Amgen's debt offering has many investors taking note. (Wall Street West).

WALL Street deals can be hard to decipher at times, even to market veterans. Such was the case with a huge recent sale of convertible notes by Amgen Inc., the Thousand Oaks-based biotech giant.

Back on Feb. 22, Amgen said it issued $2.5 billion in senior convertible notes to help it fund an ongoing stock-buyback program and its $16 billion, mostly-stock buyout of Seattle-based rival Immunex Corp. Merrill Lynch was the underwriter.

Then last week, Merrill published a tomb-stone ad publicizing an underwriting that looked quite different than the one Amgen described. Merrill called it a "$3.95 billion liquid yield option note." Even some veteran Amgen watchers were puzzled.

As it turns out, Merrill Lynch and Amgen are talking about the same deal, just using different yardsticks. Amgen said it had netted $2.5 billion from the offering, while Merrill Lynch went with $3.95 billion, which is what the "zero coupon" notes (which pay no annual interest, but rather accumulate value) will be worth when they mature in 2032.

In any event, the deal raised eyebrows - not only for its size but for its record-low interest rates. The Amgen convertible notes - essentially convertible bonds - are structured to pay a scant 1.125 percent in annual interest, considered the lowest rate paid on any major convertible-bond offering in memory.

Buyers of the notes have the right to convert them into Amgen shares at $80.61 a share, a hefty 40 percent premium to current market prices. (That means $1,000 worth of the notes can be exchanged for 12.4 shares). "The sale of the bonds is probably a testament to how the world views our company," said Steven Schock, vice president of finance for Amgen. "If you look at convertible bonds, this set a new record-low yield." Of course, the current low-interest rate environment helped too.

The idea to issue convertible notes, and raise $2.5 billion on the cheap, originated with Richard Nanula, Amgen's newish chief financial officer (hired away last year from Walt Disney Co.) and with Harry McMann, who heads Merrill Lynch's investment banking office in Los Angeles, Schock said.

Buyers of Amgen bonds can convert them into common stock whenever they want, although that isn't sensible until Amgen stock rises above the $80.61-a-share conversion price. Amgen has the right to retire the bonds after five years, although again that seems unlikely, as they are cheap, and if converted, never have to be repaid at all. "This is easily the lowest-cost alternative in terms of raising capital right now," said Schock.

Buyback Plans

Speaking of stock buybacks, more professional investors are looking for management teams with ongoing buyback plans as part of their strategy to enhance shareholder value. "Right now, small-cap value investing is in," said Brett Hendrickson, director of research for Los Angeles-based B. Riley & Co.

Value companies trade at low earnings multiples, but often don't have terrific growth stories to tell. They need something else to attract investors besides a reasonable stock price and stable operation.

Some small-cap management teams resist buybacks, worried such actions will worsen "liquidity" problems. Many large investors - such as mutual funds - eschew small-caps, as they cannot buy or sell enough of the stock to warrant the research. Furthermore, a large fund buying a small cap will drive the price up in accumulating the stock, and drive it down while selling. A smaller float only aggravates such concerns.

Hendrickson tells small-cap firms to buy back shares anyway. For one, the stock can be split. But more importantly: "As a small cap, you are always going to have this (liquidity) problem. There is no way around it. So you might as well do something for your shareholders, and incrementally buy back stock, perhaps en route to going private."

Three local companies Hendrickson likes have been buying back shares. They are Los Angeles-based Equity Marketing Inc., a maker of toys and promotional goods; Vans Inc., the Santa Fe Springs-based shoemaker; and Northridge-based Garmin International Inc., maker of geopositioning systems for auto makers BMW and Mercedes-Benz. (Garmin is legally headquartered in the Cayman Islands, but has its real base here.)

All's Fair 

By a country mile, Century City-based Houlihan Lokey Howard & Zukin is the national leader in providing "fairness opinions" to corporations seeking to merge, buy or sell a division or go private, according to a survey by Mergers & Acquisitions magazine. Fairness opinions are rendered when a board seeks an independent opinion from experts that a deal is fair to shareholders, such as when a founder takes a company private. Houlihan rendered 85 fairness opinions in 2001, compared with 28 for the runner-up team, investment banker J.P. Morgan, and 24 for third-place Credit Suisse First Boston.

Why such a wide gap? Major brokerages will only render fairness opinions when they have other substantial investment banking business with a company. Houlihan will render fairness opinions as a stand-alone product, said Marjorie Bowen, a Houlihan managing director who has led its fairness-opinion practice for three years.

Additionally, Houlihan is happy to work for middle-market firms. "We try to offer this service at a price point that makes sense to our clients," said Bowen. "We have a lot of expertise and can render an opinion and execute on a deal efficiently."

PIPE Fitting

On April 4, Michael Gardner, managing director of investment banking for Los Angeles-based Wedbush Morgan Securities Inc., will moderate a panel on raising money at the annual Los Angeles Venture Association conference. It will be the seventh year in a row Gardner has participated in LAVA's panels.

This go-round, Gardner will tell public companies one good way to raise money is to show a solid financial track record, and try a "PIPE" - private investment in public equities. That's when a public company sells a large block of securities, usually at a discount to market, to one or just a few large private investors.

PIPEs seem to be attracting the full gamut of investors, Gardner said. "You see hedge funds buying them, you see VCs (later-stage venture capitalists), you see high net worth individuals, money managers."

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. His new book is "The Pied Pipers of Wall Street: How Analysts Sell You Down the River," published by Bloomberg Press. He can be reached at [e-mail].