Inside the Allstate IPO.

Ever wonder what it's like to survive an IPO? Two financial executives who have been in the trenches tell you what to expect and how you can avoid some pitfalls of the process.

On June 3, 1993, Allstate Insurance, a property-liability and life insurer, completed one of the largest initial public offerings in the history of the New York Stock Exchange, raising $2.4 billion of equity capital from the sale of 89.5 million shares of common stock, in addition to $850 million of corporate debt. Those numbers exceeded our expectations of selling 20 percent of the common stock to the public and of raising $600 million through the corporate debt offering. Clearly, we did many things right, but we think our IPO process definitely could use improvement.

An IPO is not for the fainthearted. As a wholly owned subsidiary of Sears, Allstate already had considerable experience reporting as a public company. But the IPO still proved to be a momentous undertaking because of the company's size, the complexity of its businesses, the competitive and regulatory environments and its long history and culture.

The financial stress of extraordinarily large catastrophes in 1992 prompted Allstate to strengthen its capital position. These catastrophes, which approximated $3.3 billion on a pre-tax basis, resulted in $825.2 million in net losses. Of that amount, Hurricane Andrew alone cost $2.5 billion. Plus, shareholder equity decreased from $8.1 billion in 1991 to $5.4 billion in 1992. We used the IPO and debt offering proceeds to increase our statutory capital by $1.25 billion and retire $1.8 billion of Sears' debt, which we'd assumed as part of the process of capitalizing our parent holding company.

The lead underwriter established the IPO deadline of June 3, 1993 after consulting with senior Sears and Allstate management. Sears and Allstate wanted to have the offering to market in the second quarter of 1993, while the lead underwriter wanted to be in before the summer, when IPO activity is usually somewhat slower. Also, the IPO market was heating up and we didn't want to pass up a good opportunity.

From the beginning, the effort was truly a team undertaking. Clear and consistent communication throughout the process was extremely important, and commitment from the top was essential. Sears and Allstate management, and particularly our chairman, showed that this was a priority for the company and that they were fully committed to the project. That commitment was vital to completing the project on time, since we expected a great deal of extra effort from many employees, which often conflicted with other priorities.

Once we decided to take the plunge, management began looking at the company differently. Although Allstate was part of Sears, investment analysts and the public generally didn't scrutinize us as much as Sears. With the IPO underway, we needed to better anticipate the requirements of these new players. By meeting with our underwriters' insurance industry analysts, we developed plenty of insight into the concerns the investment community had about the insurance industry in general and Allstate's core businesses specifically. Our discussions covered a broad strategic look at the company, the economic outlook for the industry, investment portfolio conditions, Allstate financial relationships, industry comparative financial relationships, regulatory matters and current developments.

Senior management spent a great deal of time articulating Allstate's strategies, focus and operations to these new audiences. Deciding how to describe and market Allstate to the investment community, both in the prospectus and in the market-place, was key to the IPO's success. And making such decisions early makes the whole process go much more smoothly.

A WORD FROM THE WISE

We also sought out and listened to our professional advisers, which included the lead underwriter and its legal counsel, the co-managers, Allstate's legal counsel and its board of directors, the auditors and Sears' senior management. Since the IPO process is so complex and full of opportunities for mistakes, we needed the advice of professionals with different perspectives and roles in the process so that we could make informed decisions.

Accurately portraying Allstate in the prospectus was a big challenge because it's a large, diverse and complex corporation in an industry that's facing many issues and is subject to substantial state and federal regulation. We have important intercompany relationships with Sears and certain Sears affiliates. Some of these were outlined in written agreements, but others were not. That's why we needed the efforts of the entire team to identify and fully disclose all of the important information about these relationships.

The question of who would decide key issues was also important. In our case, we needed to consider Sears' and Allstate's senior management, business-unit management, the auditors, the underwriters and various groups of attorneys. We also included the people who worked in the business we were discussing. Sometimes our team consulted the entire board of directors to make sure we heard everyone's opinions, which was time-consuming but worthwhile.

Our chairman appointed a senior vice president (the chief investment officer) to manage the overall IPO effort. As chairman of the IPO steering committee, he reported directly to the chairman. The CFO and the senior vice presidents of legal, human resources and corporate relations, as well as their staffs, also played large roles in the process. Two assistant vice presidents and an attorney from the legal department coordinated the daily activities of the IPO team. The assistant vice presidents were each assigned specific duties but frequently found their roles somewhat interchangeable. The attorney coordinated legal matters for the steering committee.

The steering committee met weekly and was a focal point for activities and communications. Its members were the chairman, the CFO, the two coordinators, our attorney, the lead underwriter's vice president (lead project manager) and legal counsel, our outside securities counsel, the senior vice presidents of legal, human resources and corporate relations, our auditors and a Sears representative. Other staff members attended meetings when needed.

The steering committee was vital to the IPO's success. The committee chairman insisted that all committee members attend or send a representative to each meeting. During the entire nine-month IPO period, we canceled only one meeting. We scheduled most of the meetings at standard times each week, and we controlled them with pre-established agendas and other meeting management techniques.

We formed other business-unit and corporate teams to address specific issues, projects, the due diligence area, S-1 drafting and the road show. Generally, individuals on the steering committee pitched in, which helped continuity and communications within and between projects. Special teams covered business-unit and corporate due diligence, drafting, finance, benefits and human resources issues as well as communication, legal and administration issues. As the IPO process evolved, a group of about 20 people performed much of the overall due diligence and drafting projects, with support from many of the teams.

We devoted much time to the due diligence process, which is designed to generate the raw material for the registration statement. The due diligence process helps you develop a complete understanding of your company, its industry, and its challenges and opportunities. Assessing its strengths and weaknesses, as well as identifying business risks, uncertainties and necessary disclosures, are all part of the understanding.

To do that, you need to thoroughly understand the business and economic factors driving the company. The SEC requires you to disclose all material facts and investment risks in the registration statement. The due diligence process must be thorough enough to ensure that you expose all potential disclosure items for proper consideration in the registration statement. Not disclosing material facts and risks could financially hurt your company and its key officers and directors.

Understanding what a large company does is a big undertaking. Although nearly everyone on the team generally understood the business, no one knew enough about each aspect to completely describe it for the S-1 statement. So the discovery process helped everyone learn more about Allstate.

We kicked off the due diligence process by assigning people to coordinate due diligence activities for each business unit and for corporate functions. These individuals garnered the resources necessary to fulfill the due diligence requirements. Whoever knew the most about a specific subject presented the business unit and corporate due diligence materials to the core working group. They discussed the topics in depth until the underwriters, their counsel and our counsel were satisfied that we'd resolved all the issues successfully.

For us, the first round of due diligence began in late October 1992, soon after the project team first began meeting, and concluded in December of that year. But we had to do due diligence updates for the rest of the IPO process, and we had more of them right before the initial S-1 filing and each time we filed an amendment. Plus, we presented thousands of documents to the issuer's counsel, the underwriters and their counsel. In retrospect, we could have saved some time and effort by more clearly describing the requirements to those gathering the information.

We reviewed the impact of business and regulatory issues on the company many times to make sure we included the most current information in the registration statement. The drafting process also created due diligence questions. As we got closer to finishing the draft, the descriptions of the facts became more and more precise.

Our due diligence activities generated a list of subjects that we needed to address and resolve as part of the IPO process. Many of these areas were complex, so we often had to make policy decisions or do more research and get updates on industry developments. The list of subjects was a convenient way to organize our work and to make sure we didn't miss anything.

THE DRAFT THAT WOULDN'T DIE

Drafting the S-1 and the subsequent S-3 statements on the offering of debt securities seemed like the toughest part of the entire IPO process. We began drafting in December 1992 and filed our S-1 in March 1993, and we filed the final amendment in June. The drafting sessions were long and arduous and required all of us to share our skills and knowledge.

About 20 people served on the core drafting team, including several representatives from the lead underwriter, the underwriter's counsel, our outside counsel, our two steering-committee coordinators, the business-unit coordinators and our steering-committee attorney. The team outlined the S-1 document, based on advice from the lead underwriter and its attorneys. The general outline included the sections of the S-1 and the general contents, but it didn't specify which discussion requirements and approach we should include.

Then we assigned individuals to draft different sections of the statement, using other prospectuses as guidance. In many instances, we used the employees closest to a business segment to write that section of the statement, because we assumed they'd have the most knowledge and would cover the topic the most thoroughly. Our outside counsel completed other sections. We had tight deadlines across the board for finishing the section draft.

Each time we completed a new version of a section draft, we returned it to the core drafting group for review, which took the form of a roundtable discussion. Often, we discovered that changes made in one drafting session were revised in one or more later sessions, or that topics we'd covered in one section were also included in other sections, creating much duplication and confusion.

One member of our securities counsel team had the proverbial pencil -- the responsibility to mark changes and incorporate them in the revised draft. We had long discussions on the document's wording and style. Our counsel's office usually turned the drafts around overnight, although the staff often had to work all night to do that.

An effective IPO requires the complete cooperation and dedication of a competent, independent CPA. Our auditors worked very closely with us from the very beginning. The audit partner participated in or was represented at due diligence and drafting meetings and advised management on many policy and accounting issues. The auditor also helped research current SEC practices and counseled us on related matters.

The SEC review of the S-1 and S-3 filings is a wild-card in the overall project timing. The commission reviews the initial filing (which took about 30 days for us) and writes comments, to which the company responds by changing the prospectus and providing supplemental information to the SEC staff. Although we, our counsel and the SEC talked on the telephone, the SEC acts only on the formal written communications. We tried to respond to all SEC questions and concerns quickly, but found ourselves somewhat at the mercy of their schedule. With tight marketing deadlines, this can be stressful, and an extended review can affect the filing time of the registration statement. The most important timesaver is preparing a professional and complete S-1 and S-3 that anticipate and address SEC concerns. A carefully thought-out first effort undoubtedly speeds the process.

The road show is where the "rubber meets the road." In our case, the lead underwriter controlled the road-show process, but we did much of the work. Our executives traveled to seven countries and 22 cities in the United States and Europe in less than three weeks to meet with hundreds of investors, a process that was both exhausting and rewarding. To prepare for this trip, we created the road-show message and presentation, and we developed likely questions and answers, briefing books, rehearsals, trip logistics and syndicated marketing strategies. Our most senior executives performed the road-show duties and participated in its development. To keep things moving smoothly, we found it best to identify the key points we wanted to make up front, and that also applies to other considerations like time, slide format and script decisions.

MORE ART THAN SCIENCE

The valuation and pricing of an IPO is more art than science, so managing the process is a challenge. The evolution of a price is an iterative process based on discussion and negotiation. For us, valuation meant assessing Allstate's competitive position in the industry by reviewing the equity market overall and the insurance sector in particular. Plus, we had to consider relative trading levels for other insurance companies.

We developed both the valuation and pricing over time through a series of discussions between the lead underwriter and Allstate and Sears representatives. The lead underwriter in turn had separate conversations with the co-managers to hear what they had to say and affirm the opinion of the lead underwriter. We and Sears were also in contact with the co-managers. As we approached the offering date, pricing talk became more focused, and we negotiated a price based on prior judgments and on the book of potential sales built during the marketing phase. Our ultimate objective was an offering at a price that balanced maximum proceeds for the seller with after-market value for the buyers.

Our pricing occurred after the road show, when investors had indicated their interest in the offering to the lead manager. We fortunately generated much more demand than supply, which was why the price ended up at the top of the filing price range. We knew we'd been successful when we saw the modest premium that the stock traded to in the after-market, which showed that investors were still demanding the stock, but not so much that we thought the IPO had been underpriced.

What happens once the IPO is over? For us, the changes involved in becoming a public company didn't stop once our stock was out on the market. Allstate was a private company for 62 years, so the IPO affected us in many ways. For instance, producing the S-1 document forced us to articulate our strategy, which helped everyone focus on what we were trying to accomplish as a company. We stepped up decision-making because we had to meet deadlines, and we identified several areas that the company needed to address.

In the process of becoming a public company, we learned that we'd need skills in investor relations and shareholder services, plus some financial expertise in capital management. We developed a heightened sensitivity to investor concerns and how the investment community views a business. Investment analysts are already asking a myriad of questions about the business that the company must become accustomed to fielding. The IPO also opened our eyes to additional capital sources that were previously unavailable.

But the IPO was more than just a process. It was a cultural transformation, and it took some getting used to. Allstate employees reacted to the news of the IPO with a mix of pride and concern. They were proud of their company and hoped that an IPO would help the public recognize its accomplishments. This attitude helped those working on the IPO develop a sense of mission that carried us through those nine months.

On the other hand, many employees were concerned about changes in the company culture, benefit programs and a new board of directors. In some ways we were sheltered as a private company, and we knew that the daily stock price would now serve as our public report card. Also, the confidential nature of the IPO and the newly restricted internal communications in a company that had always openly communicated caused our employees some anxiety. Before the IPO, we regularly communicated company results and plans. After becoming a public company, we found ourselves more restricted because of insider trading rules and other SEC rules. For the most part, however, our employees considered the IPO a positive development.

Then there were the organizational issues. For example, to whom does the investor relations function report? Who should be responsible for things like the annual report, 10K, quarterly shareholder report and annual shareholder meeting, to name but a few? And we had to learn to communicate with our new board of directors.

LISTEN UP, PUBLIC WANNA-BES

But overall, we learned a great deal from the IPO process, and our lessons could apply to any company that's thinking about going public. It forced us to concentrate on a single large task, which taught us the benefit of paring down to a few key issues. And we discovered people do want to be involved. If they're focused, understand the task and want to perform it well, the chances of success increase immensely. We also learned that teams really can be effective and people function much better with deadlines. In the past, we'd operated with open-ended timeframes that we extended all too often.

As the process evolved, tensions developed that we might have avoided by spending more time researching detailed requirements and agreeing on the philosophical approaches to issues like the contents of the S-1 and articulation of business strategies. If you spend the time necessary early on to hammer out all the S-1 issues, you can avoid a great many false starts, confusion, frustration and rework.

The drafting process was the most time-consuming part of the IPO and needed the most improvement. Everyone involved should understand what the finished product should look like before beginning the draft. A general idea of the topic and the organization of the S-1 statement doesn't give the authors enough guidance to produce anything even close to the finished document. We found the S-1 somewhat of a mysterious process, so a process-flow diagram would have given us a much-welcomed road map. Your team should develop detailed outlines for content, style, legal requirements, topics to be covered, strategic framework and the approximate length of the sections. Remember, too, that the prospectus must be in good shape from both a legal and a marketing standpoint.

If your company has been involved in a quality process, it's best if the underwriters, the underwriter's counsel and the issuer's counsel are schooled in the concepts of total quality management. That helps everyone speak the same language. We had instituted a total quality management process in 1988, so the employees assigned to the IPO project expected to use certain quality tools, such as determining customer requirements, analyzing process inputs and expected outputs, and training all team members, in completing the project. But the other team members, used to conducting an IPO from a more traditional business outlook, considered some of these "extra" steps unnecessary, and this difference of opinion caused some conflicts.

To avoid confusion, senior management should communicate with the underwriters, underwriter's counsel and issuer's counsel itself. You don't want a myriad of people contacting your employees. A company representative on your team should take responsibility for getting and disseminating the necessary information.

Last, remember that time is precious during an IPO. We worked very hard for nine solid months, but we probably could have shortened our timetables and made some steps concurrent. To develop a timeframe, you should study the proposed IPO strategy, but allow some time for unexpected developments, because they will occur. Process flows and timetables are essential, and use measurements wherever possible. Doing it right the first time and building in the necessary steps and measurements could save an enormous amount of time and effort.

Mr. Haas is assistant vice president of investment operations and Mr. Zils is vice president of finance and planning for Allstate Insurance Co. in Northbrook, Ill.