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Equity issuance may reflect rosy growth picture

By Natsuko Waki

LONDON (Reuters) - Companies around the world are increasingly turning to equity issuance to raise capital, a sign of growing corporate and investor confidence that could create a virtuous circle for the economy and financial markets.

Both primary and secondary issuance is picking up steam, with Twitter becoming the latest company to announce plans to raise equity in an initial public offering on Thursday.

According to Thomson Reuters data, a total of $491.2 billion has been raised in equity capital so far this year, up 17 percent from the same period last year.

Equity financing is sometimes considered a last resort for funding, as a theory known as the "pecking order" states that companies usually prefer internal source of funds from retained earnings and debt for raising capital.

Selling additional stock to investors is also usually negative for share prices because it increases the number of shares outstanding and reduces earnings per share.

But markets are reacting warmly to those who have raised equity or said they will do so.

Shares in social networking website LinkedIn hit a record high on Wednesday, bringing year-to-date gains to around 120 percent, days after it announced plans to raise additional equity capital to fund product development and expansion.

Similarly, shares of U.S. electric carmaker Tesla Motors have risen 93 percent since it raised equity in May.

The trend may reflect growing approval among investors for companies tapping equity markets to finance growth.

They may also welcome the fact that firms remain cautious about leverage, having spent the past few years building up cash buffers amounting to $6.7 trillion.

What is more, increased corporate finance activity on the back of growing confidence could support equity markets and help economic growth in the long run.

"Equity financing will come back in a bull or positive equity environment," said Bill Street, head of EMEA investments at State Street.

"There's a dilution effect, clearly, but in the context of a broader growth trajectory, the positive impact of having a liquidity-driven or very supportive monetary liquidity environment behind that will be able to absorb that."

According to law firm Allen and Overy, the global equity capital markets have rebounded to sit just below pre-crisis levels at $1.15 trillion in mid-August. Growth was led by the United States, where the value of total equity issues rose 11 percent in the year to August from the same period in 2007.

"When you look at academic literature, it tends to say that on average equity issuance does not create value. But it can be positive for share prices," said Benjamin Melman, head of asset allocation at Edmond de Rothschild Asset management in Paris.

Melman said a lot of capital raising is related to funding corporate mergers and acquisitions, where activity is picking up after years in which deal-making took a back seat to balance-sheet repair.

"Due to a huge backlog of M&A inactivity, we think now the situation is normalizing. We're going to see a lot of operations in Europe. We think it's the beginning of a strong move in Europe and the trend has already started in the United States."

M&A deals are certainly flourishing. European shares hit a two-year high on Thursday after Vivendi said it aimed to decide early next year on whether to spin off its struggling French telecoms unit SFR.

Telecom Italia and KPN also received takeover approaches.

Worldwide M&A activity has totaled $1.62 trillion so far in 2013, up two percent on the year, according to Thomson Reuters.

STRONGER BALANCE SHEET

There has been a rush of capital raising in debt markets as expectations grow that the Federal Reserve may start to slow its money printing, which has slashed borrowing costs, as early as next week. But year to date, debt financing activity is down one percent from 2012.

Growth in equity issuance may reflect the fact that some companies already find it expensive to raise capital in debt markets, especially after benchmark U.S. yields hit a two-year high of 3.01 percent last week.

Japan - where strong reflationary policy by Prime Minister Shinzo Abe is pushing up inflation expectations - has seen a 94 percent rise in the volume of equity offerings this year.

Sharp <6753.T> and Mitsubishi Motors <7211.T> may offer shares to the public to raise capital, possibly raising a combined $3.5 billion to transform their finances, according to Reuters and other media reports.

Both shares prices fell after the reports, but investors may reward them for strengthening their balance sheets in the long run, as the example of Tesla shows.

Tesla used part of the proceeds from equity issuance to fully repay debt from the U.S. Department of Energy.

British security firm G4S 's shares have risen more than 8 percent since August 28, when it raised 348 million pounds ($541 million) in shares to repair its balance sheet - a sign of investor support for management's turnaround plan.

(Editing by Catherine Evans)

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