In a move that might have raised some eyebrows, Research In Motion (NASDAQ:RIMM) announced plans for a 9 million-share offering Wednesday afternoon. This comes on the heels of a fantastic year in which the shares climbed from as low as $10.76 to above $70, as the company blew away and raised earnings expectations. Naturally, the stock fell a few notches yesterday.
What's interesting about the $600-plus million in net proceeds from the impending sale is that the company doesn't really need the money. RIM already has almost $400 million in cash and negligible debt on its balance sheet. Plus, if everything is going as well as the company suggests it is...
So maybe RIM has its eyes on potential acquisitions. Or maybe management is saying that its shares have reached a premium level, and is simply creating long-term value by taking advantage of the opportunity to raise some cash.
If you really want my take, this is a far better scenario than RIM trying to raise cash when it needs it.
You might recall how optical components manufacturer JDS Uniphase (NASDAQ:JDSU) at the height of the bubble used its overpriced stock to raise capital and make acquisitions. JDS didn't necessarily need the cash then either. And though it helped pop its own bubble by essentially declaring its stock overvalued, taking advantage of the opportunity to raise cheap money helped JDS survive a downturn in its business. JDS is now sitting on over $1 billion in cash it would not otherwise have.
Let me explain.
If your company has 10 shares outstanding worth $10 each at fair value, and you sell an 11th share for $15, then each share's fair value has increased to $10.45 [($100 +$15) / 11 shares outstanding]. But by the same token, when you sell that 11th share of that $10 stock for $15 (overpriced), the stock price likely will go down post-offering, even though each share's fair value increased to $10.45.
So, JDS increased the value of its shares by selling when they were overvalued, even though it arguably deflated the then-current stock price. And if JDS hadn't raised capital when its stock was in triple digits, the company might have been forced to dilute its shareholder base today at $4 a pop just to survive -- a scenario Sirius Satellite Radio (NASDAQ:SIRI) shareholders endured over this past year. Instead, just a few months ago, JDS was able to raise $400 million in a convertible offering at a small premium.
There are really two points here:
- What might be in the best interest of the company (selling overpriced shares) may not necessarily be in the best interest of the current shareholders at the current stock price.
- Investors should avoid overpaying for stocks, and consider selling overpriced stocks.
I'm not suggesting that RIM shares are wildly overvalued at $70 per share, or 30 times next year's earnings. Nor am I suggesting that RIM will soon face such a sharp downturn that it will need to sit on $1 billion in cash. What I am saying is that RIM's best interest may not necessarily be in keeping its stock price at $70 today, but in making sure that the stock is worth $70 tomorrow.
Give us your take on the Research In Motion discussion board -- only at Fool.com. Jeff Hwang owns shares of JDS Uniphase, and can be reached at [email protected].
