DirectMarkets – 24/7 Company Share Sales

 

The big capital market news today is Rodman & Renshaw’s announcement of the planned launch of “DirectMarkets”, an automated means for companies to sell shares directly to investors.

Like any new capital market development, this announcement was met with some skepticism about its likely success in the marketplace.

Will it operate like a vending machine, available 24/7?

How much control will companies retain on timing and pricing of new issues?

Will listing a company’s shares effectively cap its price appreciation since any demand can be filled with primary shares? And what about the effect on liquidity?

One of my colleagues reminded me of another major capital market development, the dutch auction IPO, used with much fanfare on Google’s IPO five or six years ago.  It’s interesting to note that the recent major IPOs, including Facebook’s planned IPO, use the traditional method, not the dutch auction IPO.

So, we will debate the future of DirectMarkets, but only time will tell.

Link to Rodman & Renshaw’s press release.

If the link doesn’t work, please cut and past the following URL into your browser: http://phx.corporate-ir.net/phoenix.zhtml?c=122722&p=RssLanding&cat=news&id=1655924

The Corporate ATM

dennismccarthy@ariesmgmt.com – (213) 222-8260

Comparing ATMs and Equity Lines

Small cap companies are increasingly using the “at the market” or ATM offering as a means to raise capital in response to a volatile and unpredictable stock market environment.

An “at the market” offering enables a company to take advantage of a receptive stock market to raise capital either by dribbling out its shares over time or by doing a large offering.

How does a corporate “at the market” offering work?    First, the requirements:

In order to create a corporate ATM, a public company must be traded on NASDAQ or one of the exchanges, NYSE, AMEX, etc.

These public companies can register shares for future sale by filing an SEC “shelf” offering.  This “shelf” permits a company to sell its shares in the future whenever it wishes either by “dribbling out” its shares or by selling them all at once.

The shares sold are fully registered so the buyer can resell them whenever it wishes which expands the universe of potential investors and reduces the liquidity risk.

In a typical corporate ATM, the company picks an investment bank (or banks) to be its agent in selling the shares over time.

The shares are sold “at the market” less a small agent fee.

The company determines the timing and amount of shares to be sold constrained only by what the market will accept.

In theory, the shares are sold to long-term holders but there’s no guarantee.

Let’s compare this with an equity line which is another increasingly common means to raise equity over time.

In an equity line, like a corporate ATM, a company files a registration statement for its planned share sales.

In the equity line, however, the company selects an investor to buy the shares.  There is no agent or agent fee. 

This investor, however, will structure the relationship with the company to limit the investor’s risk.

This typically means that the investor will price the shares at a healthy discount to market and may add warrants to sweeten its return.

Also, the investor typically limits the amount of shares it will purchase at any one time.

An equity line investor is typically not a long-term holder but rather intends to resell the shares at a profit.  Stock market fear of this resale volume has been blamed for depressing an equity line company’s stock price and has slowed the growth of this type of offering.

In contrast, as companies come to learn about the advantages of an “at the market” offering, its use is growing.

If you have any questions about “at the market” or other types of offerings, please contact me.

dennismccarthy@ariesmgmt.com or dmccarthy@cca-ccs.com

(213) 222-8260

Timing Stock Buybacks

dennismccarthy@ariesmgmt.com

(213) 222-8260

The McKinsey Quarterly has come out with another interesting article, this time about stock buybacks.

In this article, the authors suggest that most company buyback programs don’t work the way they’re intended, to buy back stock when prices are low.

Most companies end up buying back stock at high prices, not at low prices.

It seems that companies, like many investors, are not good at market timing.

I suppose it’s human nature that companies initiate buyback programs when the company is doing well but the stock price seems to lags the fundamentals.

The irony is that companies typically don’t maintain buyback programs when a company’s situation is less favorable and its stock price has dropped.

The bias, therefore, is to buy back stock only at high prices.

The authors calculated that companies’ buyback programs would have been more successful if applied consistently over time, in good times or bad.

The SEC permits these programs, like 10(b)5 programs, to accomplish what the authors suggest.

I noticed in the article’s footnotes, however, that other academic studies have shown that smaller companies have used one-time purchases, like tender offers, to successfully buy back stock at low prices.

I can help you to evaluate which kind of stock buyback program best fits your company and on setting up the program.

Again, my name is Dennis McCarthy. Please contact me to discuss.  Thank you.

dennismccarthy@ariesmgmt.com

(213) 222-8260

www.capitalmarketalerts.com