On Tuesday afternoon, XM Satellite Radio (NASDAQ:XMSR) announced a secondary offering of 18 million shares. Of those, 11 million can be attributed to insider sales, with the company selling the other 7 million, which should net about $170 million in cash.
Is this a big deal? That depends on how you look at it.
On one hand, the dilutive impact is minimal, as the 7 million new shares offered represents only 4.8% of XM's outstanding shares. That looks relatively harmless. On the other, the 11 million shares insiders are selling drops total insider ownership by almost half, to about 8% of total outstanding shares. By comparison, the Foolish 8 screen calls for a 10% threshold for smaller, up-and-coming companies, which might be cause enough for reevaluation of the stock.
Further, a secondary sale after a nice run-up in share price -- much like the one XM has experienced -- also might indicate a healthy stock price. This is definitely cause for evaluation.
Last week, in RIM Cashes In, we examined Research In Motion's (NASDAQ:RIMM) own secondary offering after a fantastic run-up. Using JDS Uniphase's (NASDAQ:JDSU) activity during the tech bubble as an example, we showed that a company selling overpriced shares is actually healthy and beneficial to its shareholders' value. However, we also showed how investors who had overpaid or were holding that overpriced stock could get hurt, as the company's stock sales advertised the rich valuation of its shares.
Despite those concerns, XM selling shares after a huge run-up is far healthier than XM selling shares when it desperately needs cash. While this doesn't mean that its shares are necessarily overvalued, investors should take the time to reevaluate the stock and examine the possibility that they are. If you own XM shares and find that you are comfortable with its current valuation, then keep them. If not, take this as an opportunity to follow the insiders' lead and sell.
Post your thoughts on XM's share offering on the XM Satellite Radio discussion board.
Jeff Hwang owns shares of JDS Uniphase, and can be reached at [email protected].
