I'm not sure how you could possibly be happy with being diluted.
Effectively, what you are saying is that you (as the non-participant in an equity issuance at a discount to the market value of your company) are happy to transfer some of your wealth to a group of complete strangers (the placement participants).
In terms of relativities, this is no different to someone taking some of your MSB shares and – with your consent - transferring them into someone else’s name.
Surely you wouldn’t be happy with that?
And yet, that is the exact effect a selective placement has, to the benefit of a select group of institutional investors, but at the expense of retail investors.
Now, to pre-empt any potential argument along the lines of “Yes, but at least then the pressure will be off the balance sheet and the stock will re-rate because the funding concerns will have gone away” (which I sense is your line of argument), it needs to be stressed that that misses the point.
The point is dilution versus entitlement in any issuance of new equity.
And if elimination of funding concerns is the objective of any equity raising, then there is no reason whatsoever for a company in MSB’s position not conducting it on a full entitlement basis.
It’s not like it would be an emergency raising (well, not yet, anyway) so timing is not critical.
Also, given MSB has only about 7,000 shareholders, the costs of an entitlement offer would not be dramatically higher than that involved in doing a selective placement of shares; the investment bank is going to charge 3% or 4% of the total capital raised, either way.
People carp and bleat about the mythical evils of “manipulators” and “shorters” and yet are happy to acquiesce to the real, palpable forces of evil, namely stockbrokers and investment bankers who make their living by fleecing small shareholders via shonky, biased research, meaningless “target prices”, and looking after their institutional mates at the expense of you and I, the small investors.
And don’t for a moment believe that institutional brokers allocate the stock on the basis of which investment institutions necessarily understand the business, and will therefore make for mature, supportive long-term holders of the stock.
All the broker wants to do is to get the placement away so that he/she can collect the fees and move onto the next raising.
In fact, don’t be surprised to learn that placement stock often ends up in the hands of institutions are interested in nothing more than selling the stock on Day 1 in order to make a few percentage point gain, or even investment institutions who are short the stock, and participation in placements is how they cover their short positions.
And do you think the institutional broker cares, or thinks, about that for a minute?
Not in the slightest, because the criteria for him/her to allocate placement stock is based on who his/her best/favourite institutional clients are.
So to say you would be happy to be diluted is no difference to saying:
“Despite my being a supportive, long-term shareholder I am happy to be fleeced while some broker allocates discounted stock to some or other fund who is more than likely to immediately tip the stock out in order to make a small, short-term profit.”
So are you really sure you are happy about this?
And if you are, then on behalf of all small, retail Mum and Dad investors, I urge you to reconsider what I think is a very naïve viewpoint, and it is the kind of apathy that allows the financial sector to persist with this heinous practice.
As a minority shareholder with minority shareholder rights, you need to fight against it.
Forget about the shorters, the “bots”, “manipulators” and the various other pixies at the bottom of the garden: The selective placement of shares is the real, tangible corruption in capital markets.
And by being “happy” with it, you are obviously not helping to stop it.
You talk about trusting management to spend capital well.
Yes, that’s fair, but why do you then not have an expectation of management to raise capital well, too?
For why should a company’s and executives get rewarded for only doing parts of their job well, and not others?
Personally, I have zero respect and tolerance for management teams that do not include minority shareholders in capital raisings, for in failing to do so they hold minority shareholders in sheer contempt.
(PS. In case you can’t tell from my tirade, this is a subject about which I feel passionately, and one which I have actively campaigned to see terminated. And I continue to do so.)
Expand
(20min delay)