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Lured by low costs and flexibility, many big companies are issuing shares "at the market."
David M. Katz, CFO.com | US
March 5, 2010
When times are good, there's nothing like a big, standard-issue equity offering to raise large amounts of cash speedily. After filing the necessary paperwork, a company can walk away with enough capital for an acquisition or a hefty debt repayment in a matter of days.
But these are not good times. The high cost of a one-shot stock issuance makes it less than appealing to companies more likely to be focused on saving money than spending it. Perhaps worse, companies run the risk of hedge funds or other large investors buying up their stock and selling it short, thereby sending the share price tumbling.
What's more, by doing a single large stock offering (also called a secondary or follow-on offering) during a time like the present when investors are wary, a company can endanger its reputation and its value. "Once you've announced it, if you don't consummate it, it can be perceived as a reflection of your success in the market," says Bruce Nolop, CFO of E-Trade Financial.
Over the course of the recession, finance executives have thus sought cheaper and more-cautious ways of raising capital. Enter "at the market" stock offerings — which, like automated teller machines, are abbreviated ATM and are a quick and easy way to get relatively small amounts of cash.
In an ATM, an issuer takes out a shelf registration for a maximum amount of shares and then dribbles out portions of the total when the price is right or when a jolt of capital is needed. Or, the issuer does nothing if senior management feels it's not the time to sell. Typically, the offering period for an ATM is two years, with the company issuing no more than about 20% of the volume of the registered shares at any one time.
Once a favorite of small and midcap companies, ATMs have recently become popular with big companies. Strapped for capital and in need of funds to pay back money to the Troubled Asset Relief Program, financial-services companies were particularly active users in 2009. In perhaps the biggest such offering to date, Bank of America grossed $13 billion. For its part, E-Trade raised a total of about $215 million in two separate ATMs, and PNC Financial Services Group raised more than $600 million. But nonfinancial companies were also in the game last year, including FPL Group, Kinder Morgan, and Freeport-McMoran.
Perhaps the biggest lure of an ATM is its low cost. Issuers of secondary offerings must pay high fees to underwriters to distribute shares and take on risk. In an ATM, corporations pay much lower fees to agents, who simply sell the stock on the open market. Of more concern in a secondary offering than the fees are the big discounts that buyers of the stock receive because of the large supply of shares that is put on the market at one time. ATM issuers avoid such discounts because each issuance tends to be small and priced at the market price.
Another advantage is strategic: in the boilerplate language that usually accompanies the launch of an ATM, a company may choose to issue shares "from time to time." By issuing stock gradually, "you can react to conditions and increase, decrease, or postpone your sales without having it perceived as a failed offering," says Nolop. Before the market opened on each day during E-Trade's two ATMs, the company got a reading on market conditions from its agents to help executives decide how to proceed. The agent would inform E-Trade about trading conditions in worldwide markets, the financial-services industry, and the company's own stock, according to Nolop.
For some issuers, the process provides them with the ability to keep their shares out of the hands of undesirable investors. "A lot of guys are very concerned about who owns the stock. They don't want the big activist hedge funds getting a huge stake or the guy who's currently shorting the stock to be able to cover the position" through secondary offerings, says Erin O'Reilly, a partner in Miller Tabak, a firm that recently began packaging ATMs with a "stock surveillance" product.
The need to keep a constant eye on the markets can be a big downside for busy senior finance executives, however. "You have to stay really active in it every day. It's not something you can put on automatic pilot," says Nolop, who notes that E-Trade's CEO, acting on the board's delegated authority, had to approve the company's ATM activity daily.