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Selby, John --- "Market Disclosure and Governance Challenges When Floating University Research on the Stock Market: The Float of Melbourne IT Limited by the University of Melbourne" [2015] JlLawInfoSci 2; (2014/2015) 23(2) Journal of Law, Information and Science 1

Market Disclosure and Governance Challenges When Floating University Research on the Stock Market: The Float of Melbourne IT Limited by the University of Melbourne

JOHN SELBY[∗]

1 Introduction

Whilst most Australian universities are very familiar with the heavy burden of complying with laws relating to the proper management of the public sector, they have had fewer opportunities to gain experience complying with laws regulating the proper management of the private sector. The need to reconcile these two regulatory burdens is particularly challenging when those universities seek to commercialise their research, especially through floating subsidiary companies on the Australian Stock Exchange. This article examines the events which led to the first float of a company by an Australian university, that of Melbourne IT Pty Ltd (‘MelbIT’) by the University of Melbourne in 1999. Amongst its other activities, MelbIT held the commercially valuable right to process applications to register dot-com.au domain names, a right which aligned with significant investor interest in Internet-based business models in the 1990s. Using new primary sources, it is a case study of the challenges that affected the University’s governance, and of the importance of making full disclosures to the market during the time before the initial public offering of their shares to investors (known as the pre-IPO period).

Australian universities are subject to ongoing financial pressures. This article seeks to inform stakeholders within Australian universities of some of the risks and opportunities to make better use of information in their governance processes relating to research commercialisation so as to capture a greater proportion of the profits generated by floating research companies on the Australian Stock Exchange. This article applies agency theory to argue that several internal incentive structures, information asymmetries, and decision-making processes within the governance systems of the University of Melbourne led to the university receiving a significantly smaller proportion of the overall profits from the float of MelbIT than it otherwise could have achieved. It also argues that the failure to disclose adequately to the investing public the existence of sales contracts signed by MelbIT before the closing date for subscriptions to the initial public offering of the company may have amounted to a breach of the Corporations Act 1989 (Cth), which was in force at the time. It offers valuable insights for senior managers in Australian universities who may find themselves in similar circumstances in the future.

The first section of this article reviews the existing scholarly analysis of the MelbIT float. The second section is a case study of the events which led to that float. The third section analyses the three main issues which arise out of that case study, namely the decisions made about how MelbIT should be valued, the method by which it should be floated, and what information should be disclosed to investors so as to inform their decisions about whether to invest in the company.

2 Existing Analyses of the MelbIT Float

Whilst several print and some radio[1] and television[2] journalists have analysed the privatisation of MelbIT and its surrounding stakeholder conflicts, analysis of the subject by academics has been relatively scant. The few scholars who have examined this float can be divided into two camps: those supportive and those critical of it. Sharrock’s 2001 article, ‘Media Representations of the MelbourneIT Story’,[3] was supportive of the management of the University of Melbourne and the float in general. His perspective can be contrasted with the lengthy critique of the float within Cain and Hewitt’s book, Off Course: From Public Place to Marketplace at Melbourne University.[4]

Sharrock’s analysis focused upon the rationale behind the float of MelbIT, how its shares were allocated, and whether it was appropriately valued. Whilst Sharrock accepted that the Australian education sector (as a whole) was underfunded, he rejected media claims that Melbourne University’s motivation for privatising MelbIT was the need to ensure its own survival. Instead, he argued that it was sold to generate funds to be re-deployed more effectively in other research projects being undertaken by the University (e.g. in the Bio21 project), and that the company ‘was never an essential part of the University’.[5] Sharrock next rejected the Auditor-General’s finding[6] that the University of Melbourne should have sought independent advice regarding the valuation of MelbIT (which would have enabled the University to better decide which float strategy to pursue), claiming that of the four broker responses, JB Were’s was simply the most remunerative for the University.

Whilst Sharrock posited that the only appropriate methodology for determining the value of a company to be floated on the stock exchange was the discounted cash-flow methodology (the methodology used by JB Were in determining the maximum amount it was willing to underwrite the float) and that other methodologies were based on ‘irrational exuberance’,[7] this appeared to contradict the multiple of forecast revenues valuation methodology referred to on MelbIT’s own website shortly after it formally announced that the company would float on the stock exchange.[8] The next claim by Sharrock (that 10% of MelbIT’s shares were sold to the general public) seems slightly disingenuous, given that he appeared to have included MelbIT’s Directors and staff as members of that public (which would boost the 8.4% claimed by the Auditor-General by another 1.3%). Whilst those staff may be ‘members of the public’ in a sense, they were insiders, not outsiders, to the float.

Finally, Sharrock dismissed the National Tertiary Education Union’s (‘NTEU’) claim that the company should have been floated through a non-underwritten book-build process[9] because it would have exposed the University to the risk of a lack of demand for the shares. His position can be contrasted, however, with the views of a panel of experienced Australian stock brokers and asset managers, who candidly stated that:

Under the old fixed-price system... inevitably the vendor gets a lower price than he might. Book-builds... limit the risk that a sale is mis-priced.... [Vendors and brokers] don’t like mis-pricing, whereas [Asset Managers and other investors] like mis-pricing ... [because they are] ... after inefficiencies. The Americans run the deepest capital market in the world and they’ve never even heard of fixed price floats.[10]

As part of a broader study of perceived shortcomings in the grand strategy of the University,[11] Cain and Hewitt were critical of the decisions made when floating MelbIT. These authors were academics within the Department of Political Science at the University of Melbourne - Cain having formerly been the Premier of Victoria. Whilst Cain and Hewitt regarded the value of MelbIT as being based on excellence in academic research, it should be noted that the company was always distinctly separate from the Department of Computer Science at the University of Melbourne and that it did not undertake academic research.

Sharrock published two reviews of Cain and Hewitt’s book. In his first review, Sharrock disputed the validity of the overall concept of the university expressed by Cain and Hewitt as out-dated, and criticised the book for containing errors in facts and interpretations. Whilst he argued that the sale of MelbIT delivered a very substantial financial gain to the University (i.e. $78m clear profit, or a >20 000% return on investment), this ignored the potential for an even larger return if the float had been undertaken through a book-build process (albeit during a period of relative investor irrationality).[12] Sharrock was incorrect to argue that MelbIT’s first cash-flow positive business activity was the registration of domain names – the company was formed to expand an existing profitable research relationship with Ericsson.[13] Finally, Sharrock argued that, given the opportunity for a $78 million upfront payment in 1999, it would have been ‘fantasy’ for the University to have kept MelbIT for its ongoing cash-flows.[14] Although he made this statement back in 2004, the perspective available from hindsight now appears to contradict it: MelbIT generated $178 million in net profits after tax between 1999 and 2013.[15] At an average of $12 million per year in net profits after tax over fourteen years, the $78 million float proceeds would have had to generate an annual yield of more than 16% to be equally valuable.

Sharrock’s second review of Cain and Hewitt’s book covered similar territory to his first, but in greater detail, particularly in relation to the shifting role of universities from providers of elite education to providers of mass education.[16] He referred to MelbIT as a ‘commercial enterprise that served no academic purpose’, claiming that the University of Melbourne would have been ‘at least $78m poorer’ if it had not floated the company, before criticising Cain and Hewitt as ‘subscrib[ing] to an old-fashioned, monopoly-oriented, public sector fundamentalism that is inadequate to the tasks and resource requirements now facing the Australian university sector’.[17]

3 Floating MelbourneIT

Having criticised the analyses published by other scholars on the float of MelbIT, this section examines primary source documents and interviews with key participants to build a richer case study of the events between 1996 and 1999 that led to the float by the University of Melbourne of MelbIT. First, the earliest commercial activities of MelbourneIT Pty Ltd are examined. Next, the commercial opportunity (i.e. the processing of applications for com.au domain names) that led to MelbIT’s financial growth is briefly explored. The decision-making processes through which the University of Melbourne floated MelbIT are explored, and a discussion of how its value was determined is included. Finally, the case explores how two international sales contracts signed by MelbIT prior to its float affected its market value.

3.1 MelbourneIT Pty Limited Founded

MelbIT was incorporated at the University of Melbourne on 22 April 1996,[18] prior to the University agreeing with RMIT in September 1996 to discontinue their former joint-venture, the Collaborative Information Technology Research Institute (‘CITRI’).[19]

Having started at CITRI in 1994[20] and established its relationship with the telecommunications company Ericsson on 1 May 1996, Professor Peter Gerrand was offered the opportunity to be the founding CEO of MelbIT by Frank Larkins, Deputy-Vice Chancellor (Research) at the University of Melbourne.[21] The Vice-Chancellor of the University of Melbourne at the time, Alan Gilbert, advised that MelbIT’s role was to be ‘long-term and strategic – to demonstrate the University’s leadership in information technology to industry and to government’.[22] MelbIT sat outside the Faculty of Engineering and the Department of Computer Science at the University so as to focus on commercialising applied research with, and for, industry partners. MelbIT started with a 3-member board of directors, and 3 staff and research development contracts with Ericsson (a commercial relationship which Gerrand had developed at CITRI).

Despite reports to the contrary, early in its life MelbIT’s main business was not focused on domain names.[23] It expanded its profitable research collaboration with Ericsson and developed maxi.com.au, a system to facilitate the online payment of local council rates, inter alia, with NEC Consulting.[24] It operated on a cash-flow positive basis from the beginning, although it did receive a support guarantee of up to $350 000 from the University when it was formed.[25]

MelbIT’s role regarding the dot-com.au domain name system arose as a consequence of it being in the right place at the right time. On 21 June 1996, Charles Wright published an article on the front page of the Australian Financial Review, ‘Business Tackles the Net Keeper’, in which he identified Robert Elz as ‘a bearded 42-year old bachelor, a computer scientist at the University of Melbourne’, and criticised the up to 12 week delays in registering business domain names occurring under Elz’s watch. In response to threats of lawsuits from major corporations, Elz was reported as saying ‘I’ve got no money, and no assets... so that doesn’t worry me a bit. I’ve no interest in money’.[26]

This newspaper article, with its implied criticism of the University of Melbourne, caused significant consternation at senior levels of the University. When the Department of Computer Science, where Robert Elz worked, could not provide a solution, the head of that Department, Peter Thorne, turned to Peter Gerrand at MelbIT for assistance in reducing the backlogged queue of applications for registrations of dot-com.au domains.[27] Peter Gerrand sought from Robert Elz,[28] and was granted on 8 October 1996,[29] a 2-page contract which granted MelbIT a five year non-exclusive licence to process the applications for the registration of dot-com.au domains.[30]

As MelbIT developed subsequent generations of its automated domain name registration application processing platform software, additional functionality was added.[31] To recover the costs of developing its higher-volume/more rapid dot-com.au registration service, in late 1996 MelbIT proposed to introduce a time limit for the registration of domain names (two years before renewal was required) and a registration fee (tiered depending upon the speed with which the applicant wanted the registration to be processed). As it did not know the fair market value of its service, Peter Gerrand decided to charge a fee which undercut by 10% the cost of registering a dot-com domain through Network Solutions (i.e. $125 for a two-year dot-com.au registration).[32]

When interviewed for the Wright article published in the Australian Financial Review, Robert Elz had mooted the idea of charging registration fees, but on an exponential scale for each commercial entity (i.e. $20 for their first .com.au domain, $200 for the second, $2 000 for the third, and so on).[33] MelbIT’s proposal was for a flat fee for each registration, which would encourage a higher volume of applications than did Elz’s pricing model. MelbIT announced this proposal through a statement issued on Christmas Eve 1996 (and then shut down its offices for the holidays until 1 January 1997).[34]

MelbIT’s proposal caused a swift reaction by Australian Internet users, with a surge of applications lodged for the still fee-free .net.au 2LD. To cope with the sudden spike in application volume, the manager of the .net.au 2LD introduced a registration fee of $150 per .net.au domain, $25 higher than that charged by MelbIT.[35]

3.2 Significant Growth in MelbourneIT’s Revenues and Profits

This section outlines how growth in the domain name application processing component of its business enabled MelbIT to significantly increase its revenues (and profits) between 1996 and 1999, leading to its float on the Australian Stock Exchange. The introduction in 1996 by MelbIT of an automated online processing system for applications for dot-com.au domains and a help desk for applicant enquiries significantly increased the efficiency with which Australian businesses were able to register such domains. Rising demand and the ability to charge a significant fee for a business with high start-up costs but relatively low marginal costs delivered economies of scale that enabled this for-profit subsidiary of the University of Melbourne to generate significant positive cash-flows.

In the three weeks that followed the launch of MelbIT’s .com.au registration application processing software platform, a backlog of more than 2500 applications was processed. To further facilitate increases in the demand for .com.au domains, MelbourneIT used the process developed by Robert Elz of gaining endorsement from Australian Internet community bodies for changes to eligibility requirements within the .com.au application policy. In February 1997, the Internet Industry Association DNS Forum agreed that the Warwick Jackson-imposed prohibition on the registration of ‘common words’ would be narrowed to the rejection of ‘specific classes of words, such as gazetted place names and generic products (goods and services)’.[36] Eleven months later, the board of the Australian Domain Names Administrator further refined generic products to be those categories listed in the index to Telstra’s Yellow Pages phone directory. In November 1997, at a seminar hosted by the Registrar of Trade Marks, the members of the Australian Internet community present voted overwhelmingly to permit registrations on the basis of trade marks.[37]

These changes, together with increased awareness of the benefit of using the Internet in Australian society, the perception of a ‘dot-com boom’ in the United States and heavy advertising, led to massive growth in the volume of applications for .com.au domains being received by MelbIT (see Figure 1 below). In mid-1996, applications were arriving at a rate of 1 000 per month. By the end of that year, applications had grown to 1 500/month. In its first 18-months of operations, MelbIT processed 33 000 applications.[38]

2015_200.jpgFigure 1: Cumulative .au and .com.au registrations over time[39]

Whilst MelbIT had always been cash-flow positive since its inception, once the registration fee of $125 per domain came into effect in late 1997, that cash-flow soared (despite the significant costs associated with the development of its three generations of domain registration application processing software, which led to a temporary cash-flow crisis in March 1999). Its senior managers approached the University offering a management buyout worth $1.5 million to $3.5 million, which the Board of MelbIT rejected. The Board was concerned, however, about senior managers of the company resigning to take up more lucrative opportunities in other dot-com companies, so they started looking at options for spinning off the company from the University, with an initial valuation of $15 million.[40]

This idea was reinforced within the senior management of the University of Melbourne by another front-page article published in the Australian Financial Review on 23 April 1999, entitled ‘MelbourneIT’s Giant Leap for Domain Kind’.[41] That article relayed MelbIT’s success in being appointed as one of five companies to be test registrars of the .com global top-level domain. Peter Gerrand attributed that success to MelbIT’s technical skills and its carefully nurtured relationship with Paul Twomey, who by that time was the Australian Government’s representative on the Governmental Advisory Council of the Internet Corporation for Assigned Names and Numbers (‘ICANN’),[42] which had its first meeting in Singapore in March 1999.[43]

3.3 The Decision to Float MelbourneIT

The previous section examined the role played by MelbIT’s domain name application processing department in significantly increasing the revenues (and profits) of its business. This led to pressure from some internal stakeholders who sought to privatise those public profits through various commercialisation strategies.

Given the range of privatisation strategies promoted by different stakeholders within MelbIT outlined in the previous section, it was not a foregone conclusion that the company would be floated on the Australian stock exchange. The company was a subsidiary of the University of Melbourne and consequently fell within the ambit of the overall commercialisation strategy of that university and the decision-making processes which operated therein.

Universities undertake a range of basic- and applied-research projects, some of which eventually reach the stage of readiness for commercialisation. It is relatively common for universities to enter into technology licensing agreements with existing private and public companies wherein the company pays a proportion of income (or profits) for the right to exploit the research (e.g. the 1991 royalty agreement reached by the Faculty of Medicine at the University of Melbourne relating to the Cochlear implant).[44] The university may also enter into an outright sale agreement wherein a company purchases the patent in its entirety for a fee. Alternatively, the university may offer to sophisticated investors (and/or internal or external venture capital firms) the opportunity to invest in a private company to fund further the development of a product which commercialises the original research. This may involve successive rounds of funding offers which dilute the university’s holdings substantially (especially for research involving significant up-front expenditure). A third method of commercialisation (though less common) is for the university to float directly a company established to exploit the research on the Australian Stock Exchange.[45] It was this latter method which was selected by the University of Melbourne as the means of exploiting opportunities generated by its wholly-owned subsidiary, MelbIT.[46] The typical reasons as to why a for-profit company is floated on the stock exchange include:

• The need to raise additional capital which will be used to fund the ongoing operations of the company;

• To enable early investors to sell-down their holdings and cash-out some or all of those monies;

• To raise the public profile of the business (which is especially relevant for debt-financiers, suppliers, and customers); and

• To establish liquidity in the shares of the company through the determination of their fair market value on an ongoing basis (which assists the company to borrow money, to launch takeovers and to clarify the value of employee share- and option-schemes).[47]

Given the proven financial success of MelbIT, its public popularity, and the fact that it was so cash-flow positive that debt financing was not necessary, the first, third, and fourth reasons listed above were not applicable. However, the second of those four reasons does appear to have been the motivation for the University Council to approve the float of the company.[48]

3.4 Determining the Value of MelbourneIT

The previous section outlined the decision-making process through which stakeholders within the University of Melbourne agreed to commercialise MelbIT through a float on the Australian Stock Exchange. This section examines how those stakeholders determined the price at which they would value the company for its float.

Once the decision was made to pursue a public float of MelbIT, one of the major challenges faced by the board of the parent company, Melbourne Enterprises International Limited (‘MEIL’) and the Board of MelbIT was to determine a fair market value for the company. In 1999, listed companies with Internet-related business models were trading at very high multiples of their revenues (whether current or forecast) and were experiencing significant volatility in their market capitalisations (even on a daily and weekly basis).[49]

In preparing for the float of MelbIT on the Australian Stock Exchange, the Council of the University of Melbourne was concerned about the volatility of the market capitalisation of listed technology companies and the impact that such volatility could have on the market demand for shares in the float. Such technology companies had been valued by investors in the share market on the basis of being ‘growth firms’ (i.e. their share price was a function of the present value of their current operations and of their future investment opportunities, not only of their existing cash-flow). This was because of the potential for some of those firms to dominate their nascent markets and earn abnormally-large returns in the future (as had been the case with, for example, Google). Unfortunately, due to information asymmetry and the impossibility of knowing in advance which markets would prove profitable (as was the case with, for example, pets.com), it was not possible for investors to predict which firms would succeed and which would implode as a consequence of expending too many of their resources on marketing and research and development without achieving such a dominant market position. Another reason for the stratospheric price-earnings multiples of those companies had been the excessive optimism of financial analysts who made recommendations to clients seeking to invest in the share market.[50]

One method of valuation which was considered was to determine the multiple which represented the value of market capitalisation over projected revenues for similar companies, and then to apply that multiple to MelbIT’s forward revenue projections. Unfortunately, the multiple was changing rapidly and the University was concerned that ‘there was froth in the market generally at the time’. Ultimately, the University of Melbourne hoped to generate proceeds in excess of $50 million from the sale of MelbIT.[51]

MelbIT’s board supported the concept of determining its own value based upon multiples of market capitalisation over projected revenue through a press release it issued on 18 November 1999. In that statement, the company formally announced details of its $110m float, which would raise $93.5m by selling 85% of the stock onto the market. Revenue growth was forecast at 100% year-on-year. The float would be ‘one of the first domain registration business floats since Network Solutions in 1997. Network Solutions has a p/e of 246 (market cap $US5Billion and its shares went from $25 in Nov 98 to $150 in Nov 99)’. MelbIT’s projected revenues in 1999 were $A12.34m. JB Were said ‘interest in the float was high and would be fairly evenly divided between institutions and private investors’.[52]

In return for agreeing to fully underwrite the float of MelbIT, JB Were received a fee of $2 898 500 in addition to reimbursement of its out-of-pocket and legal expenses up to a maximum of $45 000.[53] As MEIL was a company limited by guarantee, it was prohibited from paying a dividend to the University of Melbourne. Instead, it made a gift to the University of $50 million of the proceeds it received from the float.[54]

MelbIT’s shares were sold to its initial investors at $2.20 per share. On its first day of trading as a listed company, MelbIT’s shares opened at $8.21, reached an intra-day high of $9.10, and closed at $7.95. 11.8 million shares were traded on that first day, delivering a ‘stag profit’ of around 320-410% for the initial investors. For the next few months, its share price moved roughly sideways, oscillating around $8, as seen in Figure 2 below.

2015_201.png

Figure 2: MelbourneIT’s daily closing share price in the three months after it was floated[55]

3.5 Pre-Float (non-)Disclosures of International Sales Contracts

Whilst the previous section examined how stakeholders within the University of Melbourne determined the price at which they would float MelbIT on the Australian Stock Exchange, this section examines the impact that two major customer sales contracts signed by the company before its float had upon investor perceptions of its fair-market value in the period shortly after that float. Later sections analyse whether those contracts were accurately communicated to investors prior to the closing date for subscriptions to the float.

In the first few months after its float, MelbIT announced to the share market that before its float it had signed two sales contracts which would be likely to increase the volume of domain name registrations that it processed, thus potentially increasing its revenues (though not necessarily profits); one with Verio and another with Intuit.[56] Analysis of price and volume signals extracted from trading data shortly after those announcements provide evidence of shareholder attitudes towards the valuation of MelbIT (i.e. whether shareholders were relying primarily on the basis of the discounted cash-flow method or a multiple of revenues method).[57]

3.5.1 Verio Contract

In the week prior to its announcement to the public after close of trade on 12 January 2000 that it had signed a contract to provide domain name registration services to Verio (in return for which Verio took a 4.9% shareholding in MelbIT), MelbIT’s share closing price had averaged $7.58 with an average daily volume of 297 000 shares traded. Whilst there was an initial rise in both share price and volume on the morning of the first day after the announcement (a 3.4% intra-day rise in the share price on average volume), share traders sold the stock on the following day, driving the price down by 8% on volume 40% higher than average. Overall, the news that this contract had been signed appears to have already been factored into the public’s valuation of the company during the price surge that occurred on its first trading day, and subsequent disclosure to the public of the identity of the counterparty to that contract did not have a lasting positive impact on the company’s share price.

3.5.2 Intuit Contract

The outcome of not announcing the Verio contract to the public before the closing date for subscriptions to the float can be contrasted with the impact on its share price when MelbIT announced that it had similarly partnered with Intuit to provide domain name registration services to its QuickBooks customers (a contract it had signed on 6 December 1999). When that announcement was made after the close of trade on 9 February 2000, MelbIT’s share price rose 70% to $12.95 in just five days on trading volumes 3.75 times heavier than it had averaged in the week prior to that announcement.[58] Over those five days, the overall share market rose by just 0.76%. Thus, this announcement of an opportunity for an increase in the volume of domain names registered clearly altered shareholder perceptions of the value of the stock – as demonstrated in Figure 3 below.

2015_202.jpg

Figure 3: Change in MelbourneIT’s daily closing share price compared to overall share market in the months after its float[59]

This section has explored the events which led to the float of MelbIT. This case study has examined in greater detail the decision-making processes prior to the float and revealed an issue missed by previous scholars concerning the decisions regarding the University of Melbourne, and MelbIT’s executives’ decision not to disclose to investors prior to the closing date for subscriptions to the float of the company the significance of two sales contracts which subsequently had substantial impact on the valuation of the company. The legal consequences of those decisions are explored in the next section.

4 Reviewing the Adequacy of the Pre-Float Valuation and Disclosure Decisions

This section first examines two previous investigations into the float of MelbIT: an internal investigation ordered by the Vice-Chancellor of the University of Melbourne, and an external investigation undertaken by the Victorian Auditor-General. It then considers the legal effect of the additional information presented above which does not appear to have been considered by those investigations.

An internal university investigation implemented by the Vice-Chancellor to determine, amongst other things, whether the share issue was under-priced reported that ‘a thorough and proper process was undertaken to reach what was believed to be a true valuation’ and that the boards of MelbIT and MEIL were not at fault.[60] Cain and Hewitt criticised this committee as consisting of ‘people who owed their jobs to some of those whose conduct they were examining, on premises that prevented a wide, full-blooded examination’.[61]

An external review of the float was undertaken by the Victorian Auditor-General,[62] whose report focused upon three topics: 1) the processes the University went through to determine whether and how to float MelbIT; 2) how to value the company; and 3) whether and how to allocate shares to various University employees. Its overall conclusions were that:

The failure of the University of Melbourne to obtain an independent authoritative valuation of MelbourneIT Limited was a significant deficiency in the float process, in that valuation would have provided a benchmark against which proposals from brokers and underwriters could have been better considered, [and that the University should have] considered ... alternative methods of sale to achieve the best outcome from the privatisation of public sector companies.[63]

This report highlighted the conservative ‘risk-minimisation’ mindset of the University Council (‘the University did not wish to expose itself to any risk associated with the float’[64]) and the Boards of MelbIT and its parent company, MEIL.[65] These stakeholders were focused mainly on preserving the reputation of the University by ensuring that the float was fully sold, rather than on maximising the value received from the privatisation of a public asset. The Auditor-General noted that JB Were used a discounted cash-flow valuation method to determine the maximum amount to which it was willing to under-write the float of MelbIT. Such a figure did not amount to a valuation of the company, instead only reflecting the maximum that JB Were was willing to pay to the University in the event that the float was a total failure.[66] The Auditor-General recommended ‘in any future floats of public sector companies, the use of a book-building method in fixing a share price should be seriously considered, as it may be a better indicator of market demand and therefore price for the share offer, due to the creation of competition between institutional investors and retail investors’.[67]

4.1 Decision-making by the University of Melbourne when Floating MelbourneIT

Whilst there are certainly advantages and disadvantages to the use of a fully-underwritten float structure and a non-underwritten book-build structure, it is arguable, given the risk of perverse incentives inherent in underwriting a float, the relatively miniscule financial contribution that the University had invested to capitalise the company, the fact that the University had retained full ownership of the company until the day of its float (a relatively rare situation for universities when commercialising their research, whose ownership is often diluted down to a capital holding of <50% by the time of a float), and the difficulty it was having in determining a fair market value for the company, that it would have been wiser simply to have let the market determine the price it was willing to pay for MelbIT. It is arguable that such a situation would almost certainly have generated a substantial profit for the University and saved millions of dollars in underwriting fees (even in the context of the price volatility of the time); only the extent of that profit would have been unknown in advance.

This section examines how the decision-making processes and incentive structures within the University of Melbourne may have caused it to act in a manner that was not in the institution’s long-term best interests.

As highlighted in the internal and external reviews of the decision by the Council of the University of Melbourne to commercialise MelbIT by floating it on the Australian Stock Exchange, internal stakeholder conflicts arose in two ways. The first related to how the University determined the valuation at which it should sell MelbIT.

4.1.1 Decision-making on the Value of MelbourneIT’s Business

Various stakeholders with different incentives held very different perspectives on the appropriate float value of MelbIT. As he would have an opportunity to determine where the proceeds would be allocated, the Vice Chancellor of the University wanted to generate as much money as possible from the float, whilst the University Council favoured a lower valuation as they wanted to minimise the reputation-risk to the University that the float might fail to be fully subscribed. As it regulated the university sector in Victoria and had granted $100 000 in seed funding to MelbIT to kick-start its domain name business, the Victorian Government wanted to maximise the float value so as to ensure the largest possible revenue boost to its most prestigious university. The underwriters of the float, JB Were, wanted to minimise the value of the float to the lowest level acceptable to the University Council for two reasons: first, that would minimise the extent of their liability as underwriters if the float failed to be fully subscribed; and second, the opportunity to distribute shares in a ‘hot’ float with a large first-day increase in its share price to their preferred clients could be used as a basis to extract larger commissions for the stock broker from those preferred clients in the long term than would be earned in underwriting fees from the University of Melbourne in the short term. The conflict between the goals of these various principals and agents clearly had the potential to be intense.

The risk minimisation strategy approved by the University Council contradicted the instruction that the University gave to MEIL to ‘maximise the value [of the float] to the ultimate shareholders’.[68] This instruction occurred in the context of the Vice-Chancellor reminding the University Council that ‘other possible considerations, such as the potential value of MelbIT as a research sponsor or [research and development] incubator facility for the University, should not be pursued at the expense of maximising shareholder value’.[69]

Whilst the boards of MEIL and MelbIT could only speculate that the 400%+ spike in the share price of the company on its first day of trading was ‘part of a sudden increase in interest by investors in Internet stocks’,[70] the Victorian Auditor-General attributed this to the ‘secondary market ... judging the value of the shares’ on the basis of additional information which had not been included in the prospectus for the company.[71] That additional information related to two contracts which the company had signed prior to the initial allocation of shares with US-based companies for the wholesale processing of domain name registration applications, one with Intuit and one with Verio. MelbIT had announced the existence of those agreements and their general terms (but not the identities of the counterparties) in the period of time after the closing date for subscriptions and before the first day of trading in the shares. The effect of those contracts was to raise significantly MelbIT’s revenues (though with lower profit margins per registration). This meant that whilst there would be a significant increase in revenue for the company going forward, the increase in profits was less determinable.

During its pre-float negotiations, MEIL presented the lead broker, JB Were, with its analysis of the Intuit and Verio contracts. This led JB Were to increase MelbIT’s maximum underwritten value by $20 million (from $90 million to $110 million) on the basis of the impact of those contracts on its discounted cash-flow model. However, if retail investors were to apply the alternative valuation method used by LEK Consulting (which was a multiple of forecast revenues), those investors would increase their estimate of the worth of the company by far more than JB Were’s $20 million.

Whilst the University of Melbourne could have issued an amended prospectus which included additional information about those two contracts, its directors argued that this would have caused the float to be delayed from December 1999 into early 2000 (thus requiring the preparation of revenue and income forecasts for the year 2001, which were not required in the 1999 prospectus), and risked the departure of senior staff.[72]

It is debatable whether the arguments presented by MEIL to justify its failure to notify formally potential investors (in the initial public offering of MelbIT) of the Intuit and Verio contracts were sufficient. For example, on 11 November 1999, MEIL issued a supplementary prospectus for MelbIT, which advised that on 8 November 1999 Robert Elz had transferred to auDA his authority to set policies for the .com.au second-level domain (whilst retaining control of his authority over the other .au second-level domains).[73] Despite the statements made by the directors in the supplementary prospectus that the transition ‘would have no material effect’,[74] it is arguable that such a transition would be expected to affect materially the profitability of MelbIT’s .com.au domain name registration application processing business going forward because auDA was expected to liberalise the existing policies (thus permitting a higher-rate of registration applications) prior to introducing competitors to MelbIT’s de facto monopoly on processing .com.au registration applications.

Given that the company had signed the first of its two contracts (the one with Intuit) on 7 November (the day prior to Robert Elz’s transfer of his authority to auDA), it is perplexing that information about the Intuit contract was not included in the supplementary prospectus issued four days later alongside the ‘good news’ regarding the transition in the .com.au policy regulator.[75] MelbIT had signed the Intuit contract the day before Robert Elz’s transfer, and regarded both events as being ‘not market sensitive’, yet felt it was only able to notify potential investors of the latter change (which the directors believed ‘would not have a material effect on MelbourneIT’) without causing a delay in the float.[76] MelbIT only notified investors of the existence of the Intuit and Verio contracts on 10 December 1999 (six days after the closing date for investors in the initial public offering and four days prior to the first day of trading), referring to them as ‘not sufficiently material to warrant the issue of a supplementary prospectus’. The Australian Stock Exchange was not notified that the Intuit contract was ‘market sensitive’ until 9 February 2000.[77] Clearly investors did regard the Intuit contract as being likely to materially impact upon the value of the company – heavy trading in MelbIT’s shares saw its share price rise 58% in the days after that announcement (see Figure 3, above).

At the time of MelbIT’s float, s 1021 of the Corporations Act 1989 (Cth) set out a list of information that had to be included in a prospectus whilst s 1022 required issuers to include ‘all reasonable information as investors and their professional advisers would reasonably require, and reasonably expect to find in the prospectus’.[78] s 1024(1)(b)(ii) of that Act permitted the issuance of a supplemental prospectus in the event there arose a ‘significant new matter’ that would have been required to be included in the original prospectus under either ss 1021 or 1022. s 996 of that Act made such it an offence for a person to authorise or cause such an omission, unless such omission was inadvertent.

When MelbIT took advantage of the s 1024 process to issue a supplemental prospectus on 11 November 1999, its failure to include within that document notification to potential investors of the signing of the Intuit contract may have amounted to a violation of s 1022 and s 996 of the Corporations Act 1989 (Cth). So the issue is whether the omission was inadvertent and whether it was reasonable for the directors to delay the announcement of the signing of the Intuit contract until after the closing date for subscriptions by IPO investors, and until February for the Verio contract. Given the pre-float actions of the underwriter JB Were to increase its guaranteed underwriting amount by $20 million after being presented with evidence of those two contracts, it would be hard to argue that the board of the company were unaware of the material and market value of these contracts. They appear to have simply kept that information from the general public prior to the close of the subscription date for the IPO, something which could have easily been done by adding information about the Intuit contract to the supplemental prospectus of 11 November 1999, or by extending the closing date for investor subscriptions until beyond the announcement on 10 December 1999 of the Verio contract.

4.1.2 Decision-making on the Float Method for MelbIT

The consequence for the University of Melbourne of having chosen to use an underwriter for the float of MelbIT, rather than using a book-build method or an auction for determining its valuation, was that it was forced to use the valuation method selected by the underwriter rather than the valuation method which would have had a greater probability of maximising the value of the company to the University.[79] The University of Melbourne received a much lower amount of money from the proceeds of the float than otherwise would have been the case. The vast majority of the profits of the float of MelbIT went to the preferred clients and institutional clients of the underwriter and the float manager, rather than to the University of Melbourne (the stag profits on the sale of the 11.8 million shares traded during the first day of the float alone were worth between $56.7 million and $81.5 million in profits – over and above the proceeds of the float)! Based upon just the first day of trading, the use of a book-build method for pricing the float would have more than doubled the return to the University. As recognised by the Auditor-General of Victoria, paying closer attention to the risks generated by agency costs could have delivered a much greater return for the University of Melbourne.[80]

The long-term and short-term interests of stakeholders in an institution may often be in conflict.[81] If one stakeholder (the principal) is dependent upon another stakeholder (the agent) throughout repeated rounds of transactions, there is a risk that the agent may exploit the information asymmetry and incomplete information problems which plague their principal so as to maximise their own interests in the short term.

4.1.3 Stakeholders with Conflicting Incentives

First, it is arguable that Australian universities, including the University of Melbourne, were beset by a fundamental problem both internally and in their broader institutional environment, the solution to which was disputed by Cain and Hewitt, and Sharrock.[82] That problem is that whilst the Universities have many ‘good things’ into which they could invest resources (time, minds, money, facilities, etc), those institutions lack the financial resources to implement all of those ‘good things’. Consequently, senior university administrators are placed in the unenviable position of having to select and support a subset of alternatives into which they deploy resources, with all of the zero-sum political game-playing that this involves. In making such decisions, the (idealised) goal should be to generate a return on some ’winners’ sufficient to cover those selected which do not succeed and to expand the size of the overall pot of resources for subsequent rounds of the game.

The second internal factor is that those senior administrators, like vice-chancellors, are appointed on relatively short fixed-term contracts with incentive bonuses for achieving certain key performance indicators. It is arguable that this combination of factors leads to a strong incentive for vice-chancellors to squeeze perceived cash cows for short-medium term gain, rather than be steward of them in a manner which would maximise long-term results (the benefits of which would flow to, and be exploitable for short term gains by, subsequent teams of senior administrators).[83]

During the mid-1990s, the senior management of the University of Melbourne was faced with competing demands for resources in excess of their capacity to supply such resources. For example, the Vice-Chancellor at the time supported three expensive strategies: Melbourne University Private; Bio21; and Universitas 21 Global.[84] When faced with the opportunity to generate significant revenues in the short-term through floating MelbIT, which revenues could be deployed to finance some of these strategies, it is perhaps not surprising that a vice-chancellor on a limited contract would be tempted to adopt that short-term strategy. Whilst leaving MelbIT to continue to operate as a cash-cow within the University could potentially generate greater overall benefits in the medium to long term, the likelihood of such a result would be uncertain. Given the short-term nature of employment contracts for senior university management, a long-term stewardship strategy for MelbIT would also have been prone to the whims of future vice-chancellors who could be tempted to sell off the company during their own tenure so as to gain the short term benefits of the opportunity to allocate those proceeds to their own preferred strategies. It is not surprising, then, that the vice-chancellor at the time, Alan Gilbert, deployed the largest proportion of the proceeds generated by the float of MelbIT towards a group he had championed, the Bio21 Institute, to support their medical, agricultural, and biotechnology research projects.

Third, a challenge for the university sector which arose out of the structure of these governance institutions was the impact of these short term pressures on the long term sustainability of the university system. Whilst Robert Elz was not responsible for the systems developed within MelbIT to process high volumes of applications for the registration of .com.au domain names, he did work for several decades within the Department of Computer Science at that University. Without the in-kind support Robert Elz received from that Department to focus on his network research, deployment and management activities for the .au, .org.au, and .com.au domains (which were generally outside of the scope of his employment), the Internet in Australia was unlikely to have developed in the successful manner in which it did. That the Department of Computer Science received not a single penny of the proceeds from the sale of MelbIT (at the express order of the Vice-Chancellor[85]) is a significant disincentive for that Department, or others like it, to invest their scarce resources to support long-term basic research, proselytising, and/or skills development amongst their staff to lay the groundwork for the next generation of technologies, akin to the Internet, and the next generation of businesses like MelbIT.

This prohibition on faculties or departments benefiting directly from the proceeds of the commercialisation of technology developed by their staff was clearly not the case for all faculties within the University of Melbourne as the Faculty of Medicine was receiving $750 000 per year in royalties from Cochlear prior to the float of MelbIT. Perhaps it was a case of the Department of Computer Science missing an opportunity, or choosing not to exploit its employees’ outside work for Departmental gain as a matter of principle? The consequence, however, was a significant disincentive to champions of long-term success in computer science (or, more accurately, the transfer of that incentive to the bio-medical researchers in the Bio21 project whose research and opportunities were turbo-charged by the proceeds of MelbIT).

Fourth, it is arguable that both the broader institutional environment and the opportunities presented by the high agency costs described above created incentives for the senior management of the University of Melbourne to experiment with innovative strategies, such as the first public float of a company based upon university research in Victoria. The existing constraints on public sector benefits from options and share allocations had not been defined by the Victorian government in its code of practice, thus providing incentive to the management and staff of MEIL to initiate the proposal to float the company (after their attempt at a management buyout was rejected by the University).

It is unclear whether the members of the University Council who were listed on JB Were’s preferred private clients list were similarly motivated, but they do not appear to have taken active steps to disclose the existence of their conflict of interest to the University Council when it considered the proposal to float MelbIT through JB Were. The Vice Chancellor’s desire to stimulate bio-medical research at the University of Melbourne through a public-private partnership under the Bio21 initiative was constrained by a lack of funds until the opportunity to generate a large short-term return through the float MelbIT presented itself.

The more interesting question is whether these factors also influenced the choice of the University Council to commercialise MelbIT through a fully underwritten float as opposed to a book-build. Employing the benefits of hindsight, it appears that Australian investors are quite willing to invest in companies floated to commercialise university-based research, even if those companies are at quite an immature stage in their businesses (or having, for example, large accumulated losses and negative operating cash-flows). Subsequent floats of several cash-flow-negative research companies (e.g. Regenera, Impedimed and QrxPharma) by Australian universities have been fully subscribed (some have even been over-subscribed).[86] Thus, the need for fully-underwritten floats has not been demonstrated in itself in practice, and the concern of the University Council that the float of MelbIT may not have received sufficient demand from investors would appear to have been unsupported by the evidence (despite the volatility which existed in the share market at the time). Of course, the University Council would not have known this ex ante.

The benefit of a fully underwritten fixed price per share float was that it guaranteed benefits for both the management and staff of MelbIT (financial) and for the senior management of the University (i.e. a guaranteed level of funding which could be re-deployed to Bio21, inter alia). Unfortunately, the opportunity cost of those benefits was the chance for the University to receive the full value which the Australian public was willing to pay for the company (whether rationally or otherwise). By selecting a fully-underwritten float as a strategy, the University was precluded from taking advantage of the opportunities presented by MelbIT’s growing its revenues through signing overseas contracts. Those advantages could have been pressed by notifying potential investors of the contract MelbIT had signed with Intuit via the supplementary prospectus for MelbIT which was issued by the University, and about the Verio contract by extending the closing date for subscriptions. The increased revenues (though not necessarily increased profits) available to MelbIT from those contracts would have significantly increased its perceived capital value amongst those potential Australian investors who valued technology companies on the basis of a multiple of their projected revenues (as opposed to a cash-flow or profit basis), and could have increased consequently the price per share bids which would have been received through a book-build float.

From an economic perspective, it is arguable that the University of Melbourne should have floated MelbIT through a book-build rather than a fully under-written float. However, the confluence of factors arising out of the University’s higher-level governance institutions and the agency costs imposed by inadequate supervision of its senior management by the Victorian State Government, permitted significant value to be transferred from the University to institutional investors and the preferred private clients of the brokers JB Were and Commsec through the initial public offering of the shares in MelbIT at below the price which would otherwise have been paid by Australian investors at the time. Much of those stag profits could (and arguably should) have flowed to the University of Melbourne.

As underwriters and IPO marketing advisors engage in multiple rounds of business with institutional investors and preferred clients each year, whilst a university engages so rarely with those investors that each interaction might almost be considered a separate event, the incentives for the two parties differ significantly, posing substantial risks for a university which fails to appropriately monitor and constrain its underwriters and IPO marketing advisors. The underwriters and IPO marketing advisors have an incentive to under-state the market value of a university’s research so as to deliver repeatedly stag profits to their institutional investors and preferred clients – who will then continue to use those advisors on an ongoing basis. On the other hand, a university wants to maximise the price it receives from all investors for the research it commercialises through an initial public offering. The book-build method offers a university a means of determining the fair value of its research without the risk of opportunistic behaviour by its advisors. Arguably, if the float of a business similar to MelbIT were to occur in the future (i.e. were a university seeking to commercialise its research with the goal of cashing out money from an established profitable business), a book-build method would be a more appropriate method for determining the value of the business than a fully-underwritten float.

5 Conclusion

This article has presented a more detailed case study of the foundation, early operations, and float by the University of Melbourne of MelbIT than has pre-existing literature. It has reconciled the competing perspectives of Sharrock, and Cain and Hewitt over the rationale for the float of the company through an analysis of the impact of the broader institutional environment on the senior management of the University of Melbourne, and has examined the consequences of the agency costs which arose due to inadequate supervision by the Victorian Government of that senior management.

Deficiencies in the pre-float disclosure of information to investors have been identified, along with the significant opportunity for financial gains which were missed by the University of Melbourne as a consequence of those deficiencies. A greater awareness by university senior management of their risks of liability for omissions within prospectus documents under s 1022 of the then Corporations Law (now ss 710-711 of the Corporations Act 2001 (Cth)) may be more likely to encourage more timely disclosure of transactions, which may have a substantial impact upon the valuation of a company being floated by a university, especially if the book-build method is used in the float.

Contrary to Sharrock’s position, it is arguable that there is merit in the conclusion drawn by the Auditor-General of Victoria that when considering future commercialisations of university research through floating a company on the stock exchange, those universities should consider using a book-build or an auction process rather than a fully-underwritten float, especially in situations where the entity being commercialised has already reached the stage of being operationally cash-flow-positive. This must be the case, even if such a process will not necessarily guarantee a successful float or a successful company – the commercialisation of university research is inherently risky, especially if the company is formed when that research is at too early a stage in its development.

However, such advice is unlikely to receive significant support within the senior management of Australian universities if they continue to be subjected to an institutional environment which places upon them extreme pressure to achieve short-term financial returns which can be re-deployed into other areas of those universities. The consequence of such a strategy, however, is the risk of undermining the long-term success of those universities due, as has been discussed, to the short-term interests of the contracted management of the universities, and the disincentive this provides to the tenured faculties and researchers (particularly those outside the bio-medical and pharmaceutical disciplines) to develop commercially viable research without sufficient reward.


[∗] Dr John Selby, LLB (First Class Honours, University Medal), PhD (UNSW), BInt Bus. (Griffith), Grad Dip in Legal Practice (NSW College of Law), Grad Dip in Arbitration (UQ), Lecturer in the Department of Accounting and Corporate Governance, Macquarie University.

[1] See, for example: ABC Radio National, ‘The Effect of Market Forces on Sandstone’, National Interest, 8 February 2004 (John Cain and John Hewitt) <http://www.abc.net.au/rn/nationalinterest/stories/2004/1040420.htm> (25 May 2015).

[2] See, for example, the online transcript of the ABC Four Corners story ‘Domain Games’ which also contains a chat forum with postings by Robert Elz: ABC Television, ‘Domain Games’, Four Corners, 5 June 2000 (Stephen McDonell)

<http://www.abc.net.au/4corners/stories/s136215.htm> (25 May 2015).

[3] Sharrock was an honorary research fellow at the University’s Centre for the Study of Higher Education, and a management consultant to senior university managers. See: Geoff Sharrock, ‘Media Representations of the MelbourneIT Story’ (2001) 73(2) AQ: Journal of Contemporary Analysis 7.

[4] John Cain and John Hewitt, Off Course: From Public Place to Marketplace at Melbourne University (Scribe Publications, 2004). Cain and Hewitt’s book has been reviewed both positively: Paul Kniest, ‘Book Review: University Overboard’ (2004) 46(2) Australian Universities Review 40; and negatively: Geoff Sharrock, ‘Book Review: The Idea of the University’ (2004) 20(1) Policy 44; Geoff Sharrock, ‘Rethinking the Australian University: A Critique of Off Course’ (2004) 26(2) Journal of Higher Education Policy and Management 265. Another very brief critique of the MelbIT float can be found in: Di Adams, ‘The Unintended Consequences of Deregulation: Australian Higher Education in the Market Place’ in Paul Trowler (ed), Higher Education Policy and Institutional Change: Intentions and Outcomes in Turbulent Environments (Open University Press, 2002) 154.

[5] Geoff Sharrock, above n 3, 9.

[6] Auditor-General of Victoria, Report on Ministerial Portfolios, tabled in the Victorian Parliament on 1 June 2000 <http://www.audit.vic.gov.au/publications/2000/20000601-Ministerial-Portfolios-June-2000.pdf> (25 May 2015).

[7] Geoff Sharrock, above n 3, 10.

[8] MelbourneIT, ‘Company Announcement: Melbourne IT Float to Net $93.5m’ (Media Release, 1999)

<http://corporate.melbourneit.com.au/news/newsstory.php?id=21> (29 January 2010).

[9] A book-build involves the broker soliciting bids from potential investors. Those bids specify how many shares the investor hopes to acquire and the price per share that investor is willing to pay. After the deadline for receiving all such bids has passed, the broker orders the bids on the basis of the investor who was willing to pay the highest price per share down to the investor willing to pay the lowest price per share. The broker then allocates shares in the volumes requested by the investors willing to pay the highest price per share downwards until all the shares on offer have been allocated. Thus different investors may pay different prices for the shares in the company and a volume-weighted average share price is determined after the float.

[10] See: Malcolm Maiden, ‘It’s Sink or Swim Time as More Floats Set Sail’, The Age Newspaper (Melbourne), 8 November 2003 <http://www.theage.com.au /articles/2003/11/07/1068013396687.html> (25 May 2015).

[11] John Cain and John Hewitt, above n 4, 131. They incorrectly asserted that MelbIT held ‘a monopoly as the only issuer of .au names in Australia’, a claim ignorant of the ability of Australian Internet users to register .net.au, .org.au, etc third-level domains without dealing with MelbIT (which only had a de facto monopoly on the processing applications for registrations within the .com.au second-level domain). Cain and Hewitt criticised the three members of the University Council who did not declare a conflict of interest when accepting MEIL’s recommendation to use JB Were as the primary broker for the float on the basis of being preferred private clients of that broker. Those three members of Council then were offered and accepted allocations of shares from JB Were during the initial public offering of MelbIT whilst most other University staff were under the Vice-Chancellor’s prohibition on being issued shares.

[12] Geoff Sharrock, ‘Book Review: The Idea of the University’, above n 4, 48.

[13] Interview with Peter Gerrand, former head of CITRI and founding CEO of MelbIT (Melbourne, 22 January 2010).

[14] Geoff Sharrock, ‘Book Review: The Idea of the University’, above n 4, 49.

[15] See the Financial Reports and Annual Reports issued by MelbIT between 1999 and 2013 <http://www.melbourneit.info/investor-centre/annual-reports> .

[16] Geoff Sharrock, ‘Rethinking the Australian University: A Critique of Off Course’, above n 4, 267-8.

[17] Ibid.

[18] MelbourneIT, Annual Report 1999 (2000) Domain Avenue, 70 <http://www.domainavenue.com/mit_annual_report_1999.pdf> . Unfortunately, MelbIT’s own website only listed its annual reports back to the year 2000 and the 1999 report was not available at <http://corporate.melbourneit.com.au/investor-relations/annualreport.php> (25 May 2015).

The internal holding structure of MelbIT within the University of Melbourne changed over time. In 1996, the company was created as a wholly-owned subsidiary of Melbourne Research Enterprises Limited, which in turn was a company limited by guarantee wholly-owned by the University of Melbourne. See: Auditor-General of Victoria, above n 6, 23-4.

[19] Interview with Peter Gerrand, former head of CITRI and founding CEO of MelbIT (Melbourne, 22 January 2010); RMIT, Report of the Council of the Royal Melbourne Institute of Technology: Jan 1 to Dec 31 (1996) 9 <http://mams.rmit.edu.au/4eyhwuy09094z.pdf> (25 May 2015); RMIT, School’s Affiliated Research Sold to US Company (2006) <https://web.archive.org/web/20080809170502/http://www.rmit.org.au/browse;ID=86nrvpoy3t7u> (25 May 2015); Council of the University of Melbourne, Meeting Minutes (4 March 1996) University of Melbourne <https://web.archive.org/web/20131003182657/http://www.unimelb.edu.au/Council/minutes/mar96.html> (25 May 2015).

[20] Monash University Electrical Engineering Alumni Society, ‘Newsletter of the Alumni of the Department of Electrical and Computer Systems Engineering’ (MONELEC Alumni News No 2, 1994) <http://www.ecse.monash.edu.au/alumni/Alumni2.html> (25 May 2015).

[21] University of Melbourne, ‘University Leader Frank Larkins Steps Down’ <https://web.archive.org/web/20130712184139/http://blogs.unimelb.edu.au/musse/?p=422 > (25 May 2015).

[22] Interview with Peter Gerrand, former head of CITRI and founding CEO of MelbIT (Melbourne, 22 January 2010).

[23] For example, see: Cain and Hewitt, above n 4, 131, which states that ‘MelbourneIT was established in April 1996... its business was the supply of domain names for individuals and businesses in Australia and overseas’.

[24] Interview with Peter Gerrand, former head of CITRI and founding CEO of MelbIT (Melbourne, 22 January 2010).

[25] Ibid.

[26] Whilst the archives of the Australian Financial Review are not freely available to the public through www.afr.com, that site’s searchable index shows the Wright article was published on page 1 of the Australian Financial Review on 21 June 1996. Fortunately, the author of the article, Charles Wright, reproduced the original text of it on his blog. See: Charles Wright, ‘Business Tackles the Net Keeper?’ on Charles Wright, Bleeding Edge Blog (September 2007) <https://web.archive.org/web/20130430231444/http://bleedingedge.com.au/blog/archives/2007/09/a_little_history.html> (25 May 2015). Peter Gerrand, ‘Commercial Internet Domain Name Administration in Australia’ (1998) 48(3) Telecommunications Journal of Australia 63, 65 erroneously stated the date of publication of Wright’s article in the Australian Financial Review as 12 July 1996.

[27] Interview with Peter Gerrand, former head of CITRI and founding CEO of MelbIT (Melbourne, 22 January 2010).

[28] Robert Elz cautioned that he would retain policy control over the second-level domain and would not be changing its existing policies. He hoped that this change would increase his ability to process applications for the other second-level domains he managed, namely .org.au and .oz.au. Elz admitted that ‘economic issues aren’t something I claim to know anything at all about’, but recognised that MelbIT would likely charge some annual fee. He (rather optimistically) stated that ‘I am fairly confident that this is not a profit-seeking exercise from MelbourneIT, and that the costs will be as low as practical to actually keep the service viable and operational with suitable response times’: Robert Elz, ‘Possible Changes to COM.AU Administration’, Message posted to aus.net.policy newsgroup dated 9 September 1996, <http://groups.google.com> (25 May 2015).

[29] Adrian Kloeden, MelbourneIT Concerns with .au (3 August 2001) ICANN <http://www.iana.org/reports/2001/au-redelegation/kloeden-to-lynn-03aug01.html> (25 May 2015); Internet Names Australia, .com.au Doman Name Allocation Policy

<http://web.archive.org/web/19990508065310/http://www.ina.com.au/register/names.html> (25 May 2015).

[30] Robert Elz reserved the right to appoint other registrars upon giving MelbIT three months’ notice. MelbIT could not change the original criteria through which it assessed applications for registration of .com.au domains without endorsement for the changes from an appropriate Internet community body. The Victorian government provided a $100 000 grant to MelbIT in return for it reducing the backlog of applications from 2 400 businesses. This money was used to build the first of three generations of IT systems used by MelbIT to accelerate and automate the process of processing applications for .com.au domains: Internet Names Australia, above n 29; Interview with Peter Gerrand, former head of CITRI and founding CEO of MelbIT (Melbourne, 22 January 2010).

[31] After establishing a rapport with the Trade Marks Registrar in Canberra (which was keen to offer online searches of its own register), Peter Gerrand’s team were able to incorporate trademarks as a basis for considering applications for the registration of .com.au domain names. By the third generation of the platform, sixteen national and state databases were automatically checked when considering each application for registration, including business names, trademarks, approved geographic names, the yellow pages, etc. Such a policy had not been possible for either Warwick Jackson or Robert Elz to implement prior to this time as online access to the Trade Marks database had not previously been available.

[32] Interview with Peter Gerrand, former head of CITRI and founding CEO of MelbIT (Melbourne, 22 January 2010). See also: Jan Whitaker, ‘Domain Registration Shifts to MelbourneIT message posted to LINK Discussion List on 8 October 1996, available at <http://mailman.anu.edu.au/pipermail/link/1996-October/025076.html> (25 May 2015).

[33] Charles Wright, above n 26.

[34] Michael Malone, ‘Re: Renewal Notice for iinet and invoice number iinet-1, message posted to the DNS Mailing List on 24 December 1996, available at <http://www.dotau.org/archive/1996-12/0148.html> (25 May 2015).

[35] Peter Gerrand, above n 26, 65.

[36] Internet Names Australia, above n 29. Warwick Jackson was originally granted by Robert Elz in 1986 the right to manage the .com.au ccTLD. Jackson set policies for and managed that domain for nearly a decade, but when demand significantly grew for registrations in 1995, Jackson relinquished his management right back to Elz.

[37] Peter Gerrand, above n 26, 68.

[38] Ibid 65-6.

[39] Caslon Analytics, auDA and dot-au (December 2008) <https://web.archive.org/web/20100727161558/http://www.caslon.com.au/audaprofile.htm> (25 May 2010).

[40] Interview with Geoff Rees, former Chairman of MelbIT (Telephone, 2 February 2010).

[41] John Davidson, ‘Melbourne IT’s Giant Leap for Domain Kind’ Australian Financial Review (23 April 1999) 1.

[42] Interview with Peter Gerrand, former head of CITRI and founding CEO of MelbIT (Melbourne, 22 January 2010).

[43] ICANN, Communique of the Governmental Advisory Committee (2 March 1999)

<http://gac.icann.org/system/files/GAC_01_Singapore_Communique.pdf> (25 May 2015).

[44] Interview with Geoff Rees, former Chairman of MelbIT (Telephone, 2 February 2010).

[45] See, for example, the discussion of the research commercialisation strategies of Australian universities in: Australian Research Council, Research in the National Interest: Commercialising University Research in Australia (1999) <http://www.arc.gov.au/pdf/00_03.pdf> (25 May 2015).

[46] Council of the University of Melbourne, Minutes of September Meeting, University of Melbourne (September 1999) <https://web.archive.org/web/20080201003341/http://www.unimelb.edu.au/Council/minutes/sep99.html> (25 May 2015).

[47] Steven Goodman, ’To Float or Not to Float?’, Truman Hoyle Lawyers’ Blog (28 February 2006)

<https://web.archive.org/web/20110217011224/http://www.trumanhoyle.com.au/downloads/Tofloat-SG0206.pdf> (25 May 2015).

[48] Council of the University of Melbourne, above n 19: The minutes of the September 1999 meeting of the Council of the University of Melbourne contain the relevant information.

[49] For an analysis of this price volatility see, for example: William Schwert, ‘Stock Volatility in the New Millenium: How Wacky is NASDAQ?’ (2002) 49(1) Journal of Monetary Economics 3.

[50] Tokic reports that in 1999-2000, the average listed technology firm spent 75% of its revenues on marketing and R&D. See: Damir Tokic, ‘What Went Wrong with the Dot-Coms?’ (2002) 11(2) Journal of Investing 52, 54.

[51] Interview with Geoff Rees, former Chairman of MelbIT (Telephone, 2 February 2010).

[52] MelbourneIT, Melbourne IT Float to Net $93.5m (Media Release, 1999)

<https://web.archive.org/web/20010208131240/http://www.melbourneit.com.au/ver2/html/investrelations/company_news/index.htm> (25 May 2015).

[53] MEIL paid $2 666 000 and MelbIT paid $232 500. See: MelbourneIT, Annual Report 1999 (2000) 73 <http://www.domainavenue.com/mit_annual_report_1999.pdf> (last accessed 25 May 2015). Unfortunately, MelbIT’s own website only listed its annual reports back to the year 2000 and the 1999 report was not available at <http://corporate.melbourneit.com.au/investor-relations/annualreport.php> (25 May 2015).

[54] Auditor-General of Victoria, above n 6, 29.

[55] This historical price and volume data was found at: Yahoo! Finance, MLB Historical Prices <http://ichart.finance.yahoo.com/table.csv?s=MLB.AX & d=11 & e=8 & f=2012 & g=d & a=11 & b=13 & c=1999 & ignore=.csv> (25 May 2015).

[56] The public were first notified of these contracts by MelbourneIT Limited on 10 December 1999: MelbourneIt Ltd, Company Background – Pre-Listing Announcement (December 1999), Australian Stock Exchange <https://web.archive.org/web/20010208131240/http://www.melbourneit.com.au/ver2/html/investrelations/company_news/index.htm> (25 May 2015).

[57] The performance of a stock relative to the overall market is also important in determining the significance of a company’s announcement. For an example of an academic study of the importance of price and volume signals on boundedly rational share traders, see: Steven Hubbert, Mark Lang, and Michelle Yetman, ‘Volume and Price Patterns Around a Stock’s 52-Week Highs and Lows: Theory and Evidence’ (2009) 55(1) Management Science 16.

[58] The announcement on 14 February that Mercury Asset Management had become a substantial shareholder in MelbIT by acquiring 2.5 million shares or 5.02% of the company did not contribute directly to this trading volume increase: Mercury had bought those shares by 21 January 2000 (three weeks prior to the announcement of the Intuit contract). See: MelbourneIT, Becoming a Substantial Shareholder (14 February 2000), Australian Stock Exchange <http://www.asx.com.au /asx/statistics/displayAnnouncement.do?display=text & issuerId=4199 & announcementId=161308> (25 May 2015).

[59] This historical price and volume data was found at: Yahoo! Finance, MLB Historical Prices <http://ichart.finance.yahoo.com/table.csv?s=MLB.AX & d=11 & e=8 & f=2012 & g=d & a=11 & b=13 & c=1999 & ignore=.csv> and Yahoo! Finance, ^AORD Historical Prices <http://ichart.finance.yahoo.com/table.csv?s=%5EAORD & d=11 & e=8 & f=2012 & g=d & a=7 & b=3 & c=1984 & ignore=.csv> (25 May 2015). Daily closing price data for MelbIT and the All Ordinaries Index were divided by their respective values on 14 December 1999 to generate this relative price movement chart.

[60] Cain and Hewitt, above n 4, 213-4.

[61] Ibid 139.

[62] Auditor-General of Victoria, above n 6. Whilst the report is informative and generally accurate, it does contain some errors: the Report conflates Melbourne IT’s international business which registers .com (and other gTLD) domains with the company’s 5-year licence to process applications for .com.au domains granted in 1996 by Robert Elz. The Report erroneously states that ‘Melbourne IT’s core business originated from obtaining a 5-year licence to register domain names in Australia. This licence was one of only a limited number of licences held worldwide and had originally been obtained in 1989 by a computer systems administrator employed by the University.’ MelbIT’s business in fact originated from its research contracts with Ericsson and other multi-national corporations. It was only later in MelbIT’s history that it started to process applications to register .com.au domains and even later again when it received a licence from ICANN to register .com domains.

[63] Ibid 3.

[64] Ibid 30.

[65] Ibid 27.

[66] Ibid 47. Although the boards of MelbIT and MEIL had valuation reports from its lead advisor, Deloitte Corporate Finance, and its business advisor, LEK Consultancy, had analysed the value of each component of the business, these were not independent authoritative valuation reports. LEK’s report valued the company at up to $A190 million (if it were to be listed on the United States-based NASDAQ stock exchange) and was based upon a comparison of the ratio of market capitalisation to forecast revenues for other listed internet-based businesses, such as Network Solutions.

It is interesting to note that whilst the University was willing to accept JB Were’s discounted cash-flow valuation model for the under-written value of the company, in its announcement which formally announced its intention to float the company (released in mid-November 1999), MelbIT did not refer to JB Were’s valuation model, instead it highlighted that ‘Network Solutions has a p/e of 246 (market cap US$5 billion and its shares went from US$25 in Nov 1998 to US$150 [in Nov 1999]. MIT’s projected revenues in 1999 were A$12.34 million.’ Thus, whilst internally the University appeared willing to accept a discounted cash-flow valuation model for the proceeds it would receive from the float, to the rest of the world (including institutional investors, preferred clients and the general public), it was hyping the company’s value on the basis of a far more speculative model, i.e. LEK Consulting’s model of the multiple of market earnings to forecast revenues: MelbourneIT, above n 52.

[67] Auditor-General of Victoria, above n 6, 33.

[68] Auditor-General of Victoria, above n 6, 28.

[69] Council of the University of Melbourne, Minutes of Council Meeting No 7 (4 October 1999) <http://www.unimelb.edu.au/Council/minutes/oct99.html> .

[70] Auditor-General of Victoria, above n 6, 34.

[71] Ibid.

[72] Ibid 36.

[73] Ibid 43.

[74] MelbourneIT, Supplementary Prospectus dated 11 November 1999, 2 (located on page 44 of MelbourneIT, Annual Report 1999 (2000) Domain Avenue <http://www.domainavenue.com/mit_annual_report_1999.pdf> (25 May 2015)).

[75] Auditor-General of Victoria, above n 6, 34. The Auditor-General’s report did not consider whether the contract should have been disclosed in the Supplementary Prospectus MelbIT issued on 11 November 1999.

[76] MelbourneIT, above n 74. MelbIT has only made available its annual reports from 2000 onwards on its website. See: <http://www.melbourneit.info/investor-centre/annual-reports> .

[77] MelbourneIT, ‘MelbourneIT Signs Exclusive Partnership with Leading E-finance Provider, Intuit’ <https://web.archive.org/web/20010211181518/http://www.melbourneit.com.au/ver2/html/investrelations/company_news/newsstory.cfm?newsid=46> (25 May 2015).

[78] Corporations Act 1989 (Cth), s 1022(1). Note that the float of MelbIT occurred before the fundraising reforms of the Corporate Law Economic Reform Program Act 1999 (Cth) came into effect and before the Corporations Act 2001 (Cth), which contains more detailed provisions regarding the contents of prospecti under ss 710-711.

[79] For a study of these options, see: Ann Sherman, ‘Global Trends in IPO Methods: Book Building Versus Auctions with Endogenous Entry’ (2005) 78 Journal of Financial Economics 615. Sherman identified the global IPO trend away from underwriting and even book building towards public auctions, noting Google’s effective use of that process to more efficiently maximise the revenues it generated from its float.

[80] Ibid. Having identified significant defects in the operations of the University of Melbourne which arose in the context of an innovative strategy by its management (the first float of a company attempted by a Victorian University), as predicted by agency theory, in an attempt to reduce agency costs, the Auditor-General’s findings focused on increasing the oversight of University management by the state through: 1) the involvement of the Department of Treasury and Finance in valuation issues, alongside independent third party private sector valuers; 2) the need to separate the role of the lead advisor and broker; and 3) the need for stronger risk management principles within the University.

[81] See generally: Claude Menard and Mary Shirley (eds.), Handbook of New Institutional Economics, (Springer, 2005); Frank den Butter and Sjoerd ten Wolde ‘The Institutional Economics of Stakeholder Consultation: Reducing Implementation Costs Through “Matching Zones”’ (2011) Tinbergen Institute Discussion Paper No. 11-162/3, 2.

[82] See: above n 4.

[83] Cain and Hewitt, above n 4, 31 decried this situation and called for an increase in government funding to solve the issue of scarcity and steward the (few) cash cows for the long-term. When looking at the broader institutional environment, Sharrock recognised that successive Australian governments (of both political persuasions) face a similar problem (at a larger scale) and consequently Australian universities have been tasked with finding their own solution (through the short-term-focused market). Whilst Sharrock was correct to argue that in absolute terms, the funding provided to Australian universities by federal and state governments was at an all-time high, Cain and Hewitt were also correct to point out that in both relative and real terms, that funding has significantly declined over time. So the debate between those authors can be distilled down to a conflict over whether universities should bear responsibility themselves for resolving these financial tensions internally, or should those tensions be relaxed through an expansion of state funding.

[84] Ibid.

[85] Auditor-General of Victoria, above n 6, 50.

[86] Investmart, Float Details for Listed Companies <http://www.investmart.com.au> (25 May 2015).