When a company wants to raise large amounts of capital, they can't exactly run to mommy and daddy for a $944 million cash infusion. Even if your parents are Bill and Melinda Gates, it's unlikely they'd be willing to raise your allowance to that level.
The preferred course is to run to investment bankers, who can arrange for an offering of large amounts of shares to be sold to the public. If the company is privately held, they would have an "initial" public offering. If the company is already public, the offering of new shares would be called a "Secondary Offering."
Rule Breaker Celera Corporation (NYSE: CRA) just completed a secondary offering of 3.8 million shares at $225.00 per stub, raising about $944 million for the company. (This figure includes an over-allotment option to purchase 570,000 shares by the underwriters, which they indeed exercised.)
A company can have as many "secondary" offerings as it wants to. They are always called "secondary offerings," no matter how many times new shares are issued.
There are two types of secondary offerings. One is the public sale of a large block of existing -- not newly issued -- stock, with the proceeds going to the present holders rather than to the issuing firm. In this type of secondary offering, there is no share dilution.
The other kind of secondary and the one utilized by Celera, is the issuance of NEW shares for public sale. In general, when a company sells more shares in this kind of secondary offering, it reduces the value of the shares currently out there. This is because the ownership in the company is becoming diluted and the earnings -- the primary factor in a stock price -- are spread among more shares. For example, if you owned half of a company, and you and your partner decided to sell half of it to two other people, you would then be entitled to only 1/4 of the company's profits instead of the 1/2 you were getting before the sale. Ideally, the positive impact of the use of the cash raised will far outweigh the potential negative impact of the short-term dilution.
Celera needs this money to fund its current plans to expand its business. According to its SEC Filing, the net proceeds from this offering will be used primarily "to fund new product and technology development activities in functional genomics, with an emphasis on proteomics, and personalized health/medicine." They will also use the net proceeds for "general corporate purposes, including possible acquisitions, alliances or collaborations." As noted by Paul Boni, a senior analyst with Punk, Ziegel & Co., "By raising this much cash, a whole new spectrum of things becomes possible. It could really prove catalytic in expanding the horizons of the business." Expanding horizons and catalytic breakthroughs are what Rule Breakers are all about.
Generally, the effect of a secondary offering on current shareholders will depend quite a bit on the circumstances. If the company is issuing more stock to simply cover operating expenses, watch out. Not only would that dilute the ownership, it would tend to focus the investment community on the fact that the company is in financial trouble. Not at all good.
On the other end of the spectrum, if a company holds a relatively small offering (no more than, say, a 5-10% increase in the number of shares) to raise money for capital expenditures because of high demand -- for example to build a factory to make more widgets because they just can't make them fast enough -- the effect on the stock price might not be negative at all. By focusing attention on how well the company is doing, it could even cause a bit of a rise. This is more likely the situation with Celera.
The most frequently asked question regarding secondary offerings is "How is the price chosen?" The price is determined by the underwriters as being supportable in the current market, given the company's business position. In this case, Celera's underwriters decided that $225 per share is a very supportable price. Although the stock had a brief pullback upon the announcement of the offering, it seems that the underwriter's call in this situation was a good, supportable number.
