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Convertible-debt deals are back in vogue as companies take advantage of lower interest rates, and hungry investors line up to buy into new offerings. After falling into disfavor as the economy tanked, technology companies have even managed to raise capital in auction-style transactions, with investment banks literally bidding for the deal. In recent weeks, Yahoo Inc. and Mercury Interactive Corp. raised a combined total of $1.25 billion in the fast-paced deals. And of course that means more work for Valley corporate lawyers, who are throwing together deals in as little as two days. “They’re tough on everybody because you’re operating on very tight time constraints,” said Alan Denenberg, a partner at Davis Polk & Wardwell in Menlo Park. Denenberg represented both Yahoo and Mercury. Even companies that opt for a more traditional approach — such as shopping themselves to a banker before working out the terms — are finding it’s a great time to raise capital with convertible debt. “The market environment right now allows them to be more creative,” said Tracy Edmonson, a Latham & Watkins partner in San Francisco who specializes in debt offerings. “There’s a great deal of bond money sitting out there.” Convertible-debt deals are actually loans that investors put up while betting the company’s stock value will increase to a certain price. If the stock reaches that price by a specific time, investors can convert the loan into equity. The market for convertible-debt deals has been on the rise this year, according to Convertbond.com, a market research division of Morgan Stanley & Co. Inc. Through Friday, the 83 deals closed this year puts activity on pace to match the 211 deals closed in 2001, which was considered a busy year. Companies closed 121 convertible-debt deals last year and in 2000, companies staged just 145 transactions. The pent-up demand among investors has encouraged companies and bankers to dream up new ways to structure the deals. “I have seen more convertible-debt structures in the last six months that I have seen in a long time,” Edmonson said. One of the new structures is the auction. Lawyers, however, expect auctions to fall out of fashion. As more debt deals occur, investors are going to be less likely to participate in a deal structure that gives companies an upper hand. Thomas Ivey, a Skadden, Arps, Slate, Meagher & Flom partner in Palo Alto, said technology companies are cashing in after a few years of being shunned by investors. “It’s a very competitive market out there,” Ivey said. “There haven’t been a lot of financing deals done, and investors are facing a shortage of them to buy.” Ivey represented the underwriters in both the Yahoo and the Mercury financings and said both companies scored attractive terms. They each raised capital interest-free. And their stock prices have to increase significantly before the investors can convert the loan amount into stock. The return of the converts is a good sign for the stock market in general, Ivey said. Investors are more willing to bet on how much a stock price will rise once they believe that share values have stabilized or even bottomed out. But Ivey said he won’t be sorry to see the accelerated pace of the auction-style offerings disappear. The fast pace of putting the deals together in a couple of days and then giving underwriters so little time to bid puts lawyers under the gun and makes the transactions risky for both sides, he said. “It’s hard to price the deal from an underwriter’s standpoint,” Ivey said, “and you don’t get to pre-market the deal so if your sense of the market’s appetite is wrong, you take a much bigger risk.”

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