The IPO Process

Preparation for the historic SpaceX IPO. The process, what we know, and what to expect.

On May 6, 1991 I walked into the Hyatt Regency Hotel, in Baltimore’s Inner Harbor to attend Alex Brown’s 16th annual healthcare conference. It felt like entering enemy territory. I was a first year Associate at JP Morgan, I had completed my two years as an analyst in 1990, I’d performed well enough to be promoted and had been assigned to the healthcare banking group. Alex Brown and Sons was the oldest Investment Bank in the country; they were founded in 1800 and led the first IPO in history in 1808. By 1991 they were one of 4 boutiques that dominated the emerging technology IPO space along with Robertson Stephens, Hambrecht & Quist, and Montgomery. In one 10 day stretch in 1986 they led the IPOs for Sun Microsystems, Oracle, and Microsoft, followed by their own IPO. I was there because 6 weeks earlier a deal I had worked on had closed; the IPO of American Sterilizer Company, or “Amsco” (now known as Steris) and the management team was presenting on the final day of the conference on May 9th.

The atmosphere was electric. There were over 1,000 portfolio managers in attendance, along with representatives of various corporate services firms whose clients and prospective clients were there - representatives from accounting, consulting, IR, research firms - all circulating and selling. The conference was broken into different “tracks” or presentation schedules, each with their own dedicated room with a stage for the presenters and hundreds of seats for the attendees. There was a track for Biotech, a track for Services and a track for Medical Devices. I sat down in the room where the Medical Devices track was held. The undisputed star of the show was Jonathan Osgood, Alex Brown’s Medical Devices analyst. He was in his early 40s at the time, charismatic and well spoken. He introduced every presenting company, added a few minutes of his own observations and handled the Q&A after the management presentation. When not on stage he was organizing break out meetings or one on ones with key buy side clients and the companies. Always communicating, introducing, promoting. Osgood, and the conference, was why Alex Brown was on the cover of the IPO. The deal was relatively small even for those days, $62.7mm of primary was issued and sold. There had been a marketing effort to raise the proceeds - a two week roadshow - but this final stage of the IPO process was the most important, because now the buy side as a whole was being introduced to the company, and whether long term buyers were attracted to the name or not meant the difference between a successful IPO and a failure as measured by the intermediate term performance of the stock. This is why there are 23 banks on the cover of the SpaceX IPO.

When I watched Amsco complete their presentation and the conference itself wrap up it was the end of a long, difficult but rewarding deal experience for me. It was the first IPO I worked on, and I had learned a lot. It was particularly challenging because there was no one at JP Morgan who could teach me the IPO process, not a single person had worked on an IPO before. The reason for that is that in 1933 the Glass Steagall Act separated the business of taking deposits and lending from the business of underwriting securities and Morgan Stanley separated from JP Morgan. JP Morgan had been lobbying the Fed and the SEC to make an exception for them to resume underwriting for many years and in late 1990 they were granted that exception with a number of restrictions. Yours truly was the Associate on the first equity underwriting JP Morgan had participated in in 58 years. At the time I didn’t perceive the historical significance. When Glass Steagall was finally repealed several years later the other commercial banks went on a buying spree and each of the four boutiques were acquired. And eventually the Investment Banks got into the lending business. A new phase of banking had begun - the “Universal Bank.” But JP Morgan built its equity business organically with internal resources, and over the ensuing years I was asked to teach other Associates the IPO process. Today I am going to teach it to you at a high level, so that you can understand and interpret the fluctuations in the SpaceX deal, when and what communication can be used to promote the transaction and the cycles of supply and demand for the new listing.

There are four stages of an IPO:

-The selection of the underwriters, or the “bake off”

-The drafting of the S1, including due diligence, confirmation of audits, and other SEC mandated disclosures

-The marketing phase - road show, pricing and closing of the deal

-The post IPO trading phase - stabilization, promotion, expansion of ownership, overhang of selling shareholders, expiration of lock ups, inclusion in indices and maturation of the stock.

Space X is in between phase 2 and phase 3. I am going to describe the four phases on their own, as well as make observations about what I see from SpaceX which is noteworthy or different - we can start right off with the fact Elon Musk agreed to a 12 month lockup for his shares and that the S&P 500 and Nasdaq 100 have already announced exceptions to their normal processes to include SPCX in their indices 6 months after they start trading. Then in a later article I will give my thoughts once I get through the 400 page S1.

Phase 1 -The following are the key criteria for Issuers to choose their Lead Managers and Co-Lead Managers, and my observations about why GS and MS are lead left and right: