Just a month ago, Facebook (FB) was the ''poster child" for IPO reform. Its public debacle triggered countless lawsuits, Congressional probes and regulatory inquiries, and cast a cloud of doubt over Morgan Stanley (MS) - who brokered the deal, and the Nasdaq exchange (NDAQ) that botched an orderly open. It seems the only good thing being said about the Facebook IPO was that it just might mark a turning point for a deeply flawed system. I hate to break it you, but it's not happening.
New federal filings show that Autotrader.com is looking to become the first internet company to retest the waters of the IPO market since Facebook's May 18th debut. There's only one problem; six weeks ago AutoTrader insiders borrowed $400 million in order to turn around and pay themselves a one-time dividend in the same amount. I call it, cashing in before you cash out, while my co-host Jeff Macke is more blunt.
"There's nothing illegal about this, it's just kind of scummy," he says in the attached video. "They've made it a lesser company and immediately after doing so, they're pitching it on to the public."
It was Dan Primack's article, Dividends For Us, Not For You in Fortune Magazine that first pointed this out and highlighted the nearly 50% increase in AutoTrader's long-term debt as well as the payout to pre-IPO shareholders including Cox Enterprises and two private equity investors, Providence Equity Partners and Kleiner, Perkins.
For the record, a phone call and email seeking comment from AutoTrader about its dubious dividend have not yet been returned.** (Update: AutoTrader spokesman Lou Laste left me a message saying the company is unable to comment since it is in the mandatory ''quiet period'' that precedes all IPO's, but that its S-1 filing is a full disclosure of its financial condition.)
But really, what more do they need to say? Their actions are all there in black and white within a 200-page document, for all to see.
"The lesson here being, don't buy things from people who know a lot more than you and are greedy. You're going to get stuck," Macke opines, calling the timing of the stunt audacious. To me, it's just mind boggling that a profitable, growing business with a solid track record of growth and success, couldn't just go to market on the merits of the company but felt the need to hedge their own investment and pad their own returns.
There was a time not long ago that used car salesmen were teased for being sleazy, but it seems to me those punchlines are due for update, and I think I know the perfect replacement.
As much as the phrase caveat emptor applies to all IPO investments, in this case the phrase caveat actor also seems applicable; let the doer beware.
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