PIPE refers to the situation when an investor invests in the stock of a publicly-traded company. These shares are offered to the investors at a price lower than the market value of the same.
It generally takes place when a company is looking for means to raise capital because of some reasons, one of them being a dip in their equity valuations. A company might issue shares from its existing lot or issue a fresh batch of share for this purpose. These shares are mostly issued in the form of Private Placement (Issuing shares to a group of pre-selected investors, mostly those who are wealthy).
Although the company can raise funds in a short period of time, they still lose out on the potential capital as the shares are issued at a discount. Another reason why a company issues such kind of shares is due to the reduction in the amount of paperwork involved in the procedure of PIPE shares. The process of generating money with the help of PIPE shares takes around 2-3 weeks as compared to some months when it comes to issuing equity shares, which makes it attractive.
Although the PIPE shares sound very appealing, there are some drawbacks to it as well. If the investors keep selling their shares in a short period of time, this might drive down the price of the shares causing the company to issue more shares, which might result in the dilution of the ownership of the company. PIPE shares are widely used in the US for raising funds.
A good example of PIPE shares would be when YUM, the owner of Taco Bell and KFC had announced that it is going to purchase 200 million dollars of takeout company GrubHub stock through a PIPE, which resulted in the creation of a strong bond between the 2 companies.
We can say that although PIPE is a great way of generating short term funds and has a lot of benefits to offer if done right, it does carry some amount of risk and can be exploited at the issuers peril if not done properly.
Write-up by: Rishi Raniwala
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