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, 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 seeking capital.

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 opportunistically.

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 total.

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 company.

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 completed.

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.

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