A Special Delivery Direct From Webvan's Roadshow

Editor's Note: In response to Securities and Exchange Commission concerns, Webvan said it is postponing its initial public offering, originally slated for this week. According to a report in Thursday's editions of The Wall Street Journal, the SEC is worried about Webvan's possible failure to observe quiet-period restrictions in giving pre-IPO interviews to Business Week and Forbes as well as its dissemination during roadshow presentations of information not included in its prospectus. Details of the roadshow were brought to light by this column yesterday, which earned mention in today's Journal. Readers can discuss what's happened on TSC's message boards.

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Webvan: Join the discussion on TSC Message Boards.

In an age when the individual investor has access to loads of information and ridiculously inexpensive trades, there is one last bastion of exclusion: the so-called roadshow presentation for an initial public offering. Neither press nor populace is welcome at a roadshow meeting, apparently for fear that a prospective issuer will tout its stock to unsophisticated investors, therefore violating Securities and Exchange Commission strictures. These behind-closed-doors meetings are for professional investors only.

Companies are supposed to stick to a boring script in those meetings and keep their comments and responses to information easily found in the IPO prospectus filed for public consumption with the SEC. Nobody really believes, however, that proud companies and their investment bankers stick to their cue cards. The S-1 registration statement is for disclosures, and the road show is for marketing, goes the conventional wisdom. A roadshow conference call on Tuesday for Webvan (WBVN) shows how true that maxim is.

Webvan, for everyone else not invited to the physical and virtual roadshow presentations hosted this week by Goldman Sachs and the start-up's six other investment banks, is the Foster City, Calif.-based company founded by retail veteran Louis Borders. It's out to revolutionize the grocery business by building up to 26 distribution centers nationwide, from which it will deliver groceries, nonprescription drugs and other goods within a specified 30-minute time frame. It aims to price its 25-million-share IPO after the market closes Thursday at between $11 and $13 a share. That will make it one of the biggest and most high-profile Internet IPOs of the year.

If investors buy the bullishness Webvan presented in its teleconference, however, don't be surprised if the price is even higher.

Here are a few of the elements of the (truly impressive) hype Webvan shared with the institutional investors who will get first crack at buying its shares. Note that positive embellishments are par for the course at IPO road shows. But except as noted, you won't read these meaty morsels in Webvan's SEC filings.

(For the record, neither Webvan nor Goldman Sachs invited this columnist to participate in the conference call. However, when I called the conference call number, and identified myself and my organization, I was patched through. The company declined to comment after the conference call.)

• As noted in its S-1, Webvan reckons that each of its distribution centers will generate about the same amount of revenue as 18 grocery stores at substantially lower labor and real estate costs. In its road show, however, it informs investors that one distribution center will generate about $300 million in revenue annually. More, each facility will require only 900 employees, including delivery personnel, compared with 2,700 employees for 18 supermarkets. Real estate costs will be less than 1% of revenue, compared with about 6% for old-fashioned groceries, the company says.

• That's one reason Webvan's operating margins will be 12%, vs. 4% for the typical supermarket, according to Chairman Borders and Chief Financial Officer Kevin Czinger. The CFO also notes that, unlike other Net companies, Webvan will be "highly cash-generative," an expression not in most dictionaries, let alone Webvan's IPO filings. On a cash-flow basis, a Webvan distribution center can break even four quarters after launching, Czinger says.

• Webvan has disclosed it will open its next "Webstore" in Atlanta, joining one already in operation in the San Francisco Bay area. But according to Czinger, Webvan also will open for business by the end of next year in Chicago and Seattle. Note this young company's aggressiveness: It hasn't chosen these cities randomly. Chicago is the home market of publicly traded Peapod (PPOD), and Seattle is the hometown of HomeGrocer, the still-private start-up funded by Kleiner Perkins Caufield & Byers, Hummer Winblad and Amazon.com (AMZN). Czinger said the company will add seven more distribution facilities in 2001.

• The company launched operations out of its Oakland, Calif., facility on June 2, and currently has 21,000 active customers (a Sept. 24 filing lists 16,000 customers as of Aug. 31). On the conference call, Webvan disclosed that over the past month, it has achieved 99% on-time delivery. That's a neat fact that the investing public might like to have known, too.

• Webvan's SEC filing discloses that part of its billion-dollar deal with construction behemoth Bechtel Group of San Francisco to build its distribution centers involves Bechtel receiving warrants to buy Webvan stock. Gary Dahl, vice-president of distribution, adds some additional insight: Bechtel can't do the same for another Internet company. A similar exclusivity arrangement exists for conveyor-belt maker Diamond Phoenix of Lewiston, Maine. By the way, Webvan has taken a 10% stake in Diamond Phoenix. Gee, that's interesting information to present to prospective investors. I wonder why Diamond Phoenix appears nowhere in Webvan's SEC filings.

All in all, Webvan's sounding very impressive, despite the huge projected losses ($300 million-plus in 2001 alone) that Internet investors have been trained to ignore. It already has $300 million in cash and at the road show it said it hopes to have at least $350 million more by the end of the week. That's enough to pay for more than 20 distribution centers, meaning that if Webvan truly is "cash-generative," it will have no trouble funding its development.

Sounds good. So what's the problem? The beef here is that Webvan -- and scores of other companies -- present such an upbeat story in their road show to privileged investors. The little guys and the press are not invited.

The SEC's prohibition might have made sense in an earlier era, when individual investors were truly less exposed. But the lines are blurring. The rule makes little sense in this era when the public has so much access to information. Why not throw the show open to the great unwashed, if only in a listen-only mode? Or at least let the media monitor their presentations?

The way it is now, the institutional guys get the full show, and the little guy only gets the CEO appearance on the day of the offering. And even that practice is questionable. Companies are still in a quiet period the day they go public, yet virtually every CEO goes on television on Day One for a cream-puff interview with a journalist who hasn't read the prospectus. I routinely get phone calls from publicists a few days before an IPO asking if I'd like to interview the CEO on the day trading begins. That's not touting the stock?

It's important to stress that Webvan's IPO roadshow presentation isn't unusual in the least. And the company may yet amend its registration statement to reflect further changes. What's more, it's got a great story to tell, one that, to borrow the tired phrase of the Internet era, could change the world.

Too bad public investors are shielded from hearing the full story until long after the stock is out of the gate.

Adam Lashinsky's column appears Mondays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at [e-mail].

As originally published, the editor's note contained an error. Please see Corrections and Clarifications.