Something all too rare happened last week – and we’re not talking about annual 10-K filings. Rather, long-sought but sadly rare in our time, there were upticks in both offering registrations and M&A. Stranger still – the U.S. government wasn’t behind (most of) it, nor was it concentrated in the financial or pharmaceutical sectors. 10-K filing season may signal the start of a spring-like thaw in more ways than one.

10-K season can be a hectic time for executives, legal counsel, and accountants. The corporate bandwidth that this yearly beauty pageant eats up leaves little time for long-term planning. However, with many 10-Ks already filed, it seems that companies are turning back to the business issues of capital raising and M&A.

A 10-K filing can be a catalyst of many sorts for corporate transactions, whether offerings to stave off distress, capital to finance acquisitions, or good old-fashioned M&A.  10K’s are this central for several reasons.  Executives need to gain a holistic view of their company’s position before engaging in strategic deals.  Perhaps even more importantly in today’s post-Sarbox environment, auditors and legal counsel also need a wealth of information, preferably audited information, on 10-Ks, before blessing a company for transactional purposes with their respective comfort and opinion letters. Another import side effect of 10-K filings is that investors, who have been on a subsistence diet of fear and uncertainty for several months, can now evaluate the risk and reward potential of freshly reviewed company.  In sum, a company’s 10-K filing can allow it to do deals.

The financial crisis has pushed many companies to the wall and their recent 10-Ks have exposed some ugly industry and liquidity situations. Markets have been unkind to even the bluest of blue chips – GE. The company disclosed in its 10-K that ratings agency downgrades on GE Capital of four notches or more on its AAA credit rating would most likely force the company to pay out more than $8 billion in the form of collateral calls (a mini-AIG, if you will). General Electric Capital Corp. sold exactly $8 billion worth of notes guaranteed under the FDIC’s Temporary Liquidity Guarantee Program earlier this week. Financial markets breathed a collective sigh of relief today when Standard’s & Poor’s cut the company’s credit rating only one notch to AA+, under which no collateral calls are expected. Boeing, another super blue chip, is in nowhere near as bad of shape, but its 10-K does reveal the pressures of the delayed release of the 787 Dreamliner, the slow pace of new orders, and financing in short supply for capital goods. It seems that Boeing could use the flexibility that comes with a little more cash on the books and recently filed a registration and sold $1.85 billion of new notes.  Meanwhile, ProLogis, a former superstar of the real estate investment trusts (REIT) world, has about $2.8 billion in debt coming due by the end of 2009. The company’s 10-K outlines plans to pare $2 billion in debt by year end. ProLogis registered two equity offerings for corporate use earlier this week. However, not all REIT are suffering quite as bad a liquidity drought.

Other REITs might be revving up for expansion. Simon’s Property Group, a marquee retail REIT, followed last week’s 10-K with a universal shelf registration. The registration use of proceeds section outlined that the funds could be used for general corporate purposes such as: repaying debt, financing capital commitments and financing future acquisitions. However, given the company’s healthy balance sheet and the fact that many retail commercial real estate properties are at clearance or even liquidation sale prices, it seems likely that some of the offering proceeds could go towards acquisitions. Companies in other industries are strong enough to simply jump from the hectic pace of 10-K preparation, straight to merger announcements.

Evidence seems to suggest that many companies do like to finish up their 10-Ks before announcing mergers. Scientific and technical instrument supplier Beckman Coulter and First Solar, a maker of solar panels, announced multimillion dollar acquisitions days after filing their 10-Ks. Merck and Schering-Plough celebrated the 11 day-anniversary of their respective 10-K filings by announcing a $41.1 billion mega-merger. It seems that they did put off announcing the deal until both of their 10-Ks were out. Still, we doubt that either of the companies’ executives, lawyers, or accountants got much sleep during the past two or so weeks. Could M&A pick up even more as 10-K season tapers off?

Bucking this trend are companies that don’t need to wait for their 10-K. Some have to act quickly because of the terrible laundry that their 10-K would air and others are simply strong enough to allay market concerns pre-annual report.  Sirius, a satellite radio company, postponed their 10-K because of life saving investment agreement and exchange offer. On the other hand Cisco and Health Care REIT (hospitals and retirement homes are seen as rather safe tenets) raised cash before their 10-K.  Cisco issued for $4 billion in new debt for “general corporate purposes”, but the media has speculated that the funds will be used for acquisitions. About a month before filing its 10-K, Health Care REIT sold close to $200 million worth of common stock to invest in additional health care and senior housing properties and to use for deleveraging. If only all companies were in this good shape.

While the 10-K leading to offerings and M&A transactions link is not a precise one, there is a connection. Expect some executives, lawyers, accounts, and investors to regain their transactional appetites as 10-Ks are released.  Further, as 10-K season tapers off, hope for deals and offerings may continue to pick up.

Published: March 12, 2008