Companies back at the market for fresh stock offerings
Wall Street has started to feed the ducks. Since October, new equity offerings have mushroomed, fed by a soaring stock market.
Last week, the pace quickened when the American Telephone & Telegraph Company announced plans to raise $1 billion through the sale of new shares of stock. And just two weeks ago, General Foods Corporation, headquartered in White Plains, N.Y., floated 2.310 million shares of new stock at $44.25 a share. This $100 million deal was the third-largest block of stock traded on the floor of the stock exchange.
Wall Street investment bankers and economists expect the pace to continue as long as the market remains strong. ''Corporations need to convert short-term debt into equity financing,'' says William Freund, senior vice-president and chief economist at the New York Stock Exchange. According to a study by Kidder, Peabody, an investment banking firm, the average industrial corporation has seen its balance sheet deteriorate so that its bond rating has gone from single A-minus to BBB.
As Mr. Freund pointed out, corporate balance sheets have become heavily skewed with short-term debt, borrowed from friendly bankers at the prime interest rate. Treasurers have had little choice. They did not want to float new long-term debt offerings at 15 to 17 percent and did not want to sell new stock at substantially under the book value of the company. Thus, they borrowed heavily from the banks and waited for either a window to open up in the debt markets or for the stock market to rally. Both have happened.
Initially, there was a surge of new debt offerings. Corporations, filing under the Securities and Exchange Commission's Rule 415 (commonly called shelf registration, which allows them to file prospectuses far in advance of an offering for marketing later at an advantageous time), pulled registration statements and floated large new debt offerings.
Now, many companies are turning to equity financing. But as Neal Garonzik, a vice-president at Morgan Stanley & Co., says, making that decision to float new equity is tougher than a decision to float new bonds.
On an after-tax basis, Mr. Garonzik says, the cost of long-term debt today for an AAA company paying the maximum 50 percent tax rate would be about 5 1/2 percent. This is low compared with the cost of raising new equity, where the dividend rate and the growth rate of the dividend must be considered. Interest paid to bondholders is deductible from a company's taxes, whereas dividend payments are made on an after-tax basis. Furthermore, he comments, new equity dilutes the holdings of a company's current shareholders.
''There are so many factors that affect an equity offering,'' he said, ''such as the state of the balance sheet, the company's financial flexibility, and its strategic plan, including its acquisitions and diversification strategy.''
Some companies decide to sell stock to balance debt-to-equity ratios. This was the case with General Foods, which had acquired Entenmann's Inc., a bakery, for $315 million this fall and was financing part of the acquisition with debt and equity. The company also sold the stock near its high of $47 a share. In August, the stock sold in the high 20s.
The roaring market was one of the attractions to AT&T. Ma Bell's stock was selling near its yearly high of of $64.75 when it announced the deal. Virginia Dwyer, AT&T's treasurer, said this was an important consideration in selling the new equity. One investment banker also pointed out that with the breakup of AT&T from its operating companies hanging over the markets, the best way the company could raise money was through the stocks.
Finding buyers for the new equity offerings has presented something of a challege to some of the underwriting firms. In the last few weeks, for example, stocks have been extremely volatile, with 10- to 20-point swings in the Dow Jones industrial average commonplace. The result, says Eric Dobkin, vice-president at Goldman, Sachs, another investment banking firm, ''is that you just have to be little bit more nimble.'' Fortunately, Mr. Dobkin points out, the stock market has now become more attractive compared with the bond market, so the major institutional buyers who make up so much of the market are more interested in buying stocks.
The increased interest in equities has also helped the new-issues market, notes Robert L. Cooney, managing director of First Boston. ''We haven't returned to the days of the Denver penny stocks,'' he commented, ''but we have had a new spate of IPOs (initial public offerings).'' For example, last Friday Lee Data came out with a new offering priced at $19 a share, which jumped 9.25 points in initial trading.
Some market observers wonder if all the new issues might absorb much of the cash now fueling the market's advance.
Frank Parrish, senior vice-president at Fidelity Management & Research in Boston, says he doesn't view the increase in new offerings in a positive light. ''If you increase the supply of stock,'' he said, ''you depress the price of the stock.'' He notes that AT&T stock fell 87 cents a share after the company announced the new offering. And, he remarked, ''the billion dollars used to buy AT&T stock will mean there is $1 billion less for other stocks.''