Wanted: the right investment banker.

• Author: Smith, Orin C.
• Position: Starbucks Coffee Co.'s initial public offering

Not just any investment banker would do when Starbucks Coffee Co. decided to tackle the public markets. Starbucks' rigorous standards narrowed the field of potential investment bankers from two dozen candidates to two.

At Starbucks Coffee Co., we had our sights set on an initial public offering for years. In 1992, when we finally decided to put the wheels in motion, we needed the best investment banker we could find to take us public. So we began our search.

Selecting an investment banker should be a thorough, deliberate process, and it's probably a mistake to select the first firm that offers its services. We met with more than 20 investment-banking firms in the 24 months before we made the final decision to go public. That was unusual, and it took a lot of time, but it was well worth the effort because we learned a great deal about the IPO process from talking with all the banks.

Through our interaction with the investment bankers, we were also able to begin shaping the perception we wanted the investment community to have of Starbucks, which sells premium coffees and beans and operates 405 stores nationwide. By communicating with so many representatives of the investment community before we went public, we were relatively well-known by the time of our IPO. This helped increase the receptiveness of the investment community to Starbucks both during and after our IPO.

WHO MAKES THE GRADE?

There are several ways to select an investment banker, all of which may work well for a company, depending on the circumstances. We've been told our approach was somewhat unusual, but it worked well for us. We reviewed the investment-banking firms we had interviewed during the 24 months prior to our decision to go public and created a short list of six firms whose capabilities appeared to best match our requirements. We then developed a thorough request for a written proposal and sent it to those firms, from which we received some outstanding responses in about two weeks. Finally, we asked each banker to do a one-hour presentation, followed by an hour of questions from two of our five board members and two representatives from our management group.

Our request for proposal asked each of the investment bankers to respond to a number of questions, which were designed to enable us to determine the bankers' capabilities in several critical areas. The list of questions allowed us to control the content of both written and oral presentations, which ensured the bankers addressed our issues. Also, the list made it easier to compare bankers.

We asked each banker to tell us when we should become a public company and what size offering it would recommend, given our capital requirements. At the time of our "beauty contest," as the investment-banker selection process is often called, we were uncertain about when to do an IPO and what size offering we should have. Essentially, we were asking the bankers to help us think through the fundamental questions of market timing and offering size. The different opinions of the six bankers on these crucial issues were helpful in our decision-making process.

In selecting a banker, the capabilities of the investment banker's corporate-finance function are critical, since this group will lead your IPO process. For some companies in some markets, almost any investment banker can take you public successfully. But in difficult markets, and you never know when this will occur, only an experienced banker with a strong reputation will get you through the process. So look for a banker that's successfully completed a number of IPOs, preferably in your industry. You should also ensure the individual assigned to your project has considerable experience in leading the IPO process. This individual is critical in any market because the IPO process and the relationships between the various players are complex and require strong leadership.

In addition, inquire about the banker's ability to act as your financial advisor after the IPO. Although it may be difficult to envision future needs during the IPO process, this is an important function, and you'd be wise to ensure the corporate-finance people have the experience to assist you in developing your business through acquisitions, joint ventures...