Drinking Beer Pays Off — After a Long Time

Photographer: Scott Eisen/Bloomberg

How long do IPO shares take to ferment into a tasty beverage?

Bloomberg’s Brendan Coffey yesterday profiled C. James “Jim” Koch, the founder of the Boston Beer Co., maker of Sam Adams and more or less the patron saint of the U.S. craft beer movement. Now a billionaire after Boston Beer’s recent stock price increase, Koch still goes bar to bar selling his beer. It’s a story of slow success for a project that once seemed as unlikely as starting a car company.

One group that’s done well with Koch is loyal — that is very, very loyal — Sam Adams drinkers. Back in 1996, when the Boston Beer Co. went public, small investors were offered shares in the IPO in a deal advertised on Sam Adams bottles. The price was $15 a share — $5 less than the $20 price for larger investors. Soon after the offering, shares slipped below $12. In the following years, the shares rose steadily, but not spectacularly, breaking $20 again in 2004. Now the stock is at $226. If any investors had held on since the beginning, they’re surely happy.

Boston Beer is one of a small set of companies that have parceled out shares to their customers. Others are software Red Hat Inc. and Internet telephone company Vonage Holdings Inc. One inherent problem with handing out shares in IPOs to customers is that more shares tend to be available for average Joes when professional investors aren’t interested — and often the professionals aren’t interested for good reason. You can see that dynamic of smaller investors piling into an IPO that turns out to be awfully cold at work with Vonage, which went public in 2006 at $17 a share, dropped immediately and now hovers near the $3 mark.

The other difficulty with selling shares to loyal customers is that IPOs in general underperform the market. Even good companies often come with offering prices that reflect a best-case scenario. That was the case with Red Hat, which shot up out of the gate in 1999, then fell in the Internet crash, and has slowly recovered. There’s a case to be made for investing in companies whose products you really believe in, as Peter Lynch used to counsel. As with Sam Adams it can certainly work in the long run; just keep in mind that “long run” might be further out than most investors are willing to travel.

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