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All- Quick general question about the pricing of secondary offerings:

I understand that a dilutive offering decreases earnings / share, which is why it often leads to selling pressure.

I’m wondering what the benefit of pricing an offering significantly lower than stock closing price is for the company.

Why is it more advantageous for a company to offer 1 million shares at $8 as opposed to $10 if it closes at $11?

Thanks in advance!

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    Does this answer your question? How does a public company issue new shares without diluting the value held by existing shareholders?
    – Grade 'Eh' Bacon
    Commented Apr 28, 2021 at 14:34
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    In short as implied that linked answer - the offering is often done with fixed pricing, with a 3rd party financing entity basically setting the price on behalf of the company, with a guarantee that if the offering doesn't sell out to the public [ie: the public thinks it was overpriced], it will buy out the remainder of the offering. The company wants the highest price to be agreed to, the 3rd party wants the lowest price, and the price is set as part of a negotiation between the two parties. Obviously more money for the offering = better for the company, but it is higher risk for the financer.
    – Grade 'Eh' Bacon
    Commented Apr 28, 2021 at 14:36
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    I see. So a higher priced offering implies that an underwriter perceived a company as more valuable? That makes a lot of sense from a public confidence perspective.
    – cc993399
    Commented Apr 28, 2021 at 22:51

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When new shares are issued, the total value of the company does not change. After all, it is still the same company. But the value of the company is now split up among more shares, so price per share should decrease.

So in theory, the price should be chosen such that the newly issues shares balance the devaluation. Depending on the number of existing and newly issued shares this may already be pretty far below the closing price. Suppose your company had 5 million shares trading at 11$ which makes them worth 55 million. Now you add 1 million at 10 and you have 6 million shares at 10$ which makes them worth 60 million. That would quite likely lead to a price drop. Secondary investors can do that math too and would not buy at 10$ if they can get the same shares the next day cheaper on the market.
So shares for secondary offerings will often be sold at a slight discount. So in the example above, issueing another million of shares would make the company worth 9.17$ per share. One surely will get buyers for shares issued at 8$ or 8.50$ in this case.

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    "When new shares are issued, the total value of the company does not change." – In a dilutive offering, the total value of the company does change, doesn't it? If a company issues 1 million shares of stock and sells them at $10 each, the company receives $10 million in cash, so its total value increases by $10 million.
    – Sophie Swett
    Commented Apr 28, 2021 at 13:32

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