World Online debacle casts a cloud over European hi-tech float plans

Don't forget to read the prospectus - this is the lesson to be learned from the World Online flotation.

The watchdog of the Dutch stock exchange yesterday said it would look into World Online's IPO, particularly the extent to which investors are locked in to a company's stock after a float.

The announcement follows considerable ill-feeling among investors over pre-IPO share sales - detailed in the prospectus but overlooked by many investors - by Nina Brink, the founder and chairwoman of World Online. When it subsequently emerged that the buyer of those shares had sold 1.2 million shares on the first day of trading (the last time World Online's share price was above the offer price), irritation turned to anger. Yesterday, World Online was trading at 28 euros compared with the 43-euro offer price.

Following other internet IPO disappointments, such as lastminute.com, the City is concerned that the World Online débâcle could have a lasting impact in the appetite for hi-tech offerings, especially given the general decline in internet share prices. Across Europe, dozens of internet IPOs are in the pipeline, include the massive 39bn-55bn euro T-Online internet service provider in Germany. "The whole issue of lock-ups is going to be a major issue with these offerings, plus the issue of disclosure," said one City figure familiar with packaging internet IPOs.

Mark Pignatelli, head of European equities at Schroders, yesterday said that it would be an exaggeration to say that the World Online and lastminute.com problems would kill demand for technology IPOs in Europe, but that investors realised that there was a shakeout coming and that the second line players were not going to survive. "We can expect a lot more rigorous stock appraisal," he said.

When World Online floated on the Amsterdam stock exchange on 17 March, the company was valued at more than 12bn euros, and could claim considerable success for selling 2.9bn euros of stock amid a fast-declining internet sector. Now it is fast becoming a textbook example of how not to handle an IPO. The mood swiftly turned sour, primarily because of questions over Ms Brink's shareholding, which soon became the subject of daily press coverage in The Netherlands.

Throughout the run-up to the IPO, Ms Brink had been irritated by questions about her personal stake in the company. As a household name in The Netherlands, her affairs have always been of considerable interest to the local newspapers.

Ahead of the IPO, no one was that concerned to press her to be more forthcoming: internet stocks were still riding high, and interest in World Online was buoyant among investors. World Online's launch press conference was held in Amsterdam on 1 March, but the journalists were hindered by the fact that the prospectus had not yet been published.

During questions about her stake, Ms Brink did not give a figure for her holding. She said: "I didn't sell any shares at this [IPO] time. As you know I'm not happy to divulge this information." As part of the IPO, some of the shares were being sold by existing shareholders (the Swiss-based Sandoz family, Reggeborgh Participaties, and NS Telecom), but it was confirmed that board members and major shareholders would not sell further shares for 180 days after the IPO - the six-month lock-in.

It was not until Friday 3 March that the initial prospectus finally came out. Careful reading disclosed the following: On 27 December 1999, Ms Brink had "transferred" 14.89m World Online shares (6.35 per cent of the company) to three parties. One-third of these shares went to existing shareholders who were covered by the six-month lock-in. But two-thirds (10.03m shares) went to Baystar Capital, a US private equity house. The prospectus at this stage said that, provided certain conditions were met, Ms Brink was "entitled to share the profits made by Baystar on any subsequent resales of the shares. Baystar has not agreed to the lock-up restrictions to which certain other shareholders have agreed". A later edition of the prospectus added that "such share of the profits will be paid ... in cash and, to the extent the price per share sold exceeds the offering price of 43 euros, in shares of World Online". Those shares would be covered by the lock-in.

The prospectus showed that Ms Brink 's stake had fallen from 9.48 per cent before the 27 December sale, to 3.13 per cent just before the IPO (which was then diluted to 2.61 per cent in the share offering), as reported in The Independent on 8 March.

Still, no one was unduly concerned. As the road show got under way, investor interest was strong. In the event, the offer was 21-times subscribed, and the shares were as high as 135 euros in the grey market. The company felt confident enough to pitch the price at the very top of the forecast range - at 43 euros. With the benefit of hindsight, the company and its financial advisors were over-confident. Tech shares had already started their slide in the United States and Europe, and unlike other internet IPOs which tended to offer 10 per cent of the company, World Online was offloading more than 20 per cent of the company.

On 17 March the shares started trading at a 17 per cent premium to the offer, but the price soon started sliding, ending the day barely above the offer price. Amid a general rout in internet stocks, the collapse continued.

This slide was worsened because some investors only belatedly woke up to the 27 December share sale. When it then emerged that Baystar had actually sold around 1.2m shares on the first day of trading, the implication appeared to be that Ms Brink could have been due a share in any profits from that sale.

Damage limitation measures were quickly taken. On Thursday last week, Nina Brink put out a statement strongly denying that her arrangements with Baystar represented an attempt to avoid the lock-in.

"Nothing could be further from the truth. I wish to make it clear that I had no prior knowledge of Baystar's plans to sell any shares in World Online and that had I known of their intentions I would have done my best to stop them.

"Furthermore, I wish it to be known that I have not received and will not receive any proceeds at all from the shares that Baystar have sold so far." It was not explained why not. Baystar has subsequently signed on to the 180-day lock-in.

Ms Brink's press spokeswoman in The Netherlands yesterday said that the company planned a statement which would clarify any remaining questions relating to the chairwoman's shares. Answers which would be interesting include: why, in the first place, did Ms Brink sell two-thirds of her holding to Baystar in December; and what is the precise profit-sharing arrangement with Baystar?