by Lance Lange
May 5, 2003
PIPEs aren't just for small, struggling companies any
more. They're becoming a financing tool with the flexibility to meet the
needs of a wide range of issuers.
Three years ago, PIPEs -- private investment in public equity --
experienced a period of rapid growth as access to the equity markets
tightened and many companies struggled to raise capital. According to PlacementTracker.com,
in 1998 just $3 billion was raised industrywide through PIPE deals. In
2000, the value of PIPE transactions was $24.7 billion, an eight-fold
increase. The surge in demand, however, was short-lived. The following
year, the dollar volume of PIPE deals fell to $15.2 billion, and in 2002,
$12.1 billion of PIPE transactions closed.
While these numbers suggest there was a bubble of sorts in the PIPEs
market, the volumes experienced in 2001 and 2002 still demonstrate that
PIPEs have become a viable and often attractive alternative for companies
Historically, issuance in the PIPE market was dominated by early-stage
technology and biotechnology companies, as well as struggling companies
that had no other way to access capital. Today, companies from all sectors
of the economy access the capital markets via PIPE transactions. And,
increasingly, larger, more mature companies are issuing PIPEs.
In our view, PIPEs (and PIPE hybrids such as registered direct offerings)
have become increasingly important methods of accessing the capital
markets and provide companies with a strategic alternative to a
traditional public follow-on offering.
As a financing tool, PIPEs offer many advantages, including reduced time
to market, less dilution, lower market risk and confidentiality. As
financing windows have become increasingly narrow, issuers have realized
the value of being able to access the capital markets quickly and
In 2001, the telecommunications, healthcare and technology sectors
accounted for 69% of all PIPE deals, while manufacturing accounted for
just 11% of the total.
In 2002, telecommunications, healthcare and technology accounted for just
57% of all PIPE transactions, while manufacturing jumped to 22% of the
Measured by the number of deals, PIPEs continue to be dominated by small
issuers, which accounted for 76% of the transactions in 2002. However, 56%
of all PIPE dollar volume was raised by companies with more than $200
million in market capitalization, with 40% coming from issuers that had
market capitalization greater than $400 million.
Clearly PIPEs aren't just for small, struggling companies any more. There
is sufficient flexibility in the structure to address the needs of a wide
range of issuers, depending on size and recent market history of the
In general, the higher-quality issuers gravitate toward the more
straightforward deals. A look at the data since 1995 confirms that the
quality of issuer has been improving, with some of the most dramatic
improvements taking place over the past two years.
As a percentage of the overall number of transactions, structured PIPE
transactions -- this category includes floating convertibles, reset
convertibles, common stock with resets and structured equity lines --
peaked in 1997 at 57%.
By 1999, however, traditional PIPEs -- this includes common stock, common
stock with warrants and fixed convertible instruments -- accounted for 72%
of the market.
And for 2002, traditional deals represented 85% of all PIPE transactions
A case in point demonstrating the new role PIPEs are playing is a
transaction we managed recently for a Tier 1 automotive-parts manufacturer
with $2.4 billion in revenues and more than $500 million in market
capitalization at the time of the offering.
This was not the type of company usually associated in many investors'
minds with PIPEs. But management found that, from a strategic perspective,
the rationale for the transaction was compelling.
The PIPE proved to be a highly efficient way to provide a cushion against
relentlessly tight bank lending and potentially inaccessible capital
markets. The transaction allowed the company to reduce its debt load and
thereby improve its position with respect to its bank covenants at a price
that management found persuasive.
There are a number of reasons why quality companies are beginning to look
at PIPEs as a viable alternative for raising capital. For a quality
enterprise, the potential benefits include demonstrating investor
confidence in its business, expanding its shareholder base, negligible
dilution and increased financial flexibility.
With this in mind, we believe that the PIPEs market will continue to
broaden as more and more mainstream companies accept PIPEs as simply one
more tool available for accessing the capital markets.
Lance Lange is an investment banker with Robert W. Baird & Co.
Deal, LLC. All Rights Reserved.