A Journey Into the Secret Heart of Capitalism
Washington Post Staff Writer
Sunday, August 9, 1998; Page A1 NEW YORK "If you guys are so great, how come no one has acquired you yet?"
Late on a June night at Giovanni restaurant on West 55th Street, the sour-faced manager of a large investment fund was grilling Michael Saylor, an eager young chief executive, over a plate of sea bass.
Saylor, 33, had been waiting 10 years for a meeting like this, since the day he started his software firm, Microstrategy Inc., and built it into one of the most closely watched technology firms in the Washington area. He had no intention of being bought out, he told the fund manager; in fact, he planned to lead his company until it made history, which he was certain it would do.
"We're not just entrepreneurs, we're industrialists," he said in a high, slightly evangelical voice.
Now, however, Saylor needed to raise cash and was making an initial public offering (IPO), which meant he would allow outside investors to buy Microstrategy shares for the first time. But before he could debut on Wall Street, Saylor had to pitch and defend his enterprise to a procession of the nation's most rigorous money masters.
The "roadshow" that precedes an IPO is a peculiar ritual known to few beyond the most rarefied circles of U.S. capitalism. In 11 working days, ricocheting across the nation in a leased corporate jet, Saylor would hold 70 meetings in 11 cities, pushing the Micro strategy "story" to managers at financial institutions that controlled, in sum, about $2.5 trillion in investors' assets.
This was one man's foray into the opulent domain where vast portions of American wealth are germinated. So far this year, CEOs from about 250 other about-to-be public U.S. companies have gone through this highly secretive rite of passage. The roadshow is a roving, insular process given to its own traditions and governed by entrenched rules.
That's because there's actually very little that is public about an initial public offering. Few individual investors are allowed the privilege of purchasing shares at the IPO price, which often climbs precipitously in the first hours of trading. Only a select group of preferred broker clients, large money managers and company friends are invited to take part.
But Saylor viewed his journey as an industrial milestone, something to be chronicled. He granted The Washington Post rare access to parts of the roadshow, even though many investors on his schedule did not. Those who allowed The Post to attend their meetings did so on the condition that their firms, funds and money managers not be named.
"What they ask of a company is their art," said Scott Ryles, the lead high-tech official at Merrill Lynch & Co., the New York investment house that managed, or "underwrote," the Microstrategy IPO. "These are people who are used to a private process."
This distressed Saylor. His roadshow, he believed, would be a demonstration of anthropological importance and a test of personal mettle, something that would define Microstrategy at its most critical stage of development.
If he performed well, Saylor stood to become preposterously rich on June 11, the day the stock would start trading on the Nasdaq Stock Market. Likewise, many of Micro strategy's 780 employees, all of whom owned company stock, could become paper millionaires. And Microstrategy, by selling 4.6 million shares, could raise over $55 million to pursue its grandest aspirations.
But if the master investors sensed weakness in the Microstrategy "story," the deal could crater before its stock even opened. And Saylor would be left just another entrepreneur humbled by Wall Street's gatekeepers, such as the one sitting across the table pelting him with questions.
Like Saylor, the fund manager was in his thirties and an MIT graduate. They had met once before, and they had friends in common and might have been friends themselves in a different setting.
But this was no night for friendship. It was a night to ask why Microstrategy's financial projections stretched three to five years into the future, instead of just two. "Give me something I can touch and feel," the fund manager said. "Five years? Who the [expletive] knows?"
The fund manager controlled $64 million of software stocks and clearly enjoyed flaunting his kingmaker's cachet. In a sinusy voice, he spewed profanities, denigrated other software executives and relentlessly name-dropped his big-money pals.
He had little use for Saylor's well-honed "we're making history" pitch, in which the CEO proclaims that his software will one day "purge ignorance from the planet." Saylor is known for long and lofty testimonials on how these products, now largely confined to business applications, will someday deliver crucial information (say, the mortality rate at a hospital) to consumers (say, someone about to have heart surgery).
"We're birthing an industry here," he often says.
Hearing this, the fund manager twitched his nostrils as if he smelled something fetid. The boyish-looking Saylor seemed to cringe slightly. "I worry that companies that are so vision-rich can be execution-poor," the fund manager said.
And why, he wanted to know, had it taken Microstrategy so long to issue public stock? "You don't want someone who's futzing around a long time," he said, slathering butter on a slice of brick-oven bread. "It could be the sign of a [timid] CEO."
And, by the way, "who's watching the store in Virginia while you're [bleeping] around here?"
Saylor sat rigidly and answered each question with disarming specificity. As the three-hour dinner concluded, and a Merrill Lynch banker paid the $350 tab, Saylor earnestly asked for the fund manager's support.
The fund manager assured Saylor he would take a long look at Micro strategy, which he referred to as "this piece of merchandise."
Given the tenor of the conversation, Saylor said he was relieved when the last word turned out to be "merchandise."
Roadshows almost never start in New York. Investment bankers prefer that company executives first hone their pitches in less influential financial centers such as Denver and Milwaukee or, better yet, in Europe before they dance on Broadway. Successful offerings depend largely on momentum, and a bad start in New York can cripple a roadshow before it begins.
But Saylor had a scheduling conflict that mandated he begin in New York the Thursday after Memorial Day. By any measure, he started fast.
At one of his first meetings, for a group at Bear Stearns Asset Management, a fund manager stood up after 20 minutes, wrote "10%" on a Micro strategy prospectus and walked out. This was her ultimate endorsement "10%" meant she wanted to purchase 10 percent of the shares Microstrategy would offer.
Later that day, Saylor pitched to a fund manager at J. & W. Seligman & Co., a New York investment house known for making astute technology picks. At the end of that meeting, the fund manager shook Saylor's hand, congratulated him and requested 10 percent.
Saylor was accompanied to the meetings by Mark Lynch, Micro strategy's chief financial officer, as well as a small group of Merrill Lynch investment bankers and stock analysts. While Saylor and Lynch wooed investors, the bankers monitored the "book," or log of orders, coming in from big investors to Merrill Lynch headquarters. This was a sure-fire way to determine how Saylor was playing on the road.
By the end of the first day, investors had put in orders for 1 million shares, more than a fifth of the total being offered. The trick to building a hot deal is to collect as many orders as possible, which allows a company to price its shares higher at the end of the roadshow.
Kansas City, Milwaukee and Chicago went smoothly. Minneapolis, on Day 4, did not. Saylor met with a large-fund manager, another fellow MIT graduate. Both wore class rings. But any old-school spirit dissolved when the man complained that the Microstrategy prospectus weighed too much. "He did everything humanly possible to try to tick me off," Saylor said later.
Saylor is prone to getting ticked off but can exercise military self-control when necessary. The son of an Air Force chief master sergeant, he attended MIT on a ROTC scholarship and dreamed of becoming a pilot until a heart murmur grounded him and sent him into the business world. Since starting Microstrategy with a fraternity brother in 1989, Saylor has made the company his steady fixation, working 70-hour weeks and spending most weekends at the office in Vienna, Va. He owns a modest town house close by that went unfurnished for years.
Saylor idolizes "institution builders" Caesar, Churchill and Bill Gates are heroes and is used to shaping Microstrategy to its smallest details. His executive style new employees spend six weeks at a company "boot camp" bears the markings of his military background, and Saylor is accustomed to being the one giving orders.
But going public made Saylor instantly accountable to new constituencies, such as the badgering fund manager in Minneapolis. He lampooned Saylor for structuring the deal so that he would retain overwhelming control of the company after the IPO. There would be two tiers of owners: Class A shareholders, who would receive one vote for every share they own, and Class B shareholders, comprising Microstrategy's 11 founding executives and employees, who would receive 10 votes per share owned. Of these, Saylor owned a staggering 22.5 million shares, or 73.1 percent of the company.
Saylor said that by retaining this control, he would not "dilute the vision" of his company. But the Minneapolis fund manager called this imbalance "unconscionable."
In a limousine after the meeting, Merrill Lynch associate Mark Hanson told Saylor not to worry, that this fund manager had a reputation for beating up his supplicants. Mark Lynch was irritated.
"Why weren't we warned?" Lynch asked. "It would have been nice to learn this before we went in." Hanson apologized.
As it turned out, the Minneapolis money manager placed a large order for Microstrategy shares.
"Why can't we do it anyway?" Saylor demanded to know, chewing furiously on a turkey sandwich in the back of a limousine inching across Manhattan.
It was Day 5 of the roadshow, and Saylor, back in New York, had just told Merrill Lynch Vice President Steve Pili that he wished to set aside about 400,000 of the IPO shares to sell to friends and family.
This is a common CEO prerogative, but Microstrategy was late sending Merrill Lynch the paperwork. With the deadline looming and friends widely scattered, it would entail sending 1,200 special forms by overnight mail in the next 24 hours.
Pili, 32, shook his head, and Saylor glared at him from an opposing seat. The traffic snarled on Broadway and the limo stopped. The driver discreetly closed the divider window.
"I don't care if we have to delay the offering," Saylor said, wiping a large chunk of avocado from his chin. "I didn't wait 10 years so that I could screw my friends."
Both men were silent for the remainder of the ride. When the limo arrived at the next investor meeting, Pili snapped open his cell phone and called the Merrill Lynch home office. He authorized the clerical overtime necessary for a massive overnight mailing.
Saylor had eight meetings scheduled in Boston, starting Thursday night, Day 6. Some of the biggest mutual fund firms are based there, notably Fidelity Investments, the largest in the world. Boston fund managers are known as being sophisticated, clubby and well aware of their influence.
Reviews from Boston always leak to Manhattan. With four trading days before the scheduled opening, Saylor viewed Boston as his biggest test. "No one wants to bet against what Boston says on a deal," Saylor said. "If they go sour on you, the whole thing can unravel."
A lobster dinner Thursday night with Putnam Investment Management Inc. went well. Fidelity, Saylor said, was much easier than expected the next day. "Usually you have four or five guys at Fidelity who just kill you," Lynch said.
"Eight slam-dunks," Saylor proclaimed of his Boston tour.
"This was the turning point," Lynch added.
By Monday, Day 8, orders were flying into Merrill Lynch and the book was filling up. Boston bought the story and, as expected, talked to New York.
Saylor, however, learned of a potentially devastating situation later. A group of disgruntled bankers left out of the IPO had started bad-mouthing the company and spreading rumors of a weak deal. Negative quotes about Microstrategy appeared anonymously in a British trade magazine.
One of Boston's large institutions heard the rumors and pulled an order of 90,000 shares. The danger was that a chain reaction would ensue in Boston and, eventually, New York. "When there's even a whiff of blood, you can get eaten alive," Saylor said.
The hemorrhage never happened. The book held and grew. Investors from Europe, where Saylor did not even visit, put in orders for 10 million shares. Saylor cruised through two days of meetings in the western United States. At one point, he postponed a meeting with investors in Houston and instructed the private jet pilot to detour to Denver in mid-flight. He met the Houston group by conference call the next day, before heading on to San Diego and Los Angeles.
With 24 hours to the final pricing meeting, the deal was clearly hot.
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