|
Sweetheart deals
|
 |
December 18, 2001: 6:00 p.m. ET
When big guns move into a troubled tech stock, they get a nice price -- and the little guy loses out.
By Adam Lashinsky
|
SAN FRANCISCO (CNN/Money) - Imagine you hold a downtrodden tech stock and you learn that a deep-pocketed investor has decided to take a stake in the company. You'd be pretty psyched right? After all, your company's balance sheet will get stronger, it will continue to fight the good fight, and your shellacked shares might one day be worth something again.
Well, it doesn't exactly work that way. Tiny companies will go on and on about the benefits of PIPEs -- private investments in public equity. But be careful not to be seduced by this up-and-coming buzzword. While an infusion of equity undoubtedly is good for the company, it isn't necessarily a good deal for the individual investor.
"These deals are being done by sophisticated investors experienced in the use of hedging and other derivatives," says J. Sanford Miller, a Palo Alto, Calif.-based managing partner for 3i Group, a British venture firm. Adds Miller, formerly a veteran Silicon Valley investment banker, "Almost invariably these are sold at a discount to market prices" and include provisions "I wouldn't get if I just called my broker at Merrill Lynch."
A good example is the recent PIPE deal in shares of Proxim (PROX: up $0.09 to $9.05, Research, Estimates) , a Sunnyvale, Calif.-based maker of wireless-telephone equipment. Proxim announced on Nov. 27 the sale of $30 million worth of stock and warrants to unidentified institutional investors. Its shares closed the day before the transaction at $12.95, but the private investors got their shares for $8.234 each.
The discount is fair: Large private investors can't typically sell a big block, so they're taking a greater risk than small-fry investors. Fair to a point, that is: The stock has since fallen back toward the price forked over by the new investors, closing Tuesday at $9.05
Sometimes the protections for private investors are in the fine print. In late November, Kana (KANAD: up $3.80 to $20.73, Research, Estimates) of Menlo Park, Calif., which makes e-mail software, sold shares to Technology Crossover Ventures, a Silicon Valley venture firm. It also collected $10 million from Amerindo Investment Advisors, a New York mutual fund company that had been a previous investor in Kana.
Dig into the fine print from the companies' SEC filings (not its press releases) and you learn that Technology Crossover is entitled to a "liquidation preference" in the event Kana should go out of business. This means if there's a queue for cash, you wait in it behind the new VCs.
Some PIPEs help send shares higher. On Dec. 4, Identix (IDNX: up $0.31 to $13.30, Research, Estimates), a maker of "biometric authentication" solutions in Los Gatos, Calif., raised $51.7 million from "both new and existing institutional investors", at $7 per share.
Identix is one of those momentum stocks that has risen because investors assumed its products would prosper in the security-conscious post-Sept. 11 environment. Identix shares closed Sept. 10 at $4.20 and on Dec. 3 at $7.93. So far the PIPE investors -- and also individual investors -- have done very well indeed. Identix shares closed Tuesday at $13.30.
The point here isn't that PIPE investments are bad. It's simply that the instrument is more complicated than it seems and could be a pipedream for the unaware individual.
Sign up to receive the Tech Investor column by e-mail.
Plus, see more tech commentary from David Futrelle and Adam Lashinsky, and get the latest tech news. 
|
|
|
|
|
|
|
