Banking & Capital Markets

Insider Buying: Company Executives Just Saying No

Share purchasing hits an eight-year low. Also, corporate borrowers going after mattress money, healthcare IPOs getting healthier.
Joseph McCaffertyAugust 28, 2001

Apparently, corporate executives aren’t showing a whole lot of faith in their own businesses. According to Lancer Analytics, senior managers are doing very little buying of their own company shares.

Insider buying, measured by the dollar value of shares purchased, declined to $77.9 million in July, from $154.7 million in June. That’s the lowest level of insider buying in nearly eight years. Monthly volume of insider purchasing is also down by about half through the first six months of of the year.

The bearish sentiment of corporate stewards could indicate that a recovery is longer off than expected. Presumably, insiders buy shares when they think they’re undervalued compared to future prospects.

Intriguingly, insiders aren’t selling, either. Lancer reports that insider selling totaled $2.2 billion in July, the lowest monthly sales volume since October 1998, and well below the average of $3.5 billion. Part of the drop is due to restrictions which limit executives from selling stock near second-quarter earnings announcements.

Summer HotSpots

No companies are expected to price their initial public offerings this week or next due to the yearly end-of-summer slowdown. The 2001 summer break for IPOs is expected to be the longest of the past three years. But the market for initial public offerings continues to show some signs of life.

As we reported last week, at least sixteen companies are slated to go public in September. That’s the biggest number since January. Six companies filed initial registrations with the Securities and Exchange Commission last week.

GameStop Corp., the video-game retailing unit of Barnes & Noble Inc., filed to sell up to $325 million shares. The Grapevine, Texas-based retailer runs a chain of 990 stores. About $250 million of the proceeds from the IPO will be used to repay debt owed to Barnes & Noble. Salomon Smith Barney and UBS Warburg will underwrite the offering.

El Segundo, Calif.-based Big 5 Holdings Corp., a sporting goods retailer, registered to sell up to $115 million in common stock. Credit Suisse First Boston, U.S. Bancorp Piper Jaffray, and Jefferies & Co., were listed among the lead underwriters for the deal.

Other companies to file for IPOs include Washington-based Advisory Board Co., which provides research and analysis for the healthcare industry; Digirad Corp., which has developed a digital gamma camera for use in nuclear medicine; and Israel-based Given Imaging Inc., which is also in the medical imaging industry.

Healthcare has been a particularly strong sector in an otherwise weak IPO market. Some 15 offerings from health-related companies are in the pipeline, the highest number of upcoming deals this year from a single sector. All told, those 15 offerings could generate as much as $2.7 billion.

One of the reasons for all these healthcare offerings: healthcare stocks have performed relatively well in the aftermarket. Moreover, many analysts say the medical industry isless vulnerable to an economic slowdown. Medical equipment maker TheraSense, for example, upped its proceeds estimate for its planned September IPO from $5 million to $120 million. That’s quite a turnaround, considering the company pulled its IPO last December when few investors showed interest.

Close Up the Convertible?

Interest in convertible bonds could be starting to wane. Convertible arbitrage hedge fund managers, who have fueled demand for the new issue convertibles, are beginning to back off as arbitrage opportunities decline.

Competition among banks to lead convertible deals has given rise to aggressive structures. Those conversion setups are finding less interest among investors. Analysts say banks may have to raise coupons and lower premiums to keep investors interested. Such a move would make the instruments less attractive to issuers, however.

The worry that the convertibles market could be going dry has led some companies to complete deals while the going is still good. Network Associates, for example, recently completed a $300 million convertible offering that was seven times oversubscribed.

Also last week, Advanced Energy Industries Inc. sold $100 million of five-year convertible subordinated notes. The Fort Collins, Colo.-based computer components maker intends to use the proceeds for general puposes, as well as possible acquisitions.

Will Corporate Paper Play in Peoria?

Individual investors, looking for alternatives to the dismal stock market, are apparently turning to bonds. And we’re not talking mutual funds here, or Treasuries. No, it appears that individual investors are now keen to buy corporate paper — long the domain of powerful portfilo managers.

Incapital LLC, a Chicago-based investment bank, has sold individual investors $2.2 billion worth of corporate debt, known as ”InterNotes.” Those notes were issued by Bank of America Corp., DaimlerChrysler AG, and Household International Inc. Based on the success of its first debt-for-small-investor offering, officials at DaimlerChrysler hope to sell up to $4 billion in additional InterNotes. Incapital was founded by Thomas Ricketts, son of J. Joe Ricketts, the founder of discount broker Ameritrade.

Executives at Incapital say small investors are turning to bonds to escape the volatility in stocks and to generate a better return than they can get with US Treasuries or money market funds. Investment-grade corporate bonds have returned 8.8 percent this year, including interest, beating all other U.S. fixed-income classes, according to Merrill Lynch & Co.

In Brief:

Maybe bigger is better. Pilgrim’s Pride, a Pittsburgh, Texas- based chicken processor, doubled the size of its bond offering form $100 million to $200 million. Managers at the company say that the market is more receptive to issues over $175 because they’re more liquid. The new issue, which is being used to refinance 10 7/8 percent notes due 2002, was four times oversubscribed. The notes carry a 9.625 percent coupon.

Through the first six months of the year, Hunton & Williams was the leading legal counsel for securities issuers. This, according to rankings released by Thomson Financial. Of course, it would be pretty hard for Hunton & Williams not to be somewhere near the top of the list. The law firm representated Kraft Foods in the company’s June initial public offering. That offering was the second largest IPO in the history of the US stock market, with total proceeds of $8.68 billion.

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