they could get. By the end of February the Dow Jones industrial average had passed In London, Martin told Gaudette that Goldman's marketing group considered the Microsoft issue very hot.

The underwriters had wanted to come offering market while euphoria from the road show ran high. But the SEC held the starting flag. The SEC had picked all sorts of nits, from how Microsoft accounted for returned merchandise to whether Gates had an employment contract he does not.

Its major concern appeared options be that the underwriters allocate shares widely enough to make the offering truly public and not just a bonanza for a handful of privileged investors. On March 6 Microsoft's lawyers and auditors called the SEC to negotiate changes. Meanwhile, the company persuaded two stockholders to sell an additionalshares. Eff Martin of Goldman, who had flown up to Seattle that morning, had good news.

The ''book'' on Microsoft -- the list of buy orders from institutional investors -- was among the best Goldman had ever seen. Gates asked Martin to leave while he conferred with Shirley and Gaudette. Eric Dobkin, 43, the partner in charge of common stock offerings at Goldman Sachs, felt queasy about Microsoft's counterproposal. For an hour he tussled with Options, using every argument he could muster. Just a few significant defections could lead other investors to think the offering was losing its luster.

Dobkin raised the specter of Sun Microsystems, a maker of high-powered microcomputers for engineers that had gone public three days earlier in initial deal co-managed by Alex. Dobkin warned that the market for software stocks was turning iffy. I keep thinking of all that pent-up demand from individual investors, which you haven't factored in. And I keep thinking we may never see you again, but you go back to the institutional investors all the time.

I don't know whose interests you're trying to serve, but if you're playing both sides of the street, then we've just become adversaries. As negotiations dragged on, Shirley became impatient. Eshelman, the securities lawyer from Shidler McBroom, was waiting in San Francisco to get a price range so he could send an amended prospectus off to the SEC. Finally Gaudette told Dobkin, ''I've listened to your prayers. Now you're repeating yourself, and it's bullshit.

Six big investors in Boston were threatening to ''uncircle'' -- to remove their names from Goldman Sachs's list. Chicago and Baltimore were fraying at the edges -- T. The market had closed flat, worrying Goldman's salesmen.

But their spirits revived the next day as the Dow surged 43 points. Gaudette, now confident that he and Dobkin could agree on a final offering price, flew with Neukom to San Francisco to pick up Martin, and the three boarded a red-eye flight for New York. Sleepless but freshly showered and shaved, Gaudette reached Goldman Sachs's offices at 11 o'clock on Wednesday, March After lunch the two Microsoft officers went to Dobkin's office and patched Shirley and Marquardt into a speakerphone.

The market had risen another 14 points by noon. About half the potential dropouts, including T. Rowe Price, had decided to stay in. The only remaining issue was the underwriting discount, or ''spread'' offering the portion of the price that would go to the underwriters to cover salesmen's commissions, underwriting expenses, and management fees.

Having agreed fairly easily over dollars, the two sides bogged down over pennies. Microsoft had always had a low spread in mind, no more than 6.

That was before negotiators at Sun Microsystems, where Marquardt is a director, wangled 6. Gates wanted Microsoft to get at least as good a deal on its offering. But he had gone to Australia, where he was difficult to reach.

In theory Gaudette lacked authority to go above 6. Dobkin opened initial an oration. He touched on what other Goldman clients had paid, noting that Sun's spread was off the bottom of the charts. Goldman's best offer, Dobkin said, was 6. When they returned, Gaudette declared that Bill Gates had given definite orders: Besides, he argued, Microsoft was a much easier deal to handle than Initial. As to the underwriters' marketing efforts, selling more shares at a higher price was its own reward since it automatically increased the money in their pockets.

The market was turning flat and would close in minutes. Members of the syndicate were clamoring to know whether the deal was done. Stock kept reiterating his arguments. When you've got something to say, send a limo to pick me up. Dobkin returned alone and closed the door.

Gaudette insisted he lacked authority to go higher. Gaudette caught Shirley as he was leaving a Bellevue, Washington, restaurant to buy a car for his daughter as public 16th birthday gift. Though it was above Sun's spread, it was way below what any other personal computer software company had achieved.

David Miller, stock beefy ex-football player who was Goldman's syndicate manager for the offering, thundered down the stairs initial his office bellowing to his assistant, ''Doreen, we have a deal!

Gaudette saved his cheers for the next morning. The commission declared at 9: On the trading floor at Goldman Sachs, Gaudette heard a trader say, ''We're going to shoot the moon and open at 25!

Within minutes Goldman Sachs and Alex. Brown exercised their option to take an extrashares between them.

Gaudette could hardly believe the tumult. Calling Shirley from the floor, he shouted into the phone, ''It's wild! I've never seen anything like it -- every last person here is trading Microsoft and nothing else. The strength of retail demand caught everyone by surprise. By the end of the first day of trading, some 2. The opportunity to take a quick profit was too great for many institutional investors to resist.

Over the next few weeks they sold off roughly half their shares. An estimated one-third of the shares in Microsoft's offering has wound up in the hands of individuals. In the wake of Microsoft's triumph, Gates still fears that being public will hurt the company. No longer able to options stock at bargain prices, he - finds it harder to lure talented programmers and managers aboard.

On the other hand, his greatly enriched executives have kept cool heads. He bought a foot cabin cruiser, options in two cars for fancier models, stock may give in to his initial pleas for an exotic horse.

That's just the kind of attitude Gates stock. Constantly urging initial to ignore the price of Microsoft's stock, he warns that it may become highly volatile. A few weeks after the offering, strolling through the software development area, he noticed a chart of Microsoft's initial price posted on the door to a programmer's office.

From the July 21, Editor's Letter: Taking a company public is usually as private-and erratically emotional-as a love affair. Managers and their underwriters view the federally mandated "quiet period" before and stock the stock sale designed to discourage hucksterism as a signal to maintain a nervous circumspection in the presence of the press. But Microsoft, the Seattle computer maker that is to yuppies what GM is to middle-aged executives, granted "astounding access" over several months before and after its offering, say Uttal.

Chairman William Gates, whom Uttal calls the "Rabid Rabbit" for his high-strung competitiveness, took the writer into his confidence. And ask questions he did. Questions of company officers, offering, lawyers, and major investors. Questions in six cities, from San Francisco to Baltimore, where he followed Gates and his troupe as they spoke to investors and negotiated the deal. Uttal went back to these sources after the successful stock offering, when many felt more at liberty to talk.

Meanwhile, invoking the Freedom of Information Act, reporter David Kirkpatrick got the Offering and Exchange Commission to release its normally private comments on Microsoft's prospectus. Uttal, who joined FORTUNE shortly after earning his Harvard MBA inhas covered electronics since He now has four of them, including an ancient Osborne model and a laptop machine for taking notes at interviews. His favorite stories for FORTUNE have examined subjects as diverse as the office of the future and corporate "culture vultures.

As Uttal says, "I doubt that a story like this has been published before or is likely to offering done again. Fortune Facebook Is Changing Its News Feed Public Again.

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