National Post (National Edition)
Open Text’s old-school equity offering
Making everybody happy seems an impossible task but at various times it does occur.
Consider this week’s US$500-million equity offering by Open Text Corp. an offering that may rise by another US$75 million if the three joint book-running managers — Barclays, Citigroup and RBC Capital Markets — exercise the overallotment option. Open Text, which announced the deal before the markets opened Monday, intends to use the proceeds to help fund its latest acquisition: the US$1.62-billion purchase of Dell EMC’s Enterprise Content Division, a purchase announced three months back.
This week’s equity financing was unusual in that the selling price of the shares was not disclosed at the time of the announcement.
Normally when a Canadian issuer raises capital via a bought deal, the shares are priced at a discount to the prevailing market price — which gives investors an incentive to purchase the new shares being offered.
The bought deal is a Canadian invention: In essence, a group of underwriters offers to buy a block of stock from an issuer (or a secondary seller) at a fixed price before a prospectus has been filed. As a result the underwriters assume the risk of finding investors for the shares they “own.”
And to the extent investors can’t be found quickly, the issue becomes hung. Eventually the matter is settled when the underwriters cut the price and the unsold stock finds a home. A few financings suffer such a fate — but in general the process works: The issuer gets the agreed-upon proceeds, the investors get new stock and the underwriters collect fees.
Instead of raising capital via a bought deal, Open Text and the underwriters opted for what’s known as a marketed offering — the way deals used to get done in Canada before the bought deal arrived three decades back. (Marketed offerings still occur in Canada. Open Text isn’t a frequent issuer of equity; its last deal was more than 15 years back.)
One reason for introducing the bought deal was that the issuer bore all the risks with a marketed deal: A financing would be announced, the company and the underwriters would arrange investor meetings, orders would be taken and the price would be announced. The process could take a couple of weeks — though over time the process was shortened so much so that a new term, an overnight marketed transaction, entered the lexicon.
From Open Text’s perspective, it used a marketed deal to get the story of its latest acquisition out to investors. (It did that through conference calls and a series of one-on-one meetings.) And investors must have liked what they heard: in trading on Monday and Tuesday the price of the company’s traded shares rose to close at US$62.05 — up 91 U.S. cents so far this week. Accordingly, existing Open Text investors benefitted from the financing. The shares were expected to be priced after the markets closed on Tuesday.
That’s not the norm for a bought deal where a financing is priced at a discount, a move that normally causes the price of the traded shares to fall. It can take some time for the stock to resume its upward rise and even longer for it to return to the level before the equity financing.
Open Text also broke the mould when it financed the acquisition a few months after announcing the deal. (The norm is to announce and finance at the same time.) That was always the plan, as in September it said, “the exact components of the permanent financing for the acquisition are yet to be determined.” For the purchase Barclays provided a US$1billion debt commitment.