See You at the PIPEs Conference

My law partner Joe Smith and I are both speaking at DealFlow Media's PIPEs Conference this November 12-13 at the New York Hilton. This is by far the biggest PIPE conference of the year. Joe will be on the traditional panel discussing legal issues concerning PIPEs. My panel will be on reverse mergers. I urge all interested in this space to attend- my firm is also sponsoring the luncheon. Here is the description of my panel.

Investing in Reverse Merger Companies: Navigating Rule 144

3:45 - 4:35 PM This year the SEC adopted significant changes to securities law designed to improve the regulatory environment for smaller public companies. Now that these rules have been in place for some time, new strategies have emerged for investors. This panel explores the various approaches to investing in newly-reverse merged companies, positioning private companies for the public market, and covers what investors need to know in the post-Rule 144 environment.

What Does This All Mean to Me, Al Franken?

Some of us older folks remember the early days of the NBC comedy show Saturday Night Live. A very clever guy (now running as a Democrat for the US Senate), Al Franken, used to do a sketch talking about problems in the world and then saying, "But what really matters is what this means to me, Al Franken." During the me-decade of the 1980s, this really rang true. Very funny stuff no matter what you think of his politics or the fact that he "secretly" helped SNL recently write a sketch lambasting Republican nominee John McCain.

Let's replace Al Franken with smallcap, microcap and middle market deal worlds. What does all the financial turmoil in these last few weeks mean to us? And why listen to me about this stuff anyway? I am not an economist, finance whiz, politician (my partners might disagree), prognosticator, pundit or strategist. I'm just a guy doing deals in the trenches and out building my business relationships, my Wharton degree in tow.

Well, you're here so I'll give you my thoughts anyway. Here's what I see. First, deals in our world, for now, seem to be getting done. Some are changing deal structures to be smaller deals, at lower valuations, with more investor-protective securities. The middle market and PIPE investment banks seem to be OK. They are finding money for deals. I am still getting calls on a regular basis from companies desiring to be public, and the deals are indeed moving forward. In our RM world, there also appears to still be a strong appetite for Chinese companies to go public here. The current challenges in the SPAC world pre-date these issues, and that is for another day to discuss.

In the end, both PIPEs and reverse mergers (and other IPO alternatives) tend to be fairly non-cyclical. During the worst of the early 2000s, when the IPO market was dead and the stock market in very negative territory, we were actively taking companies public through reverse mergers. That appears to be remaining true in this bear market. The reason is that current market conditions are not that important when pursuing a reverse merger or self-filing. You are thinking more 6, 12 or even 18 months down the road and hoping market conditions will be attractive at that time. Investors with that longer-term perspective are prepared to invest regardless of today's market.

The middle market M&A world, of which I am also a part, is beginning to take its hit as well. The larger M&A deals went away about a year ago, and now the middle market is finding it harder to get deals done, but if they are, multiples and such are noticeably lower. The "strategic" buyers are still active and finding attractive valuations, whereas the "financial" buyers less so for now. Not great for M&A guys, but this also means some companies looking for an exit are more interested in going public through a reverse merger or other IPO alternative. And yes I am also getting those calls.

The New York Times wrote today about who wins in the proposed bailout and sudden increase in regulatory oversight of the financial world. Two key winners, they say: private equity and hedge funds. This is good news for our world, as these still largely unregulated pools of money will continue to be available for PIPE financings that drive many RM deals. Hedge funds now have to report when they short stocks, but most PIPE players are not actively doing that anymore, or if they are they are not concerned about reporting.

Thus, as the largest investment banks move to more conservative play by becoming banks, the middle and lower middle market investment banks may well have the opportunity to be involved in larger, exciting but somewhat risky transactions that the larger banks now must shun.

Despite what some say, this is not entirely unprecedented. Some even older than me say this is very similar to 1970. I do remember the market crash of 1987, when the market dropped 20% in two days (much worse than this rapid decline). I was a young lawyer and my officemate at the time, an active investor, came in calmly after the two-day drop and started buying stocks like crazy. Of course he was right as the market returned to its pre-crash levels within six months.

A former Treasury Secretary on the Today show the other day said, "Don't unbuckle your seat belts yet." And he is right. But as tough as things seem, (1) they may not be as bad for us, (2) some of the developments may actually help us, and (3) this too shall pass. There is one thing we know for sure. The stock market goes down, and then up. And investments in equities always outperform other traditional investments over any 10-year period. Your proof: I have not sold a single stock since this all started, except one that actually has been going up.

What I'm not sure about is what this all actually means to now Senate candidate Al Franken. :)

Bigger, Bigger, Bigger, Better?

Holy big deal Batman! Several incredible milestones were reached in recent weeks as the PIPE and SPAC markets continue their explosive growth.

First, what appears to be the largest PIPE ever was announced on November 28. According to DealFlow Media's PIPE Wire, the $7.5 billion investment into Citigroup by Abu Dhabi Investment Group was structured as a PIPE, with trust-preferred securities and common stock purchase contracts. Presumably mortgage crisis-beleaguered Citi was attracted by the speed of the transaction. This transaction would seem to lay to rest most, if not all, of the remaining questions about the legitimacy and efficiency of PIPEs.

The second major development is the largest SPAC ever, set up by investor Nelson Peltz. They announced that they are going to raise $750 million for a troubled company. This dwarfs the $550 million raised in September by a SPAC led by Tom Hicks. Considering that the earliest SPACS back in 2003 raised an average of $25 million, this is simply huge.

Related to this is the fact that, according to DealFlow's new SPAC Wire, the 200th SPAC, BPW Acquisition, was filed this past week. SPAC pioneers David Nussbaum of EarlyBird Capital, David Miller of Graubard Miller and Ira Greenspan of HCFP Securities should be mighty proud of what they have wrought.

Not to forget the humble reverse merger. Recent deals financed by the likes of Goldman Sachs and Lehman Brothers took companies public through shell mergers. It was difficult to imagine 10 years ago that any bulge bracket firm would get comfortable with an APO-type structure, but this day also has arrived.

But what does this all mean? Will General Motors do a PIPE? Will Deutsche Bank raise a $30 billion SPAC? What impact does this have on those who choose to remain in the small and microcap space with PIPEs, APOs, SPACs and the like?

My view: it's all good. To the extent that some looked upon these methods of smallcap finance with skepticism, everyone benefits from the entrance of major players to "borrow" these techniques and adapt them to work with larger companies. This assumes that we continue to utilize these approaches to help smaller public companies as well as large ones.

I hope there will always be SPAC players who keep their fundraising under $75 million. I hope that more innovative techniques like WestPark Capital's WRASP structure (more about this in a future entry I am working on) will allow more companies to go public in a clean and straightforward fashion and move immediately to a major exchange. And here's possibly the hardest part: I hope the PIPE investment community, as it sees the chance to be involved in larger and larger deals, remembers the opportunity and dramatic upside possible by continuing to also work with smaller deals into smaller companies. I hope that a segment of the PIPE world will continue to provide "public venture capital" to exciting growing entrepreneurial companies, knowing that greater risk can lead to greater reward. And all while, yes, the larger and larger deals bring greater and greater credibility, legitimacy and transparency to everything we do.