As deal pros look for any sign of a rebound, most eyes have been trained on the credit markets. For some, however, it's public equities that could kickstart M&A. A number of companies in recent months have completed follow-on offerings that serve a dual purpose. The priority is clearly to slacken strung out balance sheets, but possible acquisitions are also an enticing motivator to these secondary stock sales.

In the third week of June, Harman International Industries issued 10.6 million shares that yielded $200 million in proceeds. The bulk of the proceeds will go to trimming the audio product maker's debt, but the company cited future deals as another possibility. Brookdale Senior Living, Iconix Brand Group, American Campus Communities and Regal Beloit, among others, all executed follow-on offerings in the weeks and months preceding Harman's deal, with M&A cited in each case as a likely destination for portions of the proceeds.

As of June 16, 2009, Dealogic had tallied a total of 215 secondary offerings, worth a combined $102.2 billion throughout the first five and a half months. That is a significant improvement over 2008, which saw only 125 offerings worth a combined $63.1 million. Only 240 offerings were completed in all of last year.

Even as companies specifically cite M&A as a likely destination, most deal pros only see these secondary offerings as a small part of a bigger picture. "You could argue that these offerings are a leading indicator for improved M&A activity, but it's unlikely that they will serve as a stimulus in the near term," Duff & Phelps managing director Jon Melzer says. He identifies that the more immediate impact is the reintroduction of flexibility into corporate balance sheets.

Howard Lanser, director of mergers and acquisitions at mid-market investment bank Robert W. Baird & Co., notes the equity markets have opened up for issuers as the volatility has decreased. Indeed, the CBOE's volatility index rested under 30% as of late June, compared to a high of 81% in October and November of last year.

To be sure, observers recognize equity offerings are "expensive money," as Melzer describes. Lanser adds that in most cases, the issuers are handing over substantial discounts in order to get the deals done. In the case of Harman, for instance, the company priced the stock at $18.75 a share, roughly 20% below its trading price a day prior to the announcement.

Equity offerings are even more expensive when they arrive in the form of a PIPE (private investment in public equity). But companies that may not be able to execute a traditional follow-on offering are forced to swallow tougher terms, underscoring the urgency.

Allis-Chalmers, in the last week of June, tapped Lime Rock Partners to backstop and participate in its equity offering. The private equity firm had to commit just $49.7 million for a roughly 28% stake in the NYSE-listed energy services provider. As part of that Lime Rock also agreed to acquire 7% convertible perpetual preferred stock that, along with its backstop commitment, could push its stake to nearly 45 percent. Allis Chalmers' efforts yielded gross proceeds of roughly $125.6 million, which will go directly to its debt, with any remaining capital set aside for general corporate purposes. The company did not mention M&A, but Allis-Chalmers has historically used acquisitions to build out its geographic presence and its offerings.

In some cases, follow-on offerings have already translated into new deals. Titan Machinery, last May, executed a secondary stock offering that resulted in nearly $79 million of proceeds, money that has supported eight subsequent acquisitions for the agricultural and construction machinery dealer.

M&A pros will take any signs of improvement in what has been a depressing market, though they're also disinclined to place too much emphasis on any one indicator. "We're by no means out of the woods, although I think we're seeing a thaw," Baird's Lanser says. "As companies deleverage through equity it will only increase their flexibility to pursue acquisitions."

Melzer adds that the growth in follow-on offerings is merely a building block. "It's a first step of several others that have to transpire," he describes.

In the meantime, most anticipate companies will continue to tap the equity markets. The key, most identify, is the refinancing cliff that looms on the horizon. Melzer says companies that can, will try to smooth the transition ahead of their debt maturities. "Lenders are seeking lower leverage ratios," he says. That means even strong performers will face a hole in their balance sheets when their loans mature. "That's going to require equity capital," Melzer adds.

Once the balance sheets are patched up, companies can then become opportunistic in pursuing growth. As part of the bigger picture, the hope is that cleaner balance sheets will put lenders at ease to the point that they return to the market. Not until then, though, do deal pros expect the market to normalize. "There aren't a lot of companies interested in putting themselves up for sale," Melzer adds. "When the banks come back, and the senior cash-flow lending market returns, multiples might return and we'll get some increased M&A activity again."

For now, though, a stronger equity market will have to suffice. 

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