Men and women of my generation, and likely their parents, will be very familiar with the clothing company Aeropostale, as it was a fashion staple in the 90s and early 2000’s. However, since its heyday the clothing company has been in steady decline. Things have gotten much, much worse for Aeropostale in the last few years. Over the last year alone, share prices have plummeted to half their value.1 For the fiscal quarter that ended on November 2, 2013, Aeropostale reported a net loss of 25.6 million dollars or 33 cents per share.2 During that same quarter sales fell by 15 percent, indicating the large problems that the clothing company faces.3 It would appear that the clothing company is failing to compete in today’s market. In order to move past this and hopefully back into turning a profit they need to forge a new path. Aeropostale’s executives are now struggling to figure out their way forward. Two realistic options have emerged, one being selling off the company’s assets and the second, and more likely, being a private investment in public equity, or PIPE transaction.4
A PIPE transaction is a transaction usually used by small to mid-cap sized firms that have trouble raising capital in the market.5 Despite being down in quantity this past year, PIPE deals are still fairly common, with 249 of them taking place in the first quarter of 2013 alone.6 In a PIPE transaction a venture capital firm, mutual fund, or other qualified investor will purchase stock in the issuing company at a discount off of current market price.7 This maneuver allows the issuing company to raise capital very quickly. It should be noted that there is a limit on the amount of stock an issuing company can sell in a PIPE transaction. A company cannot sell off more than 20% of its outstanding stock without prior stockholder approval.8 PIPE transactions are valued in today’s market because of their ability to raise capital fast and their ability to be tailored to the individual company in need.9 The venture capital firm then controls a portion of the companies stock, which it gained at a very low price. This allows them to spin it off for big profits if the company is able to recover.
PIPE transactions do not come without their dangers to the company, however. Since the company issuing the stock is in a very vulnerable state financially, the venture capital firms who they are trying to solicit can easily exploit them.10
The big danger in this type of transaction is obviously the price manipulation by the purchaser.11 Since the purchaser is in a superior bargaining position, the SEC has attempted to combat this price manipulation in PIPE transactions via litigation, but it has only succeeded in making the contracts more purchaser-friendly.
[A]ll types of PIPE investors responded to the SEC’s actions by substituting away from contractual rights that were under scrutiny towards other contractual rights that were not. Although such substitution may have left the aggregate level of investor-friendliness in PIPE structures unchanged, it was associated with marked modifications to the precise allocation of contractual rights. [I]nvestors could more often mitigate investment risks by exercising various investor-friendly contingent cash flow rights, without giving away similar rights to issuers.
12 While the SEC has attempted to make this type of transaction safer for the issuers, which would be beneficial, it does not appear that they have completely succeeded in this goal.
There have been some recent moves at Aeropostale that may have a major effect on how they proceed. This past September, the private equity firm Sycamore Partners bought 8% of the shares in Aeropostale and became their third largest shareholder.13 No one is quite sure what Sycamore Partners intends to do, as they could buy the company in its entirety or force Aeropostale into a more aggressive strategy.14 In November, Aeropostale was approached by another one of its large investors, Crescendo Partners, who attempted to force a sale.15 It is now up to the executives of Aeropostale to decide how to move forward in this time of uncertainty. The PIPE transaction seems to be the riskier move however it would allow them to keep control of their company.
Olivia Oran, Aeropostale Mulls Raising Capital From Private Equity: Sources, Reuters (Feb. 10, 2014, 2:33PM), http://www.reuters.com/article/2014/02/10/us-aeropostale-pipe-idUSBREA191R920140210. ↩
Michelle Russell, US: Aeropostale “Considering Private Equity Deal, Just-Style (Feb. 11, 2014), http://www.just-style.com/news/aeropostale-considering-private-equity-deal_id120669.aspx. ↩
Anna T. Pinedo, James R. Tanenbaum, Frequently Asked Questions About PIPES, Morrison & Foerster (2013), http://www.mofo.com/files/Uploads/Images/FAQsPIPEs.pdf. ↩
Aeropostale to Raise Capital From Private Equity Firms via PIPE Deal –Sources, Venture Capital Post (Feb. 10, 2014, 11:46AM), http://www.vcpost.com/articles/21543/20140210/aeropostale-raise-capital-private-equity-firms-via-pipe-deal-sources.htm. ↩
Claire Sheppard, Regulating the Pipe Market: The Unintended Ripple Effects, Blog, Ill. Bus. L.J. (April 24, 2012, 7:40PM), http://www.law.illinois.edu/bljournal/post/2012/04/24/Regulating-the-PIPE-Market-The-Unintended-Ripple-Effects.aspx. ↩
Oran, supra note 1. ↩