July 7, 1998

Off the Beaten IPO Path
by Rick Aristotle Munarriz (TMF Edible)

On a recent random day, I stumbled across travelzoo.com. I now own a piece of it. I am not sure what my stake in the company is worth, even though presently it is worth exactly what I paid for it -- nothing. You see, the travel-related website came up with an interesting way to draw traffic. It began to give away the company itself.

The ambitious Net newbie is assigning three free shares to everyone who registers with travelzoo. These new zoo-keepers can earn as many as seven more shares by referring seven new owners. The company is not public. If and when the company goes public, it is hard to dictate what price the market would give to these clearly diluted shares. In the meantime, the company has lined up more believers than the typically vanilla upstart vacation discount website.

This would sound like some sordid multi-level marketing scam if not for the fact that patrons are not paying with their wallets, they are paying with their eyeballs. Just like in the real world of content broadcasting, higher ratings attract higher advertising revenues. In a June 22 letter to shareholders, President Mark Foster noted that 110 advertisers had contacted the company in the past week alone. If issuing perceived equity in a proposed stock offering pumps up the demographics, then maybe travelzoo.com is not that far off-kilter. Does this mean the day will come when a much-maligned television show will attempt to revive its life through viewer ownership gimmicks? Stay tuned.

In a country obsessed with stocks and freebies, it is no wonder that we are fascinated by the chance of snagging them in concert. Back in 1993 an obscure royalty collecting company by the name of Golden Triangle (Nasdaq: GTII) offered my investment club a single share. The stock was fetching about $3 a share at the time and we put it to a vote. Agreeing to the freebie was not a unanimous choice. It was easy to see what Golden Triangle would get out of it. Here was a company off the radar in the investment community looking for attention.

"We were a young company and we figured if we could get investors to watch our company they might become interested and become investors," Greg Gagnon, Director of Investor Relations, explained.

Rather than issue new shares, the company went out and bought the stock in the open market. Of the 10,000 National Association of Investors Corporation (NAIC) clubs that received the offer, 3,000 accepted. At the time, the company was also appearing at a dozen NAIC investor shows a year and found another 4,000 individual takers.

For Golden Triangle, it proved to be a more effective means of getting its story across than direct mailings or in paid magazine inserts. As the recipient, we had to ponder the obvious -- we were asking for equity fruitcake. It would take a great amount of capital appreciation to ever cover the commission cost of ridding ourselves of such a gift. Was it worth the energy to even enter it into the club portfolio? We voted yes, but most clubs simply dismissed the offer.

Two years later the company had a 1-for-3.5 reverse split. While fractional shares are often cashed out during such proceedings, Golden Triangle simply upgraded the uni-share owners to a new share post-split. The fruitcake lived on!

Now that the company is more established, having ceased the free share promotions two years ago, Golden Triangle has set its sights on the efficiency of the pro-bono shareowners. While the company pays no dividend, it has initiated a Dividend Reinvestment Plan (DRiP) for additional investments. About 1000 clubs have signed up for the program. For the rest, Gagnon said that the company is considering making an offer to buy out the single share investors.

So if issuing a share of your company is bold, how about handing out a free stake in a competitor? Back in 1991 California-based discount broker Kennedy Cabot offered a free share of Charles Schwab (NYSE: SCH) stock to those transferring accounts to the smaller firm. By now we know that every freebie has a motive, even if it's just clever marketing. For Kennedy Cabot, it made for catchy ad text while having to service a single share couldn't have made Charles Schwab all that happy in the process.

There have also been the times when people have had a chance at what appears to be easy money -- an admission ticket to an Initial Public Offering (IPO). For years, clever speculators have been placing minimal deposits in privately held thrifts. If the aspiring banks decide to go public, the accountholders are usually given a crack at initial ownership. Whether the strategy is prudent or not, at least the IPO gamblers are getting interest paid on their insured deposits. Is it worth it? Even legendary investor Peter Lynch once penned an article for Worth magazine on the subject, including his list of privately held financial institutions that were most likely to make a public debut. Face it, we're a sad lot of panhandling speculators sometimes.

In 1995, opportunity rang on a six-pack beer carton. Boston Beer (NYSE: SAM), the maker of Samuel Adams lager and other beers, was set to go public just as the microbrew craze was peaking. In what seemed to be an excellent public relations move, Boston Beer (NYSE: SAM) offered the first 33,333 consumer applicants 33 shares at the $15 IPO price. Sensing that opportunity knocking mandated a nimble reply, I raced to the store, filled out the application, and mailed my $495 check to the escrow agent. The offering proved to be popular in many ways. The IPO price was bumped up to $18 a share (although the direct entrants got in at $15) and with close to 100,000 requests, two out of every three applicants got a "Wicked" hangover.

When the stock opened above $30 a share, the carton-fetching investors were elated. Seeing the craze go flat, I got out a month later at $21 -- and for those still around, with the shares recently trading at about $11, maybe the last laugh came from those who filed too late. While Boston Beer is kind to its shareholders -- this year's annual report came with a 12-month calendar -- some investors probably wish they could flip back the days to a time when they could have reversed their decision. Call it a brew ha ha. The swift believers aren't laughing.

Then again, it could be worse. As novel as it sounds, it seems that early ownership does not always have its advantages. Another company that intended to reward customer loyalty was Garden Botanika (Nasdaq: GBOT). When the mall retailer of toiletries went public in May of 1996, it allocated some IPO shares to customers on its mailing list. Priced in the high teens, the then lucky clients must have been euphoric to see the stock soar as high as $35 a share. The stock trades for a buck today. The stores smell great. The capital losses on the other hand are laced with a rotten musk scent.

Sadly there are few free lunches out there. As for travelzoo, the only thing that is clear is that the strategy to give away free shares has apparently accomplished what Travelzoo wanted -- whether or not it accomplishes what the new investors want is an entirely different question.

When I reflect on my whopping three share investment in travelzoo, I think back to the closing passage in one of my favorite Dr. Seuss books, If I Ran the Zoo (which I now do, of course)...

"WOW!" They'll all cheer,
"What this zoo must be worth!
It's the gol-darndest zoo
On the face of the earth!"

So like the story's young protagonist, Gerald McGrew, is it easy to get excited over this gol-darndest investment? Maybe, but skepticism runs a little more rampant right now. When I joined up last month the site mentioned that shares would be rewarded until the company reached the SEC limit of 70,000 shareholders. Was this a gimmick to pressure visitors to act quickly? Equity fruitcake revisited?

Try as I could, I never found the alleged SEC shareholder cap rule. Apparently travelzoo didn't either. When Foster's letter to shareholders proclaimed that 100,000 new shareholders had signed up over the past four weeks, and I was seesawing between my role as an owner or that of a whistleblower, a return visit to the site found that the company would now take the first 700,000 registrants. How convenient, no?

I also stumbled across a new site -- 1001computers.com -- that travelzoo also started, supposedly for international eyeballs. It has the same three share promo offer and the old Frequently Asked Questions text, practically verbatim. My main worry -- that travelzoo was just out to collect a marketable mailing list to peddle to junk mailers -- is addressed by the company in that it will not sell names -- but will that go the way of the 70,000 shareholder limit too?

Anyway, travelzoo.com did mention that the real stock offering would be "fairly soon." Hey, even dividends would be forthcoming once the company turned a profit. Do Internet companies make money? Oh well.

Two interview requests to the Bahamas-based company were ignored for weeks and, hey, I deserve better treatment. I'm an owner! Right?


Finally I got a hold of Mark Foster. He disputed the fact that there ever was a 70,000 shareholder maximum. As for when the public offering would take place, he refused to disclose whether the company had been in talks with an underwriter, simply that "it's the intention to go public as fast as possible."

When asked about the website's claim that shareholders will partake in dividends when the company turns a profit, and how that may seem to be feeding false hope in a niche where few content providers are in the black, Foster points to a low-cost structure. He cites that travelzoo is tapping international talent in the areas of software engineering, marketing, and legal help -- all working for free in their spare time. I trust "free" here means the same free currency the company has been dishing out to site visitors, stockola. How diluted will travelzoo.com stock be if and when it goes public?

"There is nothing fraudulent about this offer, nor does the company have any hidden intentions," he told me. "Travelzoo.com's business model is advertising-driven. By giving away shares and making netsurfers part of the company, travelzoo.com hopes to build an increased level of loyalty with its customers and users."

With 128,000 shareholders and counting, it is hard to argue with overnight success, and with hundreds of thousands of equity-fueled fanatics, it may very well prove to be money well spent. Me? I'll bag my own lunch next time, since that is still the closest thing to a free lunch on Wall Street.