Speak Softly and Carry a Big PIPE

Raising capital in a recession is tough, but some established companies are turning to private-investment-in-public-entity transactions known as registered direct offerings. Here's why.

Better pricing also means that the issuer generally can offer the select investors an attractive discount. For instance, according to PlacementTracker, Orient-Express stock was offered at a 22 percent discount, while specialty materials and chemical maker Solutia Inc. offered a 16-percent and 9-percent discount to investors on the two deals it completed in 2008.

There are other advantages too. With a registered direct deal, a company can shop the issue to key investors. “You can cherry pick who is going to give you the best deal, and do that within a week,” insists Bressman. Also, registered direct deals give more control to the companies selling stock, adds Gormley.

He explains that the issuer — rather than the investment bank — allocates the shares and has more flexibility to cancel the transaction if it doesn’t like the pricing, “because nothing is announced until the transaction is complete.” To be sure, a holder of unregistered shares cannot sell the stock for 90 to 120 days, and as a result, investors demand to be compensated for that illiquidity with a better pricing discount.

Pricing pressure plays another part in the registered direct story, contends Bressman, who explains that downward pricing pressure caused by short-sellers is what led many small and mid-size public companies to take the private placement route in the first place. Consider that one trade-off issuers must make regarding registered direct deals is that they give up the exposure of a traditional secondary offering in exchange for the secrecy of a private placement.

That means, lesser-known companies agree to forego the public road shows that provide them important exposure to analysts and investors to fend off short-sellers. By not drawing attention to the secondary offering, companies lessen the chance that short-sellers will depress the price of the stock in advance of the offering so it can be bought up at a discount when the new stock is issued.

Short-sellers have a much harder time depressing the stock of large, well-established companies. Still, when the stock market is highly erratic, as it is currently, short-selling on public information can disrupt even the stock prices of the bluest blue chips, warns Bressman. He speculates that that may be one reason why larger companies are now using registered direct offerings.

The attorney also points out that a registered direct transaction is less expensive than a secondary offering because all the regulatory paperwork is already done. One measure of cost comes from Orient-Express, which said it paid $250,000 in fees to complete its Nov. 14 deal.

For long-term investors like Berkshire Hathaway’s Warren Buffett — who completed a PIPE deal in November, investing $300 million in USG Corp. — it does not make a difference whether the issuers use a traditional PIPE or registered direct structure. It’s likely that Buffett just wants an opportunity to negotiate a deal quietly, reckons Bressman.

“But to me, a registered direct is an effective vehicle, because when you have a panicky market, you want to have more control over the process of selling securities, you want to have the benefit of having enough time to negotiate a deal that makes sense, and you want the ability … to tell the investor that ‘we’re going to walk if we don’t get a good deal.’”


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