Monkey Business (21 page)

The company has its lawyers there also. Similar to the underwriters’ counsel’s role, it’s the company counsel’s job to make
sure that any half-truths that go into the prospectus aren’t going to get the company into trouble. Sometimes company counsel
is on the same side of the fence as underwriters’ counsel; more often than not they’re arguing with one another. If there’s
ever going to be trouble, the company and the underwriters both want the other guy to take the fall. That’s usually why their
lawyers end up arguing with each other.

The company’s accountants are there. Their job is to provide a fair and impartial rendering of the company’s financial health.
The prospectus contains a lot of detail on the company’s historical financial performance, and it’s the accountants’ job to
make sure it’s accurate. Before the prospectus gets finalized, the accountants have to provide “comfort” on the numbers. They
usually spend a lot of time arguing with the company about what the right numbers should be, so their provision of professional
comfort is generally accompanied by acute feelings of personal discomfort. At the end of the day, the company can fire the
accountants if it doesn’t like the position they’re taking. This means that the accountants tend to come around to the company’s
point of view if they want
to keep the business. Usually, they want to keep the business.

If there were only one representative from each participating organization at the drafting sessions, things would probably
go pretty smoothly. Five or six people could get together in a room and hammer out the prospectus in a couple of days. The
problem is that each organization sends its own small army. An army girded for war.

The lawyers show up with the managing partner on the account, an associate, and a paralegal. The managing partner’s job is
to argue, the associate’s job is to make a lot of pencil marks on the master draft of the document, and the paralegal’s job
is to make copies and faxes. As junior bankers, whenever we were feeling low, we’d watch the junior lawyers and start feeling
better. They worked just as many hours as we did, they made a lot less money, and their work was even more boring than ours.
Three strikes, they were out.

The bankers show up with a managing director, a vice president, an associate, and, sometimes, an analyst. Having lots of bankers
at the drafting sessions conveys strength and power. The clients are supposed to believe that with such an impressive array
of financial talent, there’s no way the deal can fail. If there is more than one investment bank underwriting the deal, which
there usually is, each of the banks will send its own representatives. Only the lead manager will send the full array of bankers.
The co-managers figure that they’re not getting paid enough to have the whole cast show up. Sometimes the co-managers will
each send only an associate, but usually they will send at least a couple of bankers.

There has to be at least one banker from each underwriter.
There are two reasons for this. First, each underwriter wants to be absolutely positive that their firm’s name is printed
correctly on the prospectus cover. This is a major concern for all associates. The junior banker’s most important job is to
make sure that the firm’s name is spelled and displayed correctly on the prospectus cover and that the colors on the cover
and inside the cover are accurate and vibrant. Second, a co-manager has to send at least one banker to the drafting session
just in case the other underwriters decide that they’re going to try to get that co-manager evicted from the deal. Allowing
a drafting session to pass without at least one banker from your bank being present is more dangerous than letting a hungry
weasel into a nudist farm hot tub.

On the first day of drafting, everybody meets at the company counsel’s office. The company counsel keeps control of the document.
Everybody meets up in a conference room that has a big table in the middle of it. Usually, there are twenty to thirty people
there. Everybody stands around drinking coffee, adjusting themselves, and billing their clients.

As associates, our first order of business on the opening day of drafting was to seek out the associates from the other investment
banks. We’d find them, introduce ourselves, and size each other up. It was like two dogs meeting in the park and sniffing
each others’ asses to determine whether they were compatible. All the associates fell into one of two camps; those who got
it, and those who didn’t. You could look into any of the other associates’ eyes and determine immediately which of the two
species they were a member of. The ones who got it understood the game. They knew that an associate was
little more than a yes-man, and that our role was to be as humble and subservient as a geisha girl. They were our allies,
and we’d commiserate with each other throughout the deal process. The ones who didn’t get it believed that they were hotshots
and deal magicians. They thought they were driving the wagon train when in fact they were being ridden like an inbred pack
mule. They didn’t see themselves for what they were—street punks learning the business. They carried Mont Blanc pens in their
front pockets so that everybody could see them. They had new Coach briefcases and shiny leather shoes. They shook everybody’s
hand in the entire room and told them how glad they were to make their acquaintance. It was embarrassing to watch. In our
minds, they were there to be tormented and, if the right opportunity presented itself, terminated. They were the enemy.

In preparation for the first day of drafting, company counsel usually puts together a rough draft of the prospectus. The rough
draft provides a reference point from which to begin working. It’s easier than beginning work with a blank sheet of paper,
but this rough draft is really rough, like that institutional toilet paper that feels like a sheet of sandpaper in your ass.
The rough cut normally just includes a brief description of the company up front, and then a bunch of section titles in the
back as placeholders. It costs the company a few thousand dollars, and by the time the final draft rolls around not a single
word from the original will remain.

When it comes to drafting, there’s no such thing as pride of authorship. The normal rules of literary law and etiquette do
not apply. This is probably because the rules of literary law that address plagiarism only apply to prose
worth stealing, and there’s never been any text in a prospectus worth stealing. Bankers aren’t known for their vivid imaginations,
so the chances of them breaking any new ground in their descriptions of a company’s business are slim. Furthermore, whatever
mildly compelling prose any banker has managed to create to describe a company’s business has inevitably gotten watered down
by paranoid lawyers. There’s no prime rib in the process; hamburger goes in, horsemeat comes out.

The various sections of any given prospectus are dictated both by tradition and regulatory mandate. The sections may differ
slightly, depending on the nature of a given deal, but there are certain sections that are included in nearly all prospectuses.
What follows here is our guide to prospectuses. For the uninitiated it will hopefully serve as a road map if you ever decide,
against your better judgment, to actually sit down and read one.

Prospectus Summary
—This is always the first section. It’s what the drafting team spends 75 percent of their time working on, and it’s often
the only thing that prospective investors ever read. It’s supposed to give the reader all the key information in two to three
pages. It’s supposed to tell the reader why the company doing the offering is the best, most successful competitor in its
industry, why they’re the ass kickers who take no prisoners. It’s supposed to tell the reader how the company is going to
take over its industry, and then its country, and then the world, so that an investment in the company will eventually represent
pro-rata ownership in world domination. This section
usually contains more bullshit than any other section.

Reversion to the mean dictates that most companies have to be average. There can only be a few standouts in any given industry.
This principle works against the goal of presenting every company engaged in an offering as the industry leader. Since, therefore,
it is impossible to present facts that actually support most companies’ claim to be the standout in their industry, the prospectus
summary generally tries to confuse the readers through obfuscation. Those drafting the prospectus believe that if they can
layer in enough nonsensical prose, readers will become so confused that they’ll be unable to realize how mediocre the company
actually is.

Risk Factors
—This section is a lawyer’s wet dream. It describes all of the things that could go wrong with the company. Years ago, the
bankers, the lawyers, and the company all used to spend a lot of time fighting about what went into this section. The bankers
and the company didn’t want to put too much in here, because they thought that people might get scared and not buy into the
offering. The lawyers, though, were scared shitless and just wanted to cover their asses. The fights raged on and on. Then,
one day, folklore has it, a brilliant young lawyer came up with a most Machiavellian strategy. He decided that if he overloaded
this section with a bunch of irrelevant drivel, people would give up in frustration and neglect to read any of it or, at the
very least, stand a good chance of missing the really important points. The strategy was pure genius. Today, there are maybe
one or two
risk factors that are relevant, really relevant, for any given deal. The rest is window dressing, but there’s so much of this
extraneous window dressing that the relevant risk factors get ignored. The lawyer, the one who invented the strategy, has
been immortalized as a charter member of the Prospectus Drafting Hall of Fame.

Use of Proceeds
—Not too many people pay attention to this section, but they should. A careful reading of this section will tell you where
the hell all the money from the offering is going. If it’s not going into the company coffers to help grow the company, but
instead is going to pay out existing owners and management, then stay away. If owners are cashing out, there’s no reason for
you to be cashing in.

Selected Financial Data
—This section is also known to insiders as “Creative Presentation of the Company’s Financial Performance.” In it, the bankers
and accountants put all their efforts into figuring out a way to make the company look like a real money machine. If a company’s
got good cash flow but no earnings, you’ll see a cash flow line presented in a fat, bold font. If a company’s got neither
cash flow nor earnings, but it’s growing like a weed, then you can bet that there’s going to be a bold line at the bottom
showing year-over-year revenue growth or unit growth or employee growth. The only situation that’s difficult for even the
most talented bankers and accountants to contend with is one where there’s no revenue at all. Even Houdini can’t mask the
vacuum that a revenue line
equal to zero creates. In this situation, the company is effectively fraternizing with the professional beggars on New York’s
subway lines—“Please, I need money right away. It’s not for crack, I swear. Just soup and a sandwich.”

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
—MD&A is the place where dreams are made, and mistakes justified. While the tables in the Selected Financial Data section
can be spun and recrafted to focus attention on and present results in the best possible light, a good huckster needs a real
soapbox to get out the vote. This is where MD&A comes in. In MD&A management gets the opportunity to justify its mistakes
and take credit for its successes. In a painstaking narrative the management team explains just how things got to be the way
they are. Revenues have dropped by 20 percent. Here’s why. Costs are spiraling out of control? There’s a valid explanation,
and here it is.

Business
—This section is an exact replication of the prospectus summary, but with twice as many meaningless adjectives and even more
excruciating detail. If it wasn’t boring enough the first time around, it’ll become so in the Business section.

Management
—This section presents biographies of both the management team and the board of directors. Members
of management and/or the board of directors generally get only two to three sentences each to make themselves seem important,
so they maximize the balderdash per sentence. The Management section also presents the reader with an opportunity to assess
just how inbred the board of directors is. A good way to figure out how likely it is that the directors are sucking money
out of a company is to draw a chart with each director’s name in a box. Read through the Management section, and each time
that you identify a professional or personal connection between two directors, connect their boxes with a line. If you also
happen to know about other relationships between directors, for instance one director is married to another director’s daughter,
or one director is an old college buddy of another director, you can draw a line in there as well. If, upon completion, the
chart looks like a spider web, then hold on to your wallet.

Principal and Selling Stockholders
—This section describes who owns big pieces of the company and, if it’s an equity offering, whether any of them are selling
their stock. If there are relatively few stockholders, each of whom owns a large piece of the company, that’s good because
they’re probably going to be just as pissed off as the minority shareholders if the value of their holdings starts going down
the toilet. It’s good to have a group of people channeling their fear, frustration, and greed to maximize the value of your
investment.

If any of the large holders are selling their shares in the offering, stay away. As junior bankers, when institutional
buyers would ask us why insiders were selling their stock in the offering, we’d volunteer numerous glib responses: