|
By Paul Broude and Rick Conklin
Don’t want to announce an equity offering and watch your stock price drop 15 percent? Don’t want to spend weeks on a road show? Don’t want to risk having a financing fail in the public eye? Then consider announcing your next offering over dinner and pricing your shares before breakfast.
There is an active and growing market for "overnight deals," also known as "accelerated book building" offerings, by companies seeking to take advantage of improving equity markets and investor interest at a time when credit availability is still relatively tight. Already public companies have raised $139.2 billion through September 24 of this year, or 22 percent more than during the same period last year, from secondary offerings of stock to the public. Many of these offerings have been in the form of overnight deals. According to recent data, approximately 173 companies in a wide variety of industries have raised over $65.7 billion in overnight deals in 2009, with a median offering size of $99.8 million (excluding over-allotment options). These offerings ranged in size from $10.4 million to $7.5 billion.
Overnight deals are essentially "take downs" of shelf registrations, long used by larger companies as a streamlined alternative to fully-marketed secondary offerings. The Securities Act reforms adopted in 2005 made this process even easier for WKSIs, or "well known seasoned issuers." But those changes also made shelf registrations much more accessible to smaller companies. Coupled with the reduction of available capital beginning in mid-2008 from hedge funds and other private investors for private placements in PIPE transactions ("private investment in public equities"), these changes have encouraged more companies to seek equity through secondary public offerings.
Overnight deals are frequently marketed on a confidential basis by an underwriter to a limited number of institutional investors over a short period -- usually only two to three days. These institutions then come "over the wall,” meaning they are told about the planned offering and invited to participate only after agreeing, before the company is even identified, to refrain from trading in the company's stock or disclosing the planned offering. These marketing efforts may lead to a fully-sold transaction, known as a “registered direct” offering - i.e., one in which registered, freely tradable shares are sold to a small group of institutional investors. The costs associated with an overnight deal are substantially the same as for a similarly-sized, fully-marketed shelf offering.
In a variation that is becoming more common, however, the initial marketing effort to “over the wall” investors is not the end of the story. In these deals, the confidential marketing establishes a significant portion of the "book" for the offering and helps set the offering price. On the day the offering is priced, these deals are "flipped" into fully-disclosed public offerings for just a few hours after the market closes, allowing the underwriters to "fill the book" and complete the offering before the market opens the next morning.
For an issuer, an overnight deal is a way to raise equity capital without the potential downward pressure on its stock price that may follow the announcement of a fully-marketed secondary offering days, or even weeks, in advance. In the overnight deals completed in 2009, the average discount to the company’s closing stock price on the day the shares were priced was 7.7 percent, and the discount to the company’s average closing stock price for the three days before the deal was 5.3 percent.
Many issuers are using the proceeds of recent overnight offerings to pay down debt, or to facilitate refinancing of their loans on better terms. In a recent transaction, dental practice management company American Dental Partners raised $31 million in an overnight offering, which closed simultaneously with the company’s new $130 million credit facility. Other companies are using overnight offerings to raise capital for possible acquisitions, such as motor and control manufacturer Regal-Beloit and toy company Rc2, which raised $156 million and $60 million, respectively, in recent offerings. Others are using overnight deals to finance internal growth, such as medical device manufacturer MAKO Surgical, which raised $51 million in a recent offering.
An overnight deal also enables a company to give its existing shareholders the opportunity to participate in the offering, along with institutional investors whose internal policies or practices don’t permit them to come “over the wall.” Some institutional investors, as a matter of policy, refuse invitations to learn about pending offerings before they are publicly disclosed, since they are unwilling to accept the requirement to cease trading in a company’s stock which accompanies receipt of non-public information. Thus, a company can both broaden its shareholder base and allow its current holders to reap the benefit of any discount to the company’s current trading price by participating in the offering. The underwriter in an overnight deal will often target institutional investors who hold shares of comparable companies as new shareholders.
Why would an investor choose to come “over the wall?” If the offering is never turned into a publicly-marketed overnight deal, only the “over the wall” investors will have the chance to participate. In addition, investors who choose to come “over the wall” often receive a bigger allocation of shares in the offering (frequently a majority).
Finally, for short sellers, the increasing use of overnight deals can spell trouble. By issuing equity overnight, a debt-heavy issuer can recapitalize, leaving short sellers scrambling to cover their positions.
Paul Broude is a partner in the Boston office of Foley & Lardner LLP. He is a member of the firm’s Transactional and Securities Group practice, and vice chair of the firm’s Emerging Technologies practice.
Rick Conklin is a Managing Director in the Equity Capital Markets Group of Robert W. Baird & Co. Rick specializes in the Industrial and Real Estate sectors, in addition to leading Baird’s private placement practice.
Trackback(0)
 TrackBack URI for this entry
 Subscribe to this comment's feed
 |
in Your Career by 
