PIPEs

[Hydroblunt]

To anyone that is knowledgeable on the subject, can you share some thoughts.

Why does this seem like a scam to me? Get equity below market, watch stock pop and dump it on mom & pop. Is this a variation of the "upgrade/downgrade" scheme?

Thanks

 

[Chagi]

Quote from Hydroblunt:

To anyone that is knowledgeable on the subject, can you share some thoughts.

Why does this seem like a scam to me? Get equity below market, watch stock pop and dump it on mom & pop. Is this a variation of the "upgrade/downgrade" scheme?

Thanks

PIPE financing seems to have a pretty bad reputation for investors. One example of PIPE for a company that I have followed for nearly a year now is Broadwing (BWNG).

I think what tends to happen is actually the opposite of what you are suggesting. A company that would have difficulty in obtaining traditional financing (i.e. a bank loan) ends up going the PIPE route, usually with a convertible bond issue, whereby the company can choose to make a principal and interest payment at a certain point in time (let's say quarterly), but can instead issue new shares at a predetermined price to the bond holder.

The big stink about this apparently is that the debt holder could then potentially do a naked short of the stock, then cover their position with the newly issued shares. In addition, a company with PIPE financing in place is likely to see a protracted downwards trend of the stock value, since the issuing of new shares to cover the P&I payment causes dillution. Take a look at the BWNG chart for a perfect example of this, as well as the uncertainty caused now that BWNG appears to be switching to paying their PIPE with cash instead of shares (at least for this quarter anyways).

A PIPE finance that only involves shares issued in exchange for cash seems to be a pretty good deal for the private equity provider involved, since they can usually turn out a rapid profit on their investment (assuming that they immediately liquidate their holdings). I think this variant is a bit more difficult to quantify as a shareholder, since a cash infusion can mean the difference between the company eventually becoming profitable and ceasing to be a going concern. An example of this variant would be Transmeta (TMTA), which by the way I am currently monitoring very closely, since they have finally decided to focus (almost) exclusively on licensing their IP. This may result in them finally posting attaining profitability after all of these years, since it will basically be a RAMBUS-type model.

 

[Hydroblunt]

Quote from Chagi:

Thanks for the reply.

Yeah it's kinda obvious that it is a sign of desperation to seek PIPEs when you give the bonds or equity to the private investor at a lower than market price.

I read some stuff throug a Yahoo search and it mentioned that the annoucement of a PIPE shows a sign of strength in the company since sophisticated investors are putting money into. Hence, a pop in the stock price. Just like an upgrade from an I-bank. But like you mentioned, it makes more sense to put on the naked short and have instant profits.

With BWNG, when was the PIPE announced and what happened short term? If it was approx. a year ago, seems like there was a strong set of pops before the crap out.

 

[Chagi]

Quote from Hydroblunt:

Thanks for the reply.

Yeah it's kinda obvious that it is a sign of desperation to seek PIPEs when you give the bonds or equity to the private investor at a lower than market price.

I read some stuff throug a Yahoo search and it mentioned that the annoucement of a PIPE shows a sign of strength in the company since sophisticated investors are putting money into. Hence, a pop in the stock price. Just like an upgrade from an I-bank. But like you mentioned, it makes more sense to put on the naked short and have instant profits.

With BWNG, when was the PIPE announced and what happened short term? If it was approx. a year ago, seems like there was a strong set of pops before the crap out.

I don't honestly know when the PIPE was originally announced, it happened a bit before I started watching the stock in October/November. They used the financing to aquire another company (I think it was called focal), renamed the company, etc...