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Well, since I'm the only Fool foolish enough to post in this group I just created, I thought I'd add a little content. This is an article about CNSW that appeared in the February edition of Worth Magazine. While it sounds really awful, I think it actually worked to the advantage of those of us that bought shares on the open market. Furthermore, since the share price has recovered rather steadily, I think it will also work to the company's advantage in the long run since it now has more capital shares in reserve to sell at a higher market valuation.

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FORBES MAGAZINE (FEB.)

The IPO Market Now
2000/02
Burnt Offering

By Greg Knauss

High-tech IPOs are the key to riches these days, right? Not always. Not if your company can't even remember to get a ticker symbol. An insider's view.

The parking lot is supposed to be filled with new cars. Continuus Software went public last year, and its parking lot should now be jammed with Lexuses, Mercedeses, and BMWs. People in the high-tech industry, as if driven by instinct, invariably buy themselves an expensive reward after their employer has its initial public offering, and the quickest way to celebrate a newfound fortune is apparently by blowing a good chunk of it on leather seats and teak highlights. But the tired, dirty automobiles that crowd the parking lot of Continuus's plain, off-white building in Irvine, California, can't be anybody's idea of a reward. And Continuus's stock offering--marred by everything from bad timing to outright ineptitude--can't be anybody's idea of an IPO.

It certainly wasn't mine. I was one of the insiders, a former programmer who had been granted options years ago, and I was poised to ride the high-tech IPO wave--swept along by incessant boom-time hype--directly into the driver's seat of a significantly more comfortable commute.

But things didn't work out that way. The hard truth is that nothing guarantees a high-tech IPO, and as often as they launch a stock through the roof, the fates that rule Wall Street can take another and smash it into the floor. While the business press and mainstream media have been filled with endless, effusive tales of nerds made good these past five years, they're telling only half the tale. The brutal fact is that dozens of new companies debut every week, and they're not all hits. In an age when no wrong seems possible, plenty of wrong actually happens.

And most of it seems to have happened to Continuus.

At the company's headquarters, its 220 employees build, support, and sell complex, enterprise-class configuration-management software. CM is a vital tool for just about anybody who programs a computer, up to and including the leading lights of the New Economy. Reduced to its simplest terms, CM allows companies to track the changes they make to their software, allowing those changes to be cataloged, organized, and generally coped with. Susan Dart, author of the upcoming book Configuration Management: The Missing Link in Web Engineering and a former Continuus vice president, believes the increasing complexity of computer systems-- especially those on the Internet--will reach a crisis point in the near future and create a booming market for CM as a result.

You don't have to be a genius to see the market potential here. If only a fraction of Dart's vision plays out, CM will be huge, the key to maintaining the growth of the entire technology sector. Any company in a business with that kind of potential should be an IPO darling, the belle of the ball--in Dart's words, "the core to any kind of software and Web development." I mean, how can you lose?

Note to self: Never ask a question you don't really want to know the answer to.

Continuus went public in July 1999, offering its stock on the Nasdaq market under the symbol CNSW. It was new, it was high-tech, it was everything the market had been going bonkers over for years.

It was a disaster.

"Continuus Software made an abysmal debut," blithely noted The Online Reporter, a technology-news Web site. "The company sold 2.5 million shares at $8 each to raise $20 million, but no one seemed to care." And no one continued to care. Over the next two months, the price kept falling, losing more than 40 percent of its value by the end of September 1999-the seventh-worst IPO of the third quarter, according to Hoover's Online, a popular financial Web site.

"Investors have so much to choose from in the IPO environment that they can't be bothered with anything but the most attractive deals brought by the most successful banks," says Gordon Anderson, former editor in chief of Hoover's. "It's difficult, if not impossible, to recover from a broken offering."

I never expected to get rich off my stake--1,313 shares, lucky 1313, a massive 0.00006 percent of the company--but neither did I expect to be off by a factor of ten. Over the course of six long months, from the IPO announcement through its aftermath, fantasies about my shiny new "IPO car" shriveled into the bitter reality of "IPO bus fare."

It's important to emphasize that i am not a disinterested observer in this story. In addition to being a Continuus stockholder, I'm also a former employee and someone who had a very stormy relationship with the company. My tenure as a programmer for Continuus--covering almost two years from 1994 to 1996--was marked by frustration, disappointment, and more than a little anger, on both sides.

This history no doubt plays a role in why the people directly responsible for the IPO--Continuus's officers, venture capitalists, directors, and legal counsel--have all chosen not to be interviewed for this article. The only official statement I could get from Continuus or its PR firm regarding the IPO--or any other matter--cited my "conflict of interest" as a former employee and the company's consequent refusal to participate. They wouldn't even send me a standard information kit. Continuus employees, many of them my friends, were reminded that it is a violation of company policy to talk to the press.

Which is unfortunate, because I sure would have liked some answers. I am, after all, still a shareholder.

The first and perhaps most critical mistake continuus made in the IPO process was its decision to go public at all. While the stock market has been willing to climb into bed with just about anything lately, the company's financial history has all the charm of a dead cat: 12 years without a profit. "With a long string of profitless years, the company was probably not destined for greatness in the public markets," says Corey E. Ostman, cofounder of the Alert-IPO, an IPO news service. "Sure, start-up companies with no profits can go public, but companies that have a longer profitless operating history are causes for concern."

The goal at Continuus had always been first to achieve two or three consecutive moneymaking quarters. Unfortunately, those quarters never came. While the consensus of analysts following the company predicted a small profit in 2000 (and third-quarter results for 1999 edged slightly into the black), the sudden decision should have engendered some skepticism. If profitability was right around the corner, why the rush to go public?

"Most companies go public when they do because they need the money," says Ostman. The last round of venture capital--a puny $2.6 million-had come during the second quarter of 1997, over a year and a half before the IPO, and at the rate that cash was draining out of the building, the choice had likely come down to either going public or going out of business. After a dozen years of frustration, the firms that provided the venture capital may have lost their patience. At least that's what some former employees thought. Says one programmer, "I imagine the venture capitalists had decided that enough was enough, and they wanted some return on their investments."

Of course, you had to be pretty jaded to think of mid-1999 as a bad time for a company to go public. An average of 12 stocks were debuting each week, and most high-tech issues were leaving the atmosphere immediately after launch and settling into orbit around the moon. If Net2Phone--an unprofitable provider of Internet telephony that premiered the same week as Continuus--could go from $15 a share to $85 over the course of a month, what could keep CNSW (less unprofitable!) from doing the same?

Reminder to self: Never ask a question you don't really want to know the answer to.

It's an unspoken reality in the computer industry that most companies looking to IPO are ridiculously dilute. Short of cash and desperate to attract talent, boards hand out stock options like candy on Halloween, offering anybody from the receptionist to the CEO a potential payoff down the road in exchange for a Bit o' Honey today.

And in the run-up to the IPO, Continuus was no different. Of the options I got when hired, 1,313 had vested by the time I left, allowing me to convert them to stock. Venture capitalists, programmers, vice presidents, secretaries, people who wandered in off the street, all had their own little chunks of the company. According to the minutes of one board meeting I recall seeing, even the headhunter who had turned over the rock to find the CEO was offered thousands of options, apparently in lieu of beaver pelts.

All this largesse ultimately creates a problem. These shares, added up and divided by the estimated total worth of the company, leave each individual share worth..."squat" is the technical term, I believe--or just about three bucks a pop. Not nearly enough for an IPO. Nasdaq won't even let you in the door if you're going to price your shares at less than five dollars. But perhaps more important--and this is from an amendment to the company's own certificate of incorporation--"many brokerage houses and institutional investors have internal policies and practices that either prohibit them from investing in low-priced stocks or tend to discourage individual brokers from recommending low-priced stocks to their customers." So how do you raise the price of each share? By cutting the number of shares-- a reverse split.

Fundamentally, a reverse split is little more than a crude accounting trick designed to make an offering price look bigger than it actually is, like the feathers on an angry chicken. A stockholder vote called three months before the IPO--in which I had 0.00006 percent of a say--reduced every 2.65 old shares I held to one shiny new share. Poof.

The impact such a move has on pre-public shareholders--especially those of us participating in our first IPO--is immeasurable, certainly out of proportion to what it actually means financially. If you've been valuing your post-IPO paper fortune at $10 a share (which just about everybody does), a reverse split deals you a devastating psychological loss even before the stock can make it out on the floor.

Reports of a poorly conceived road show don't help, either. During the weeks preceding an offering, a company's management team pays a personal visit to big, institutional investors around the country in an attempt to sell them on the upcoming IPO. The people who run these investment houses have the power to make or break public offerings, almost at a whim, simply by voting with their dollars. The dog-and-pony show given to them by company officers is the last, best chance to hit a home run.

Or to strike out. The road-show presentation, based on external signs as well as the word that started bouncing around Continuus headquarters, was ill conceived from the beginning, a disaster of missed opportunities. Continuus had skipped the pony entirely and put together a dog.

Continuus--like every other configuration-management vendor--has always had a problem explaining what it actually does. CM is a complex, involved subject, not easily digested in the course of a few hours. Over the years, the company has tried several catchphrases as explanatory shorthand--"Configuration Management for Team Engineering," "Software for the Progressive Developer"--but none has fit quite right. In preparing for the road show, the managers were left with this intractable problem: how to get across what they do. Unfortunately, the answer they came up with owes more to trendy buzzwords than to software. Does "E-asset management" really clear anything up?

Call it the curse of the E-bandwagon. Affixing an "E" to some mundane, real-world noun gives it the instant, magical sheen of the Internet. Buzzwords are an apparent enthusiasm of Continuus CEO John Wark. (He packed the third-quarter analysts' conference call with Dilbertisms like "mission-critical E-business infrastructure solutions.") "In their IPO-registration statement," says Alert-IPO's Ostman, "they were positioning themselves as an Internet company." But Continuus isn't an Internet company, or at least not enough of one to impress veteran investors, and those buzzwords don't come close to covering the difference. Continuus was founded in its current incarnation in 1987 and has produced fundamentally the same product, using fundamentally the same business model, for its entire lifetime. The company does offer a browser-based version of its main application, but that particular program was only a year old at the time of the IPO and seems to have made up no more than a fraction of total sales.

But even an unsuccessful road show--piled on top of a poorly justified filing and a nasty reverse split--isn't enough to prevent a successful IPO. Given the rickety state of most start-ups, you can make all the missteps in the world, and each and every one of them will be happily forgotten if the first day of trading--the actual IPO--works the way it's supposed to.

Which, it turns out, can be a big if.

The night before the offering date, July 29, 1999, lead underwriter US Bancorp Piper Jaffray and Continuus decided to cut the number of shares being offered by 20 percent, from 3.1 million to 2.5 million. Such a move is "typically the result of not enough interest," says Mark Verbeck, a senior analyst at Piper Jaffray. In fact, it's capitalism at its most efficient and brutal: If you think there's going to be a demand for your product, you make more of it. If not, you make less, just to keep the price from falling through the floor. A cut offering is a cold, hard sign of investor indifference and an underwriter's lack of confidence.

Of course, the number of shares offered makes little difference if even the investors who are interested can't find them. In perhaps the biggest blunder of the whole IPO--and certainly the most careless--the opening bell rang on Continuus's first day of trading...and the company didn't have a ticker symbol. I didn't even know you could have an IPO without a symbol. I mean, come on.

The thought leaves me flabbergasted to this day. How do you get all the way to a public offering and not manage to bring along a ticker symbol? It goes like this: A company files an S-1 with the Securities and Exchange Commission, stating its intent to offer shares and at what price. Once the form is accepted, the SEC takes steps to certify the order as "effective." The registration of a stock symbol, however, is a separate matter, involving the company, its lawyers, and the exchange. Nasdaq used to require registrationsfar ahead of time, but the rules now let the symbol be claimed as late as 24 hours before a stock's premiere.

While nobody at Continuus's law firm, Cooley Godward, would agree to be interviewed, one of Piper Jaffray's lawyers explained what happened: Someone forgot to make a phone call. "One of the associates on the team was under the impression that he had received the final clearance from Nasdaq," says Michael Danaher of Wilson Sonsini Goodrich & Rosati. "In fact, there was one more step to go, and Nasdaq had to be alerted the day before that we want to start trading tomorrow. Through a miscommunication--sometimes things slip between the cracks--that didn't happen. It's a matter of a two-minute phone call that got missed."

And so, ready to start trading but minus a symbol, Continuus stepped out on the dance floor of the stock market with a "Hi! My Name Is..." badge that read TEMPA--the stopgap automatically assigned by Nasdaq in the absence of the real thing. Somehow, TEMPA just doesn't have that zippy, high-tech ring to it.

Not that things couldn't get worse, of course. Somehow, traders didn't immediately learn about the mistake. "Our software that monitors the exchanges picked up all the other IPOs [for the day]," recalls Ostman, "and we figured CNSW would start trading at any moment. We called the underwriter to confirm. They said it would start trading very shortly. We waited another hour. We called the underwriter just to check, and they said, 'Oh, that's already trading.' We scrambled around to check our multiple quote feeds, but nobody had any data for CNSW. We called back, and they said it was trading under TEMPA.

"The proper thing to do would have been to issue a press release well before the IPO would begin trading, letting the investment community know about the problem. It's their job to let folks know about the IPO, and it would seem to me that changing the symbol is of such immediate concern that they'd tell you immediately."

If the offering to this point had been a comedy of errors, this turned it into tragedy. "IPOs these days are like movies," says Anderson. "The first weekend is a lot of what matters. If you have a mangled IPO from a technical perspective and people can't find the ticker symbol, there are just too many other stocks to worry about. You get lost in the crowd."

And in fact, the temporary symbol rendered Continuus almost invisible. While a lot of high-tech stocks explode into the market, Continuus dithered in the confusion, reaching its opening-day high of $8.06 a share during its first few hours of life before dipping to $6.25. The company closed its first day as a public entity at eight dollars, matching the lowball opening price.

No matter the merits of the company or its software, no matter how hard or long its employees worked, no matter how much effort the management or the underwriters or the venture capitalists put into the IPO...nobody cared. Continuus threw a party--cake, banners, the works--and the market had to stay home to wash its hair.

Of course, the IPO was only the beginning of continuus's public life. A month after the offering, Piper Jaffray exchanged half a million unsold shares to Continuus for 5,000 shares of preferred stock. A couple of weeks later, Continuus retired a million shares as unwanted. For the first three months of trading, daily volume flat-lined in the range of tens of thousands of shares, even dropping into four digits a few times. Some days, Continuus's stock changed hands on only a few dozen occasions. The price bottomed out on September 28, at just a smidgen over four--half off the initial price.

But in early November 1999, the price of Continuus zoomed. Over the course of 72 hours, it went from a dismal $5 to a dizzying $11.75--a 135 percent increase. Volume surged, from 50,000 shares on November 1 to 3.7 million on November 3. The Yahoo discussion board was deluged with messages, with the number of posts in November 1999 five times greater than in the previous three months combined. Influential momentum trader "Tokyo Joe" Park added fuel to the fire--and exposure to the stock-by including CNSW in the "Current Alerts" section of his Web site. Suddenly, unexpectedly, inexplicably, Continuus was back.

CEO Wark credited the reversal of fortune to a "delayed reaction to a strong third quarter." While the company did post an unexpected four-cent-a-share profit a week prior, such sluggishness hardly jibes with anybody's theory of market efficiency. Whatever the reason, in less than a week the stock was back from the dead, rescued from haunting the bottom of the Nasdaq by luck or fate or some strategic master plan that has yet to be made public.

Which only leaves the cynic in me wondering where CNSW might be today if the offering had been done right. What damage did all the bungling do? How much did each missed opportunity cost?

Oh, yeah: Never ask a question you don't really want to know the answer to.

As for me, i'm going to hang on to my Continuus stock. Even at the higher price--after subtracting the cost of the options, various commissions, and the inevitable taxes--I'd end up only with about $3,000 for my trouble. The geek fantasy of a new car--leather and teak and all--has been reduced to a used Nova.

When I worked at Continuus, I ate lunch almost every day at a small business-park deli in the building next door. You could get a bland but edible sandwich, a bag of chips, and a pour-it-yourself soda, all for about six bucks. If you divide $3,000 by the number of days I worked at the company, the IPO added about nine dollars daily to my paycheck--enough to pay for those hundreds of roast-beef sandwiches.

For everything that went wrong with the IPO, for all the mistakes made and hopes dashed, for every bad decision and selfish folly, never let it be said that there's no such thing as a free lunch.

Heck, I could have sprung for a cookie.

Greg Knauss is now the vice president of research and development for a small software company. He drives a 1993 Ford Thunderbird that has 120,000 miles on it and a "check engine" light that keeps coming on.
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