Executives at Neopost, one of the world's biggest makers of postage meters and document handling equipment, were starting to feel that their investor roadshows might not have been as successful as they had expected when, in February 1999, the demand for its stock at the eve of the proposed IPO roughly corresponded to the size of the offering.
This indicated a distinct possibility that the stock price might plummet during the first day of trading, undermining investor confidence from the outset. This would hardly be an auspicious start for the first company to undergo a leveraged buyout (LBO) to ever attempt floating on Paris's blue chip premier marché.
As INSEAD visiting research fellow Oliver Gottschalg, under the supervision of the Shell Fellow in business and the environment, Maurizio Zollo, explains, this patent lack of confidence left the Neopost board with several options, all of them fraught with considerable risk.
Should its owners, BCPartners, scrap the IPO and look for an alternative buyer? Should they simply delay the launch until the overall market climate started to look more positive? Would it be best to reduce the share price, or the volume of shares offered? Or should they simply proceed as planned, and hope for the best?
The case illustrates the sometimes precarious evolution of a spin-off operation. Neopost was created when technology giant Alcatel divested its mailroom division in the early 90s. A French private equity firm became Neopost's majority shareholder via an LBO in 1992, but sought to exit their investment four years later. The firm's #2 shareholders, European buyout specialist BCPartners, then gained ownership through a second leveraged buyout in 1997.
But conditions for Neopost were unusual. It was in an oligopolistic industry, meaning that anti-trust legislation forbade larger competitors from taking outright control. Within France, none of the smaller players were thought to have enough funds to engineer a takeover.
Moreover, at the time it was felt very unlikely that buyers from outside the industry would be interested. Neopost's business model was also quite unorthodox, making its presentation to potential investors a learning experience for all involved.
Gottschalg describes the highly ambitious exit strategy BCPartners hoped to engineer, which would have allowed them to divest a majority stake in less than half of the originally intended holding period. The case offers insight into the particular pressures associated with IPOs.
Substantial first-day returns are typically all but demanded, with investors often expected to cash out their shares almost as quickly. This poses obvious risks for the issuing company.
Timing is also critical. It became clear in the days leading up to Neopost's IPO that the bookbuilding process did not reflect any great share of confidence on the part of investors. But delaying the launch could also be dicey: trying to convince suitors that "things were different" through a second IPO road show might prove next to impossible. And with markets having being exceptionally volatile of late, there were fears that an already weak investor climate could worsen.
The "A" case closes with Neopost's board of directors and IPO team considering how best to try to further the interests of their principal constituents. BCPartners needed to keep the interests of investors in its LBO funds at the forefront.
The investment bank underwriting the IPO had its considerable reputation to worry about if the initial offer went sour. And the company's top management team was concerned about the motivation of its employees who had worked hard towards the IPO goal in case the IPO plan was abandoned.
The "B" case describes the risky and difficult compromise that was reached in light of the unsatisfactory initial response. With Neopost's owners willing to make major concessions and despite the stock's initial struggles, the strategy proved a success.