By William Patalon III
Executive Editor
Money Morning/The Money Map Report
In an odd bit of capitalist irony, the U.S. banking crisis could end up as the catalyst that finally jump-starts the long-moribund market for initial public stock offerings (IPOs).
In fact, it already appears to be happening.
U.S. banks - under government order to raise capital as a result of the recently completed bank stress tests, and desperate to shed the onerous shackles of the U.S. Treasury Department's Troubled Assets Relief Program (TARP) - have been announcing billions in secondary stock offerings in recent days, and experts say many more such deals can be expected.
Anadarko Petroleum Corp. (NYSE: APC), Bank of America Corp. (NYSE: BAC) and Ford Motor Co. (NYSE: F) yesterday (Tuesday) became the latest U.S. companies to pursue new sources of capital, announcing deals that involved offerings of stock or debt, or outright asset sales.
Those announcements came just one day after four of the largest U.S. banks - BB&T Corp. (NYSE: BBT), Capital One Financial Corp. (NYSE: COF), U.S. Bancorp (NYSE: USB) and KeyCorp (NYSE: KEY) - announced plans to raise a combined $6.5 billion through stock offerings. At least some of the money raised will be used to repay the TARP money the federal government injected into troubled U.S. banks.
"All the deal activity sends a clear signal - investors are willing to take more risk," says Louis Basenese, a longtime expert on the IPO market and editor of The Takeover Trader and White Cap Report newsletters. "And it's already trickling down into the IPO space. In the next two weeks, four deals are slated, doubling the total volume for 2009."
When asked if all these deals could end up soaking up all the capital that's still sitting on the sidelines - blunting, as a result, the rally that's had stocks surging over the past two months - Basenese said there's no reason for that to be a concern.
"With $8 trillion-plus on the sidelines, we've still got a ways to go before the capital is gone," Basenese said.
In fact, we may well be just getting started, he says.
"During slowdowns, the IPO space is as lonely as a geek on prom night. But right now, our geek might be getting lucky. Along with the market rally and strong appetite for secondary offerings, we're seeing IPOs hit the market again," Basenese said. "This week we get Digital Globe. Next week, OpenTable and SolarWinds are slated to debut. And there are over 100 more in the pipeline to fuel a sustained recovery."
The Latest Deals
Yesterday's announcements involved a carmaker, an energy company and a top U.S. bank.
Anadarko, an independent oil-and-gas exploration and production company based in Woodlands, Tex., said yesterday that it priced a public offering of 30 million shares at $45.50 each. Underwriters have an option to buy up to 4.5 million additional shares of the company's common stock through the offering, which is expected to close Friday.
The company's shares were down about 6% and listed at $45.70 in pre-market trading yesterday morning, FoxBusiness.com reported.
Bank of America, ordered to find $33.9 billion in new capital as a result of the recent bank stress tests, has finally sold about $7.3 billion worth of its shares in China Construction Bank Corp., Reuters and Bloomberg News both reported.
BofA sold 13.5 billion shares, or 6% of CCB, to investors including Hopu Investment Management Co. and Singapore sovereign wealth fund Temasek Holdings Pte. The sale cuts Bank of America's stake in CCB to 10.6%.
Hopu Investment was founded in 2007 by Fang Fenglei, Goldman Sachs Group Inc.'s (NYSE: GS) China partner. Hopu and Temasek have collaborated before; in late April, the two announced plans to invest $300 million in a Mongolian iron-ore mine. It was Hopu's first deal since being launched as a private equity firm, Bloomberg News reported.
Bank of America's sale of part of its CCB stake wasn't news to Money Morning readers. In a story published in mid-January - "The Global Financial Crisis Will Cost Western Banks a Share of Future China Profits" - Money Morning reported that BofA was going to have to sell some of its stake in that key China bank. Indeed, the report detailed how banks in the United States and Europe would have to divest their interests in China's promising banking market in order to close capital deficits created by the global financial crisis. The story was part of Money Morning's ongoing investigation of the U.S. banking bailouts.
On Friday, BofA filed with the U.S. Securities and Exchange Commission (SEC) to sell as much as 1.25 billion shares of common stock, a move that would raise as much as $11 billion (given a proposed maximum offering price of $8.79 per share).
BofA said it will use the net proceeds from the offering for general corporate purposes. Bank of America Securities LLC and Merrill Lynch & Co. (NYSE: SQD) were listed as the underwriters for the stock offering.
Bank of America is also looking at still more asset sales to raise the rest of the required capital. Last Thursday the bank said it's looking to end a loss-sharing agreement with the federal government on $118 billion of troubled assets, calling the agreement unnecessary - and too expensive.
Ford announced plans to sell 300 million common shares, and said it would use the proceeds from the offering for "general corporate purposes," and to make a contribution to a fund that pays for healthcare for its retirees.
Total shares outstanding will increase to 3.102 billion - or to 3.148 billion if underwriter's option for an additional 45 million shares is exercised.
Citigroup Inc. (NYSE: C), Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM) and Morgan Stanley (NYSE: MS) are acting as joint managers for the stock offering.
Ford's shares closed yesterday at $5.01, down $1.07, or 17.6%, from Monday.
According to an SEC filing, a settlement with various unions calls for the initial three payments to be made on Dec. 31, 2009, June 30, 2010 and June 30, 2011. At each date, as much as $610 million of the amounts payable could be satisfied by the delivery of Ford common stock, valued at fixed prices of $2.00, $2.10 and $2.20 per share, respectively, the filing stated.
Ford intends to use a portion of the proceeds of this offering to fund all or a portion of the payments to the settlement fund - in lieu of delivering shares on those payment dates, according to a media report by 123Jump.com.
Ford Chief Executive Alan R. Mulally took advantage of the stock-offering announcement to say that Ford's management and employees are making "strong progress on our transformation plan - gaining retail market share with great new products, improving quality, reducing costs and positioning Ford for a return to profitability."
Ford also said that it's unlikely the company will pay any dividend in the foreseeable future. Ford last paid dividends in the third quarter of 2006.
As Ford Sells Shares, So Do GM's Top Execs
Interestingly, Ford is trying to sell shares to investors just as a group of top General Motors Corp. (NYSE: GM) executives - including GM Vice Chairman Robert A. "Bob" Lutz - have sold what was left of their personal stakes, according to several SEC filings on Monday. The stock sales by GM executives were reported by MarketWatch.com.
"Our shareholders are obviously facing some pretty severe dilution if the bond exchange goes through or we end up in bankruptcy," GM spokesperson Julie Gibson told MarketWatch. "Either way, no matter the outcome, we'll essentially be issuing new stock."
She acknowledged to MarketWatch that the executives took advantage of a trading window to sell their shares while there's still some value "like most reasonable people would do."
GM's executives sold their shares just as the company is trying to rid itself of $27 billion in debt by persuading thousands of creditors to exchange their bonds for 10% in GM stock.
According to the MarketWatch report, the SEC filings say that Lutz was joined by fellow Vice Chairman Thomas G. Stephens, Ralph J. Szygenda, Troy A. Clarke, Gary L. Cowger and Carl-Peter Forster. All together, the six sold nearly 205,000 shares between Friday and Monday, fetching between $1.45 and $1.61 a share.
GM's shares closed yesterday at $1.15 each, or 20.14%.
It is worth noting that Money Morning Contributing Editor Martin Hutchinson wrote this week that there's a chasm of difference between the prospects of GM and Chrysler LLC - the two foundering members of Detroit's "Big Three" - and Ford, which Hutchinson says may actually be worth investing in.
If the market shakes out as Hutchinson expects, Ford could emerge as only real winner among the U.S. automakers.
Under such a scenario, "Ford will pick up market share from GM and Chrysler, even if domestic brands overall continue to see their market share ebb," Hutchinson wrote. "That will reduce Ford's losses, and when the automobile market does rebound, the company that created the original automobile assembly line will move to a position of substantial profitability. For the first time since Henry Ford kept the Model T in production too long in the 1920s, Ford may become the dominant U.S.-controlled automobile manufacturer."
As the secondary-offering market heats up, and the recession, Basenese, the stock-offering expert, says investors need to focus on these investment opportunities - and especially on those that emanate from the expected escalation in IPOs.
"History suggests IPOs are the place to invest coming out of a slump," he said. "For proof, all we need to do is go back to the last 'severe' recession on record, from 1973 to 1975. As we exited, IPOs turned in impressive numbers, with first day gains jumping to 40% and three-year returns climbing to more than 150%, easily outpacing the Standard & Poor's 500."
News and Related Story Links:
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Money Morning Market Analysis:
Why Ford Will be the Last U.S. Automaker Standing. -
Money Morning Investigative Report on the U.S. Bank Bailouts:
The Global Financial Crisis Will Cost Western Banks a Share of Future China Profits. -
Money Morning News Analysis:
BB&T, Capital One, U.S. Bancorp and KeyCorp Planning Stock Sales to Raise Capital, Repay TARP. -
FoxBusiness.com:
Anadarko Prices 30 Million-share Offering. -
123Jump.com:
Ford, Anadarko, BofA Raise Capital. -
Bloomberg News:
Goldman's Fang Makes First Private Equity Investment. -
MarketWatch.com:
Lutz and other top GM executives sell shares. -
Wikipedia:
Robert A. Lutz.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.