PIPE: A PIPE is a private investment in public equity. It refers to a private transaction, typically an institutional investment, in a public company without a public offering. The motivation for not using a public offering typically results from not wishing to raise sufficient money to justify the costs of a public offering. Wall Street firms typically don't want to do a public offering for anything less than $20 million. PIPEs are frequently completed for less than $5 million and sometimes for less than $1 million.
There are a variety of creative structures used in PIPE transactions. A plain vanilla sort of deal would include common shares sold at a 15 to 30% discount to the trading price at the closing date. The deal itself typically includes a clear understanding of the issuing company's obligation to register the shares so that they become freely tradable.
Other structures include a variety of convertible preferred stock, convertible notes and debentures. These instruments may include what is called a "death spiral" conversion feature, where the stock converts at a discount to the lowest price in the days leading up to the conversion.
For small, but profitable and growing public companies, PIPE financings can be great options. For small, unprofitable and struggling public companies, the fees, costs and terms incorporated into such financings make them so painful for the issuing companies that they are preferable only to bankruptcy.
Check Investopedia's definition.
I can't imagine using a PIPE if I am a small publicly traded company. I'd have to be really desperate. What kind of signal does it send to the marketplace when you are so desperate to raise capital that you sell at a 15-30% discount to market? Sounds like a good short candidate.
Posted by: Bconnery | March 22, 2006 10:02 PM | Permalink to Comment