8 ms·

I am not too familiar with financing stuff. So is this a dilution? Does it mean that current shares will be devalued?

repsilat 11y ago
To first order, current shares should be worth a smaller fraction of the company, but should be worth the same dollar amount as they currently are. This process is meant to increase the size of Tesla by $500M, by simply putting $500M into its bank account. The people who are providing this money are getting new shares in return. In theory, the value of the new shares should be $500M, and the value of the old shares should add up to the old market cap of the company, and the sum of the new shares and the old shares will naturally add up to the company's new market cap. There are second-order effects, though. If there is only a fixed demand for Tesla shares, this may reduce the price of shares (and so devalue the shares of existing shareholders.) Conversely, if people think that Tesla is going to make very good use of any new money, then existing shareholders may end up better off.
- wslh 11y ago
  > To first order, current shares should be worth a smaller fraction of the company, but should be worth the same dollar amount as they currently are. Is this fair? I mean, you lose power because you have less shares. The share price is only part of the investing story.
  - deleted 11y ago
    [deleted]
  - robbiep 11y ago
    It's how it has always worked. If you already own x percent of the company (a sizeable enough percentage to influence voting) then you buy in. You probably were a shareholder consulted about the plan anyway. If you weren't, your shares are still worth the same amount, so even though your voting percentage has gone down you still have the same value of stock, so it shouldn't affect you materially anyway.
  - mmahemoff 11y ago
    Keeping the same voting rights as before would mean the new shares would be issued with no voting rights. Which is possible, but would then discount the price people are willing to pay for them.
  - redwood 11y ago
    you have less power but over a more valuable company that's how it works
    - maxerickson 11y ago
      I think for voting power in large companies, 200 shares and 2000 shares compare as approximately equal (probably 20,000 too).
      - mattmaroon 11y ago
        There are, however, often institutional investors who own meaningful amounts of a conpany's shares.
        maxerickson 11y ago
        I don't see how that is a however, my point was that there is some threshold below which an investor is basically irrelevant when it comes to control of the company, not something about whether there are large holders of shares. As a small investor, this usefully informs reasoning, because you are not buying control of the company, you are giving control over your investment to the people who do have meaningful amounts of stock. (For instance, when Google IPO'd, they made sure that everybody buying stock in the IPO was irrelevant to control of the company by issuing a different class of shares to the founders/insiders)
    - t0mbstone 11y ago
      But if a company increases in value, shouldn't the value of your shares go up? I mean, isn't that the whole point of owning a percentage of a company?
      - Renevith 11y ago
        The increase in value only came from the new $500m in cash. That cash didn't come from the company's operations and it didn't come from you, so there's no reason to think that your shares would increase (or decrease) in value.
  - fweespeech 11y ago
    Yes. Its better than losing your investment. If you don't like it, buy 51% or cash out. You aren't forced to "accept" it.
  - netcan 11y ago
    Yep, so long as the price is fair. You owned x/(Tesla^). Now you own x/(Tesla^ + 500M). (Tesla + 500M)>(Tesla) so your share is proportionally smaller. Put another way, you own a share of tesla. The day after the offering, Tesla has 500MM more in the bank and you own a percentage of that money. Real life is complicated in all sort of ways. Demand for shares does not perfectly trace inherent value (an unknown number). The action could act as a signal to investors to buy or sell ("They need money because they're growing so fast!" or "They're bleeding cash, run!."). But theoretically, it's supposed to be perfectly fair to shareholders ^Tesla = all Tesla assets the day before the offering.
  - mattmaroon 11y ago
    Well, presumably this had to be approved by the board, which is elected by the shareholders. So democratically speaking, yes it's fair. They chose it.
- kgwgk 11y ago
  In principle whoever holds TSLA at $238 does so because they think it's worth more than that. And they are being diluted, the intrinsic value of their shares is now worth less than before the capital increase. Stock holders who find TSLA overvalued should be happy, but I don't think there are many of those. (Edit: I don't disagree with the parent comment, the effect on the stock price will be because people will re-evaluate the company and not because of the new shares themselves, which by the way are not priced yet. I was addressing the dilution part of GP's questions).
  - eigenvalue 11y ago
    A better way to think about this is to look at what they will do with the capital they are raising. If they can put it to work in very high return-on-capital projects that have a return that is higher than their cost of capital, then the net impact will be to increase their earnings per share, which presumably will lead to a still higher valuation for the stock.
  - scott00 11y ago
    You need to know more about an investor's view of the world to figure out whether an investor thinks this is good or bad. Given the capital-intensive nature of the business, I think many investors would be expecting TSLA to spend at least some of its lifetime running negative cash-flow (as indeed it as for the last three quarters). Depending on how much investment you see as being required in the future, you may or may not have predicted that they would need additional financing in the future (ie, after your investment). If you did not predict the need for additional financing, this is probably bad news for you. If you did predict it, than what matters most is how the terms of this financing compare to the terms you were expecting. If you think the stock is worth $1000/share, and expected them to do a secondary at some point, you're probably happy they're doing it now as opposed to later, when you suspect the price will be converging to your value. If you thought they would be able to raise all needed capital with 30 year bonds paying 2% interest, you're probably not happy about this.
    - kgwgk 11y ago
      > If you think the stock is worth $1000/share, and expected them to do a secondary at some point, you're probably happy they're doing it now as opposed to later, when you suspect the price will be converging to your value. The only reason I see to be happy with the new shares being issued sooner rather than later is if I'm going to keep buying shares, they won't be diluted because it already happened. Otherwise I don't get why would I prefer the new shares to be issued at a lower price. If they raise $500mn at $250 it will take longer to get to $1000 than if they can wait until the stock trades at $500 (because the dilution would be lower in the second case).
- Dwolb 11y ago
  The other piece of the equation is the decision behind financing with debt vs equity. A company may choose whichever financing is 'cheaper' for them. Therefore if equity financing were chosen due to it being 'cheaper' then it may be a signal the stock is too high. This kind of reasoning is probaby why the article mentions Musk himself is buying this round of equity - to give shareholders confidence in the stock price.
mc808 11y ago
It is dilution but doesn't necessarily reduce the price the stock trades at. That depends on how confident investors are that the money will be spent wisely.
hnolable 11y ago
Shares are valued by people based on three things. Future direct cash you receive from the company based on the shares you hold (e.g. dividends/distributions and share buybacks). Voting power (i.e. control) in the company based on the shares you hold. And finally the ability to sell the shares you hold on the open market in the future (i.e. price speculation). Issuing more shares (usually) directly affects (i.e. dilutes) #1 and #2. But #3 is not directly affected in any way.
- hockley 11y ago
  Given that most TSLA holders are in category 3, if you like the stock yesterday, you should like it today (absent any other information).
anonu 11y ago
Yes, ceteris paribus, all else equal, this is dilutive. Tesla is creating new shares to sell to the public. This is also considered a primary share offering. This stands in contrast to secondary offerings where no new shares are issued. Instead a company sells shares which they already own, like treasury stock.
justincormack 11y ago
Think of it as old fashioned capitalism - they raise more capital in the capital market and spend the money on physical capital (plant and stuff) which pays for itself. The capital is not diluted it just changes from money to physical form. Dilution happens when you issue more ownership of a limited resource. In practise it is not quite so simple, which is why often capital raisings were issued to shareholders as rights to buy into capital raisings, which could be sold and other means, because control is dilutable as a limited resource.
jczhang 11y ago
I'm not familiar with this stuff either. What price per share is this $500M offer at? Who is selling and who is buying?

To first order, current shares should be worth a smaller fraction of the company, but should be worth the same dollar amount as they currently are. This process is meant to increase the size of Tesla by $500M, by simply putting $500M into its bank account. The people who are providing this money are getting new shares in return. In theory, the value of the new shares should be $500M, and the value of the old shares should add up to the old market cap of the company, and the sum of the new shares and the old shares will naturally add up to the company's new market cap. There are second-order effects, though. If there is only a fixed demand for Tesla shares, this may reduce the price of shares (and so devalue the shares of existing shareholders.) Conversely, if people think that Tesla is going to make very good use of any new money, then existing shareholders may end up better off.

wslh 11y ago
> To first order, current shares should be worth a smaller fraction of the company, but should be worth the same dollar amount as they currently are. Is this fair? I mean, you lose power because you have less shares. The share price is only part of the investing story.
- deleted 11y ago
  [deleted]
- robbiep 11y ago
  It's how it has always worked. If you already own x percent of the company (a sizeable enough percentage to influence voting) then you buy in. You probably were a shareholder consulted about the plan anyway. If you weren't, your shares are still worth the same amount, so even though your voting percentage has gone down you still have the same value of stock, so it shouldn't affect you materially anyway.
- mmahemoff 11y ago
  Keeping the same voting rights as before would mean the new shares would be issued with no voting rights. Which is possible, but would then discount the price people are willing to pay for them.
- redwood 11y ago
  you have less power but over a more valuable company that's how it works
  - maxerickson 11y ago
    I think for voting power in large companies, 200 shares and 2000 shares compare as approximately equal (probably 20,000 too).
    - mattmaroon 11y ago
      There are, however, often institutional investors who own meaningful amounts of a conpany's shares.
      - maxerickson 11y ago
        I don't see how that is a however, my point was that there is some threshold below which an investor is basically irrelevant when it comes to control of the company, not something about whether there are large holders of shares. As a small investor, this usefully informs reasoning, because you are not buying control of the company, you are giving control over your investment to the people who do have meaningful amounts of stock. (For instance, when Google IPO'd, they made sure that everybody buying stock in the IPO was irrelevant to control of the company by issuing a different class of shares to the founders/insiders)
  - t0mbstone 11y ago
    But if a company increases in value, shouldn't the value of your shares go up? I mean, isn't that the whole point of owning a percentage of a company?
    - Renevith 11y ago
      The increase in value only came from the new $500m in cash. That cash didn't come from the company's operations and it didn't come from you, so there's no reason to think that your shares would increase (or decrease) in value.
- fweespeech 11y ago
  Yes. Its better than losing your investment. If you don't like it, buy 51% or cash out. You aren't forced to "accept" it.
- netcan 11y ago
  Yep, so long as the price is fair. You owned x/(Tesla^). Now you own x/(Tesla^ + 500M). (Tesla + 500M)>(Tesla) so your share is proportionally smaller. Put another way, you own a share of tesla. The day after the offering, Tesla has 500MM more in the bank and you own a percentage of that money. Real life is complicated in all sort of ways. Demand for shares does not perfectly trace inherent value (an unknown number). The action could act as a signal to investors to buy or sell ("They need money because they're growing so fast!" or "They're bleeding cash, run!."). But theoretically, it's supposed to be perfectly fair to shareholders ^Tesla = all Tesla assets the day before the offering.
- mattmaroon 11y ago
  Well, presumably this had to be approved by the board, which is elected by the shareholders. So democratically speaking, yes it's fair. They chose it.
kgwgk 11y ago
In principle whoever holds TSLA at $238 does so because they think it's worth more than that. And they are being diluted, the intrinsic value of their shares is now worth less than before the capital increase. Stock holders who find TSLA overvalued should be happy, but I don't think there are many of those. (Edit: I don't disagree with the parent comment, the effect on the stock price will be because people will re-evaluate the company and not because of the new shares themselves, which by the way are not priced yet. I was addressing the dilution part of GP's questions).
- eigenvalue 11y ago
  A better way to think about this is to look at what they will do with the capital they are raising. If they can put it to work in very high return-on-capital projects that have a return that is higher than their cost of capital, then the net impact will be to increase their earnings per share, which presumably will lead to a still higher valuation for the stock.
- scott00 11y ago
  You need to know more about an investor's view of the world to figure out whether an investor thinks this is good or bad. Given the capital-intensive nature of the business, I think many investors would be expecting TSLA to spend at least some of its lifetime running negative cash-flow (as indeed it as for the last three quarters). Depending on how much investment you see as being required in the future, you may or may not have predicted that they would need additional financing in the future (ie, after your investment). If you did not predict the need for additional financing, this is probably bad news for you. If you did predict it, than what matters most is how the terms of this financing compare to the terms you were expecting. If you think the stock is worth $1000/share, and expected them to do a secondary at some point, you're probably happy they're doing it now as opposed to later, when you suspect the price will be converging to your value. If you thought they would be able to raise all needed capital with 30 year bonds paying 2% interest, you're probably not happy about this.
  - kgwgk 11y ago
    > If you think the stock is worth $1000/share, and expected them to do a secondary at some point, you're probably happy they're doing it now as opposed to later, when you suspect the price will be converging to your value. The only reason I see to be happy with the new shares being issued sooner rather than later is if I'm going to keep buying shares, they won't be diluted because it already happened. Otherwise I don't get why would I prefer the new shares to be issued at a lower price. If they raise $500mn at $250 it will take longer to get to $1000 than if they can wait until the stock trades at $500 (because the dilution would be lower in the second case).
Dwolb 11y ago
The other piece of the equation is the decision behind financing with debt vs equity. A company may choose whichever financing is 'cheaper' for them. Therefore if equity financing were chosen due to it being 'cheaper' then it may be a signal the stock is too high. This kind of reasoning is probaby why the article mentions Musk himself is buying this round of equity - to give shareholders confidence in the stock price.

mc808 11y ago

It is dilution but doesn't necessarily reduce the price the stock trades at. That depends on how confident investors are that the money will be spent wisely.

hnolable 11y ago

Shares are valued by people based on three things. Future direct cash you receive from the company based on the shares you hold (e.g. dividends/distributions and share buybacks). Voting power (i.e. control) in the company based on the shares you hold. And finally the ability to sell the shares you hold on the open market in the future (i.e. price speculation). Issuing more shares (usually) directly affects (i.e. dilutes) #1 and #2. But #3 is not directly affected in any way.

hockley 11y ago
Given that most TSLA holders are in category 3, if you like the stock yesterday, you should like it today (absent any other information).

anonu 11y ago

Yes, ceteris paribus, all else equal, this is dilutive. Tesla is creating new shares to sell to the public. This is also considered a primary share offering. This stands in contrast to secondary offerings where no new shares are issued. Instead a company sells shares which they already own, like treasury stock.

justincormack 11y ago

Think of it as old fashioned capitalism - they raise more capital in the capital market and spend the money on physical capital (plant and stuff) which pays for itself. The capital is not diluted it just changes from money to physical form. Dilution happens when you issue more ownership of a limited resource. In practise it is not quite so simple, which is why often capital raisings were issued to shareholders as rights to buy into capital raisings, which could be sold and other means, because control is dilutable as a limited resource.

jczhang 11y ago

I'm not familiar with this stuff either. What price per share is this $500M offer at? Who is selling and who is buying?