Going Public
In 1956 the Ford company, which one family had owned for fifty-odd years, sold ten million two hundred thousand shares to the public. It raised six hundred and fifty-eight million dollars. No company in America had ever raised that much on shares before. The family went public.
The man who put it together was Sidney Weinberg of Goldman Sachs. He was an old friend of the family and advised it unofficially. Not an easy puzzle. The family wanted money but didn’t want to give up the company. The public wanted a piece of Ford but didn’t want to be the family’s pawns. Weinberg worked out how to restructure the company and split the votes from the money—the way we talked about last time. He took a seat on the board himself, one of the first independent directors. And the bank put its name on the line that everything was above board.
What is a public offering? A private company sells shares for the first time to anyone who wants to buy. Sounds simple. In practice, few things in the world of money are more complicated. And all that complication serves one purpose: getting strangers to trust a company they have never seen from the inside.
Your Own People First
While a company is small, its money comes from people who know the owner by sight. Relatives, friends, people from the old village. Remember United Lathing in the Bronx? Most of its shareholders, Critchley writes, came from Corleone. What set apart the people who put money into Gagliano’s ventures wasn’t that they mixed with the underworld. It was that they came from the same little town. Some of them were his relatives.
And that’s normal. A man from your village knows where you live. He knows your father. He knows what you’ll have to say at his daughter’s wedding if his money disappears. People trust him because they live next door. But being neighbours has a ceiling. There weren’t many people from Corleone living in the Bronx, and they didn’t have much money.
Want thousands of strangers to pay? Find something to take the place of being neighbours. That’s what the whole machinery of an offering is built for. The company lays out its affairs in a prospectus. Auditors check the numbers. Lawyers do their work. The exchange decides who gets in. And the underwriting bank puts its reputation on the table and often buys the shares itself, to sell them on to the public later.
The First Offering
The first time it was done was in Amsterdam, in August 1602. The Dutch East India Company opened a subscription, and more than one thousand one hundred people brought money—from rich merchants to craftsmen. Did they know the directors? They didn’t need to. Behind the company stood a charter from the States General. A few years later the city put up a special building for trading the shares. It is still called the world’s first stock exchange.
No Prospectus
What does an offering look like without that machinery? Saviano showed it best. When the Neapolitan Camorra put its money into the legal economy, it knew how to use a crisis. If it needed capital fast, it sold forged securities passed off as government bonds.
What can the buyer of a paper like that check? Nothing. Nobody wrote a prospectus, no auditor checked anything, no bank vouched for it. There’s a handsome form and a man selling it. The public can tell a real offering from a fake only if someone answers for it. That is what investment banks charge their fees for. Sometimes unfairly large fees. But they aren’t paid for the paper. They’re paid for the signature.
How Money Comes Out of the Shadows
Now let me tell you how a private and very shady business once went public. Even if it came in through the back door.
During Prohibition, the Reinfeld brothers of Newark, together with Abner Zwillman and Joseph Stacher, ran liquor in by sea. By one estimate they brought in about forty per cent of all the liquor smuggled into America from Canada and Europe. From 1926 to 1933, Critchley reports, the syndicate kept more than twenty-one million dollars in six banks under false names.
Prohibition was repealed. The partners bought a stake in a national liquor importer, perfectly legal, and in 1940 sold it to the Distillers-Seagram corporation for seven and a half million dollars. The money had lain under other people’s names for ten years. Then it turned into a stake in a legal company. Then into a cheque written by one of the biggest whisky makers there was. Laundered? Let’s put it more gently: brought out into society.
Is that a clean offering? No. A private business was simply sold to a big buyer with public capital. But it works the same way. What was hidden got shown, a respectable buyer signed off on something doubtful, and the owners got money they could spend. Critchley, by the way, stresses that this syndicate was far bigger than the Italians people like to call the kings of Prohibition. Big money loves quiet. And it doesn’t love seeing its surname in the headlines.
The Dream of Going Legit
In The Godfather—mind you, this is a film, not history—Michael promises Kay that in five years the Corleone family will be completely legitimate. Years go by. In the third film Michael is still paying big money to buy respectability.
The screenwriters understood the main thing. Going public is hard, and not because of money. The Corleones had money. It’s hard because the public wants to know where the money came from, who runs it and what happens if something goes wrong. And you have to answer in writing, over your signature. A Mafia family can buy anything. Except the right not to answer questions.
The Don Vouches
Don Vincenzo never floated anything on an exchange. But he did have to play underwriter once.
Signora Lucia’s nephew opened a small bakery and dreamed of supplying bread to the hotels. The hotels didn’t know him and didn’t want to buy from a stranger. Lucia asked the Don. For three weeks the Don ate that bread every morning, drove out to the bakery, talked to the apprentices. Then he took the baker to two hotels we worked with himself and told the managers: “If he lets you down, I answer for it.”
Six months later the baker overslept and didn’t deliver the bread for breakfast on the day of a big banquet. The manager didn’t call the baker. He called the Don. The Don paid the hotel the penalty out of his own pocket, and only then had a word with the baker. The man never overslept again, and five years later he was supplying seven hotels. I asked the Don why he had paid himself. “Because,” he said, “next time I vouch for somebody, they’ll believe me.” A guarantor is worth exactly what he’s ready to pay for someone else’s mistake.