5

What prevents a company from doing secondary public stock offerings on regular basis? What are the cons of initiating secondary offerings other than the negative impact on stock price (at least in some cases) and the costs of such operation?

  • 3
    To the close voter: This question is directly related to investing in a company's stock, and is of interest to investors. It is on-topic and should remain open. – Ben Miller - Reinstate Monica Dec 20 '16 at 22:52
  • The issuing company needs a reason. This event will increase the denominator while not increasing the numerator (unless there's a good reason) in return on equity and similar value indicators. – user662852 Dec 21 '16 at 3:20
3

What prevents a company from doing secondary public stock offerings on regular basis?

The primary goal of a company doing secondary public offering is to raise more funds, that can be utilized for funding the business. If no funding is needed [i.e. company has sufficient funds, or no expansion plans], this funding creates a drag and existing shareholder including promoters loose value. For example with the current 100 invested, the company is able to generate say 125 [25 as profit]. If additional 100 is taken as secondary public offering, then with 200, the company should mark around 250, else it looses value. So if the company took additional 100 and did not / is not able to deploy in market, on 200 they still make 25 as profit, its bad.

There are other reasons, i.e. to fight off hostile acquisition or dilute some of promoters shares etc.

Thus the reasons for company to do a secondary PO are few and doing it often reduces the value for primary share holders as well as minority share holders.

3

Selling stock means selling a portion of ownership in your company. Any time you issue stock, you give up some control, unless you're issuing non-voting stock, and even non-voting stock owns a portion of the company.

Thus, issuing (voting) shares means either the current shareholders reduce their proportion of ownership, or the company reissues stock it held back from a previous offering (in which case it no longer has that stock available to issue and thus has less ability to raise funds in the future). From Investopedia, for example:

Secondary offerings in which new shares are underwritten and sold dilute the ownership position of stockholders who own shares that were issued in the IPO.

Of course, sometimes a secondary offering is more akin to Mark Zuckerberg selling some shares of Facebook to allow him to diversify his holdings - the original owner(s) sell a portion of their holdings off. That does not dilute the ownership stake of others, but does reduce their share of course.

You also give up some rights to dividends etc., even if you issue non-voting stock; of course that is factored into the price presumably (either the actual dividend or the prospect of eventually getting a dividend). And hopefully more growth leads to more dividends, though that's only true if the company can actually make good use of the incoming funds.

That last part is somewhat important. A company that has a good use for new funds should raise more funds, because it will turn those $100 to $150 or $200 for everyone, including the current owners. But a company that doesn't have a particular use for more money would be wasting those funds, and probably not earning back that full value for everyone.

The impact on stock price of course is also a major factor and not one to discount; even a company issuing non-voting stock has a fiduciary responsibility to act in the interest of those non-voting shareholders, and so should not excessively dilute their value.

  • Issuing new shares isn't quite the same as selling a portion of your ownership. True, your percentage of ownership goes down, but the capital raised by the new shares goes directly to the company, increasing the size of the pie. – Ben Miller - Reinstate Monica Dec 20 '16 at 23:05
  • @BenMiller Fair enough, edited (though I tend to think that there is a transaction cost that, in the short term, means you do reduce your actual ownership stake, despite of course the hope that you will increase it with growth). – Joe Dec 20 '16 at 23:10

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.