Forget about the possibility of delayed or canceled IPOs, some tech companies that are already public are having difficulty tapping into the market with secondary stock or convertible offerings.
is just the latest company to suffer from this trend. It priced its secondary offering Wednesday night but only after scaling back the number of shares offered to 4.5 million from 5.5 million and selling them at $67 per share, $3 per share less than Wednesday's closing price. The company also delayed its planned $250 million convertible offering, which was slated to be priced simultaneously with the stock offering. Lead underwriter
Morgan Stanley Dean Witter
says the convertible is now on a "day-to-day basis" -- Wall Street lingo that could mean the offering is delayed indefinitely.
In the ultra-competitive tech market, money is a crucial weapon, especially among cash-burning Internet companies. So for many publicly traded tech companies, turmoil in the secondary market may remove an important financing option.
"Clearly, without access to capital, some Internet companies -- whose focus was previously to pursue market share no matter what the cost -- may have to conserve capital," says Phil Leigh, an Internet analyst for
in St. Petersburg, Fla. This could make some companies rely on the cash they can generate or cut back -- not a pretty possibility in the Internet sector.
Or this could force them to turn to more expensive sources of cash, such as debt offerings and credit lines. And in an environment of rising interest rates, borrowing money becomes tougher. Although Net companies may not have a problem with the extra cost of borrowing -- since its all red ink, anyway -- they could chafe under a bank's stringent payback plan, Leigh says.
In addition, some of the offerings were aimed at broadening the shareholder base of Internet companies. According to investment bankers involved in the deals, the idea was to increase the number of institutional investors, moving away from what's perceived as more volatile retail investors.
"What these companies are trying to do is access different investor pools," says one investment banker, requesting anonymity. By issuing stock and convertibles at the same time, the companies could attract the attention of equity funds as well as convertible or income funds. So trouble in the market leaves some with the same shareholder base.
Investors have turned down these deals, or made them less attractive for the companies, for two reasons. First, tech stocks have taken a dive recently, simply making them less attractive for investors. priceline's stock, for instance, has dropped about 20% since June when it filed to hold the secondary and convertible offerings.
Second, insiders were selling in the some of the deals, which investors can see as a lack of confidence in the company. At priceline, 78% of the shares it sold were owned by insiders. priceline declined to comment for this story.
priceline isn't alone in having troubles.
Selling shareholders in
Wednesday night sold 3.9 million shares at an 8% discount to the market price. Rhythms NetConnections' stock has plummeted 55% since mid-July when the company filed to hold the offering.
Earlier this week,
sold $405 million in seven-year convertible notes, although it originally filed to sell $575 million. The reduction means the deal didn't wow some investors, and the ones that did buy forced down the conversion premium, meaning they'll get more shares of stock for each bond. At the same time, selling shareholders sold 9 million shares netting approximately $450 million.
Of the handful of other tech sector secondary and convertible offerings that were due out this week, two already have been canceled and one has been delayed.