Secondary Offerings: What You Need to Knowhttp://www.fool.com/investing/general/2013/02/25/secondary-offerings-what-you-need-to-know.aspx Dan Caplinger
February 25, 2013
When a company goes public, it's usually cause for celebration for investors. But when companies return to the capital markets to do secondary offerings of stock, the shares often get a lot less fanfare -- and the results for existing shareholders can be much less profitable.
Recently, a number of companies have announced plans to make secondary offerings, and investors have responded to the news by sending their stock prices downward. But if secondary offerings are such a bad thing, why do companies do them? Let's take a closer look at what motivates companies to make secondary stock offerings and whether they're always a signal to sell.
Why all secondary offerings aren't the same
When a secondary offering involves the issuance of new shares, the main concern for existing shareholders is dilution. With an increase in shares outstanding, the stock position you own represents less of the overall company, and you'll get a proportionately smaller share of the company's profits going forward. The trade-off, though, is that the company gets to keep the cash raised from the offering, which increases its overall value.
Many secondary offerings occur when the business badly needs capital, and that's most likely to happen when shares have been beaten down. Obviously, selling new stock when share prices are depressed is the worst possible timing and explains why reactions are so often negative. By contrast, closed-end fund Central Fund of Canada (NYSEMKT: CEF) often uses secondary offerings as ways to capitalize on premiums to its net asset value, resulting in accretion to NAV rather than dilution.
Getting out while the getting's good
Often, private-equity investors and other early-stage financiers are involved in the decision to do a secondary offering. Generac (NYSE: GNRC), which has gained prominence recently because of its product