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Crocs and the PIPE

Paddy Hirsch Nov 27, 2013

No, Crocs is not on crack: It needs money.

The PIPE is a way of raising cash, in what’s called a private investment in public equity.

Q. Sounds complicated. What does it mean?

It means a private equity fund – Blackstone, in this case – buys shares in a public company – like Crocs.

Q. Where do those shares come from?

They’re shares owned by the company. When a company “goes public” in an IPO, it doesn’t put all its stock on the market. A big chunk of shares are held by the company’s officers, and maybe by the company itself.

Q. So if the company needs money, why doesn’t it sell its shares on the open market?

It could, but that would take a long time. If it dumped all the shares it wanted to sell on the market in one go, that could send the price sinking, which would kind-of defeat the point. It could also sell the block of shares in what’s called a secondary offering. But that takes a long time — it’s a lot like an IPO, where you hire an investment bank, go on a roadshow and jump through all sorts of regulatory hoops.

Q. So a PIPE is quicker. But is it cheaper?

Probably not. In exchange for doing the deal quickly, the private equity company usually buys the shares at a discount to their trading price.

Q. But what about Crocs. I like my plastic shoes and know lots of folks do too. So why does Crocs need the money?

The company’s not saying, but word is they’re raising the cash to buy back a bunch of their own stock.

Q. Whoah, hold on! They’re selling stock to raise cash to buy stock? How does that make sense?

Companies buy back stock for a number of reasons. Sometimes it’s because they want more control of the company; sometimes it’s because they want to be sure the value of the shares remains high. In Crocs case, there’s talk of a restructuring, which Blackstone would help with. The company could be aiming at holding as many shares as it can afford to buy, to make that restructuring as smooth as possible.

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