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Overnight success

Companies have grown so fond of fast, efficient "overnight" securities offerings that investment banks may have a hard time weaning them away once deal making recovers.

Raising money in the capital markets can be a real pain. Corporations have to file with the Securities and Exchange Commission, audition bankers, circulate prospectuses and go on road shows to market deals. The process can take weeks or months, cost lots of money and tie up top executives.

It's little wonder, then, that a growing number of companies are opting for an attractive alternative: raising billions in just days through securities offerings known as "overnight" or "bought" deals. An investment bank will buy an entire block of securities from the issuer and then parcel it out a bit at a time to institutional investors.

The structure works best for follow-on equity and convertible bond deals. Stock offerings can be priced based on secondary-market trading levels and resold in that market. Hedge funds eager to exploit differences between a company's new-issue price and its existing stock are a receptive market for convertibles.

Issuers pay a lower underwriting fee -- as little as 1 percent of proceeds, compared with about 3.5 percent for a conventional deal -- and get their money right away, while investment banks assume the risk of secondary-market price fluctuations. Considered private placements, the deals don't need to be registered immediately.

"Companies are paying a lower gross spread than they would in a traditional deal, and they're transferring the principal risk to the bank," says Glenn Schorr, a securities industry analyst at UBS. "If you're a corporate CFO or treasurer, it doesn't get any better than that."

Just ask David Flowers, treasurer of Denver-based Liberty Media Corp. The media holding company raised $1.75 billion in March in an overnight offering of 20-year bonds exchangeable into AOL Time Warner shares. (Liberty has a bundle of them from investing in Turner Broadcasting System, which Time Warner bought.) After five years Liberty has the option to exchange the securities for the AOL shares, cash or its own class-A shares. J.P. Morgan Chase & Co. and Banc of America Securities handled the deal. "It was a much easier execution than a traditional underwriting," says Flowers. "We own quite a bit of AOL stock and found it to be a very efficient funding source. We effectively sold a call on the stock."

Although they've been around in various forms for many years, overnight deals have never been more popular. In 2000, 592 such transactions in the global equity and convertibles markets raised $103 billion, according to Dealogic. That represented 17 percent of all equity and convertible offerings that year, and 15 percent of the proceeds raised in those markets. Last year those totals rose modestly, to 605 deals worth $112 billion. But through October 13 of this year, there were 730 overnight deals worth $115 billion. More strikingly, overnights accounted for 28 percent of all equity and convertible offerings -- and a whopping 44 percent of the proceeds.

Corporations such as Halliburton Co., Walt Disney Co. and Wells Fargo & Co. have joined Liberty Media in executing large overnight deals in 2003 (see table).

A big reason for the boom: Banks, desperate for business amid a long new-issues drought, are eager to bid on even lower-fee, higher-risk overnight deals. As markets recover, say some experts, the pace of these deals will slow.

But others counter that chronic overcapacity in investment banking could mean that the bought-deal binge is here to stay. Thus, a revival in deal making might not benefit Wall Street profits as much as many expect. Nor will risk levels, which have risen as firms put their own capital up, subside as much as they ordinarily would in a strong market.

"With these deals, you may not find out you're long the stock until 5:30 or 6:00 o'clock at night," says Schorr. "What happens if you wake up in the morning and the market opens down 3 percent? The Street makes money on 90 percent of these. It's the other 10 percent I worry about."

Buying in

Increasingly, large companies are using so-called overnight transactions to raise big chunks of money in the capital markets while paying Wall Street only modest fees. Below are the ten largest such deals brought to market this year.

Company Date Deal value ($ billions) Deal type

Tyco International 1/7/03 $4.50 Convertible

Wells Fargo & Co. 4/9/03 3.00 Convertible

Koninklijke KPN 9/19/03 2.30 Follow-on equity

SLM Corp. 5/14/03 2.00 Convertible

Liberty Media Corp. 3/21/03 1.75 Convertible

Renault 7/28/03 1.51 Follow-on equity

France Télécom 4/10/03 1.43 Follow-on equity

Walt Disney Co. 4/9/03 1.32 Convertible

ABN Amro Holding 5/8/03 1.30 Follow-on equity

Halliburton Co. 6/24/03 1.20 Convertible

Source: Dealogic.

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