As we adjust to having turned the clocks ahead yesterday, let’s take a look back at Microsoft’s initial public stock offering 30 years ago. On the public company’s 25th anniversary, I put together the post you’ll see below. The story hasn’t changed.
It's Thursday, March 13, 1986: Microsoft, founded more than a decade earlier and already a powerhouse in the world of personal computer software, executes an initial public stock offering that will raise $61 million for the company and leave 30-year-old co-founder Bill Gates unfathomably wealthy.
If you had the good fortune to have bought 100 shares at the $21 offering price that day and sat on the investment for 25 years, it would have mushroomed into 28,800 shares over the course of nine stock splits and be worth about three quarters of a million dollars today (Editor’s note: Again, that was as of 2011).
That's the good news. Here's the disheartening caveat: Had you instead sold your stash on Dec. 1, 1999, when Microsoft's stock price reached its peak, you would have reaped $1.4 million.
You have to believe someone did ... and tells that story every day.
Speaking of good fortune, Fortune magazine was granted inside access to Gates, his executive and legal teams, and their Wall Street partners in the months leading up to the IPO. That arrangement resulted in a terrific fly-on-the-wall story published four months later. (For some reason the version on Fortune's site has been stripped clean of paragraph indentations, which makes it a challenge to read; here's one of the many .pdf versions floating around.)
A few highlights gleaned from that story and other online resources:
Gates was not at all anxious to go public, but Microsoft was bumping up against federal regulations governing the number of private stockholders a company can have before being required to register with the SEC (see Facebook, 2011).
A quote from Gates:
''The whole (IPO) process looked like a pain, and an ongoing pain once you're public. People get confused because the stock price doesn't reflect your financial performance. And to have a stock trader call up the chief executive and ask him questions is uneconomic -- the ball bearings shouldn't be asking the driver about the grease.''
Crafting the prospectus was a labor of dental surgery, as the driving goal became guarding against future litigation that might be fueled by even the slightest hint that Microsoft was hyping its future prospects. Look which current CEO pops up as the voice of doom and gloom in a description of one meeting with the Wall Streeters:
For ten hours Gates, (Microsoft president and COO Jon) Shirley, and other managers exhaustively described their parts of the business and fielded questions. Surprisingly, the Microsoft crew tended to be more conservative and pessimistic than the interrogators. Steven A. Ballmer, 30, a vice president sometimes described as Gates's alter ego, came up with so many scenarios for Microsoft's demise that one banker cracked: ''I'd hate to hear you on a bad day.''
If you'd like to read what they finally came up with, you can read the prospectus here (.pdf).
More Gates cautiousness was on display as the parties strategized over how to price the initial stock offering.
By late January only one major item remained undecided -- a price range for the stock. The bull market that began in September had kept roaring ahead, pushing up P/E multiples for other software companies. The underwriters suggested a price range of $17 to $20 a share. Gates insisted on, and got, $16 to $19. His argument was ultraconservative: $16 would guarantee that the underwriters would not have to go even lower to sell the shares, while a price of $20 would push Microsoft's market value above half-a-billion dollars, which he thought uncomfortably high. ''That was unusual,'' says Christopher P. Forester, head of Goldman Sach's high-technology finance group. ''Few companies fight for a lower range than the underwriter recommends.''
They would eventually settle on $21.
The day before Microsoft's big event, Oracle went public with an offering of 2.1 million shares priced at $15 and that stock opened at $19.25, which was taken as a positive sign within the Microsoft camp.
And here's how the Fortune story described the opening bell:
On the trading floor at Goldman Sachs, (Microsoft CFO Frank) Gaudette heard a trader say, ''We're going to shoot the moon and open at 25!'' At 9:35 Microsoft's stock traded publicly on the over-the-counter market for the first time at $25.75. Within minutes Goldman Sachs and Alex. Brown exercised their option to take an extra 300,000 shares between them.
Gaudette could hardly believe the tumult. Calling Shirley from the floor, he shouted into the phone, ''It's wild! I've never seen anything like it -- every last person here is trading Microsoft and nothing else.''
The strength of retail demand caught everyone by surprise. By the end of the first day of trading, some 2.5 million shares had changed hands, and the price of Microsoft's stock stood at $27.75. The opportunity to take a quick profit was too great for many institutional investors to resist. Over the next few weeks they sold off roughly half their shares.
Gates earned a mere $1.6 million for shares he sold that day, but his remaining 45% stake in the company was worth $350 million, instantly making him one of the nation's 100 wealthiest individuals.
Gates splurged by paying off his $150,000 home mortgage.
Today, of course, you can find that much money in the man's seat cushions.
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