Talk about bittersweet.
Wells Fargo & Co.'s $11 billion stock offering Thursday proved that banking companies — at least strong ones — can tap the markets to raise capital. Wells raised a billion dollars more than it had aimed for.
But the sale also provided a chilling reminder for any company that wants to raise capital: You're gambling that the volatile markets won't swing painfully low just as you make the sale. The Dow Jones industrial average shed 9.7% Wednesday and Thursday, its worst two-day drop in 21 years.
"There is, intuitively, plenty of risk right now" for any company tapping the market, Lou Brien, a market strategist at DRW Trading Group in Chicago, said in an interview Friday.
A broad market slide drove down Wells' stock and helped ignite brisk demand for its shares because of the suddenly cheap price. The day Wells made the offering, the KBW Bank Index fell 5.9%.
To ensure interest at a time when investors are skittish, when Wells' underwriters firmed up plans for the offering on Wednesday they priced the stock at 6.2% below the next day's closing price. As it turned out, Wells' shares, which closed at $35 Tuesday, fell 10% Wednesday and 9% the next day.
Had it timed and priced the sale based on Tuesday's close, Wells would have sold about 320 million shares to raise the same amount of cash. Instead, it ended up selling 407 million shares, at $27 apiece, diluting existing shareholders' stock much more than initially expected.
"It turned out to be clearly more dilutive than what I'm sure their shareholders had hoped for," Jack Ablin, the chief investment officer at Bank of Montreal's Harris Private Bank, said in an interview Friday. "It was bad luck. If you think about it, before last Wednesday it looked like we had a turnaround going. I was certainly surprised we got hit with the bloodbath that we did on Wednesday and Thursday."
On a brighter note, bankers said the Wells sale proved investors still will pony up cash if the terms are right — and the company is relatively healthy.
Wells' stock sale — a move to bolster its capital as it prepares to close its deal for Wachovia Corp. next month — was the second biggest of the year, behind JPMorgan Chase & Co.'s $11.5 billion sale in September, according to Bloomberg data.
Wells announced on Oct. 3 that it had agreed to buy Wachovia for $15.1 billion in stock.
"There is common equity available for strong companies," Brian Sterling, principal and co-head of investment banking at Sandler O'Neill & Partners LP, said in an interview Friday. "There is some discount, but the market is open."
Wells had initially said it would raise $20 billion, but it scaled back its plans after receiving $25 billion through the Treasury Department's Capital Purchase Program. That program is part of the Troubled Asset Relief Program, approved by Congress in October to strengthen the financial system. Wells was one of nine large banks to split $125 billion.
A Wells spokeswoman declined to comment for this story. The San Francisco company's shares finished up 2.5% Friday.