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Manugistics' Not-So-Mysterious Debt
Unpublished article, 1/16/01
In last week's column on TheStreet.com, Manugistics' Mysterious Debt, I raised a number of questions about the $250 million in convertible preferred securities that the company sold last quarter. I hate asking questions, though, without at least attempting to provide answers. I was hoping the company would oblige, but various people haven't returned numerous calls and emails, so I'm going to turn to my readers instead. Below is the list of my questions, with comments from three readers who emailed me after reading last week's column. (They prefer to remain anonymous.)
1. Why didn't the company issue stock to raise money? (This is certainly the most common route chosen by companies with stocks trading at extremely high multiples.) Was it the company's choice to do a convertible debt deal, or did market conditions preclude a stock or plain debt deal?
Reader Michael S., who covers the convertible securities market for a market data company, offered the following answer: "The reason why the company did not issue stock was probably due to the fact that follow-on offerings and IPOs had fallen out of favor with investors. Also, convertible debt at the time was allowing companies to raise enormous sums of money (whether they needed it at that time or not) for a pretty cheap rate...5%."
Reader Michael R. added: "Manugistics did sell stock at a 25% premium when the bonds were priced. Had Manugistics tried to get stock off, they may have been faced with an investor base less enthused. Also, converts bring new classes of investors."
A final reader, Jeffery D., who works for a private equity firm, noted: "PIPES (private investment in public equity) are increasingly being marketed to us by investment banks as they face weak demand for public offerings. My guess is that when Manugistics decided to raise cash, their bank convinced them that the secondary market was too tight and that a PIPE was preferable."
2. Why did Manugistics raise so much money? Why not a smaller amount?
Jeffery D.: "Probably because they could. Just like Amazon, they probably wanted to make sure they were around for a while. They probably needed cushion both for 1) acquisitions that could be difficult to do with stock during a down market, especially when up against I2 whose revenues (4x) and market cap (8x) provide them more stock price cushion; and 2) protection against a period of slower growth, Talus integration challenges, and deteriorating A/R quality from B2B customers."
Michael R.: "The premium does seem cheap when we consider optionality on a stock like Manugistics -- and when we consider (as you point out) that Manugistics was profitable and cash flow positive -- basically fundamentally the stock looked good (and cheap)."
3. Why was it done as a private placement? Who purchased the convertible debt? Is there, or has there ever been, a relationship between the buyer and Manugistics or its management?
Michael S.: "Of the 155 convertible offerings last year, 101 were done in the 144a market (private placements). Why? 144a offerings are easier to get priced. They take less time to market for the banks. Amongst other reasons."
[I have learned that Deutsche Bank Securities managed the offering, which was most likely sold to hedge funds and others who specialize in this type of investment.] >
4. What were the terms? Why weren't shareholders offered the right to buy this debt? How was the conversion price of $44.07 determined?
Michael S.: "For this offering the talk (marketed terms) was 4.75-5.25%, up 23-27% (the premium at which the convertible price, in this case $44.06 (post-split), will be set at). The company was able to price the offering at 5%, up 25%. So the $44.06 was a 25% premium over that day's close ($35.25). The shareholders were not offered the right to buy the offering because it was a private placement. Most of the qualified shareholders with a relationship with one of the banks involved in the offering (either Deutsche Bank Securities or Banc of America Securities) could of had a shot. But you know how the game works. Even if it was a secondary offering most shareholders would not have a shot at getting anymore shares."
5. Is the 14.2% difference between basic and diluted shares outstanding at the end of the third fiscal quarter of 2001 (there was no difference at the end of the second quarter of fiscal 2001) due solely to this debt offering?
Michael S.: "Probably, I don't know for sure."
6. I went through every SEC filing since Sept. 1 and could only find 8-Ks that had a copy of your press releases. My understanding is the deals like this typically require fairly detailed disclosure with the SEC. Did I miss it, or wasn't there any? If not, why?
Michael S.: "When a company issues a 144a convert they have I believe around three months to register the bonds (if the offering requires it). Most of these 144a converts are priced with registration rights. At that time you will be able to see who bought the bonds, because that is when they will register for the right to sell them. 144a deals are private deals and the company does not have to say anything. In fact they used to not even put out press releases. They only started doing that because companies like the one I work for were finding out and letting our customers know. It is safe to say that the company would rather we did not find out about it, but we do so they try to put out as little as possible."
Michael R.: " It does seem questionable that Manugistics raises so much debt and then states uses for the money are working capital and acquisitions. A slush fund for management. If you believe these guys can identify acquisitions in a stock market that is pretty weak to grow their business -- then you signed up for the convertible.
"You mention how a convert is a lose/lose for shareholders. This is not necessarily true. If the stock performs, Manugistics never pays back principal -- it issues paper. At the end of the day the company has grown and the balance sheet has no debt. Shareholders and the company must gauge whether the cost of selling stock at a 25% premium along with three year's low interest is worth management's strategic goals -- and as you stated -- these are pretty vague."
Jeffery D.: "Regardless of why or how much, you correctly note that the raise is pricey to existing shareholders."
When I first analyzed the $250 million offering, the thought crossed my mind that this might have been a sweetheart insider deal. (Hence, my question, " Is there, or has there ever been, a relationship between the buyer and Manugistics or its management?") This is almost certainly not the case, as the type of offering and the basic terms appear to be reasonable.
But my main points remain unchanged:
1) If Manugistics' stock doesn't perform and thus the holders of the convertible preferred securities don't convert their debt to stock, then this is a material amount of debt for a company that is currently generating negligible free cash flow.
2) If they do convert, the 14% dilution is significant.
3) Given that the company didn't appear to need the cash, management's vague explanation for how it intends to use this money is wholly unsatisfactory -- to me anyway.
4) More generally, the company's nearly nonexistent disclosure to shareholders about such an important transaction is troubling.
Overall, my opinion on Manugistics remains the same: this isn't a bad company and, in fact, has many things going for it. But at 177x next year's expected earnings, its stock is priced for perfection and -- like almost all companies -- Manugistics isn't perfect.
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