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Companies issue stock all the time when they want to raise capital. The transaction is neutral to the shareholders. Say a company is worth Y. In exchange for is

by pedrocr 12y ago

Companies issue stock all the time when they want to raise capital. The transaction is neutral to the shareholders. Say a company is worth Y. In exchange for issuing X$ of stock the company receives X$ of cash and is now worth Y+X. Now the new shareholders own X$ in stock and the old shareholders Y$ in stock which is what the company was previously worth. Of course you only do this transaction if you believe the X$ in cash will allow you to grow the total value of the company so that Y grows more than it would had you not taken the cash. Now back to the stock incentives programs. Here you are issuing stock and giving it to your employees. Assume you had to give then X$ in cash as compensation, you could just do the same as before, raise that money in the market and give the cash to them. You might as well do it in one step giving them that value in stock and get the added benefit that those employees are now financially invested in the outcome of the company.

tacos 12y ago
No. That's not how dilution works. Common sense: if issuing stock were neutral to shareholders, then buybacks would also be neutral to shareholders. (Splits are neutral to shareholders.)
- pedrocr 12y ago
  > Common sense: if issuing stock were neutral to shareholders, then buybacks would also be neutral to shareholders. (Splits are neutral to shareholders.) Buybacks (and dividends) are indeed neutral to shareholders. You have a company that's worth Y and you buyback X$ using company cash, the shareholders now have in their hands a company that's worth Y-X and X$ in cash, for a total of Y.
  - tacos 12y ago
    No! OP is talking about shareholder dilution, not balance sheet shareholders' equity. Also, dividends reduce shareholder equity so even by your perverse definition they're certainly not "neutral."
    - pedrocr 12y ago
      Dividends reduce shareholder equity and give shareholders the same amount of cash so they are indeed neutral if you ignore taxes. The same is true for the market value of a company. If a company has a market cap of Y and pays out X in cash the market cap will tend to reduce by roughly X in any normally functioning market.
- goodcanadian 12y ago
  If you believe your stock is overvalued, sell it (or issue new stock). If you believe it is undervalued, buy it. If, however, you believe that the market is 100% efficient and the price is always just right, then both of these actions will be neutral to shareholders.
  - tacos 12y ago
    No. The market is saying one thing. You believe another. So you bet against the market and the end result is... no change that affects shareholders? If that were true, why would a corporation do this?
    - pedrocr 12y ago
      > The market is saying one thing. You believe another. So you bet against the market and the end result is... no change that affects shareholders? At the moment of the transaction there's no change, you've just swapped money for stock and could swap it back the moment after and be back to square one. If you are right and the market is wrong you'll make money on the transaction in the long run. It's just like buying stock for your own account. The moment you buy your net worth doesn't change you've just changed your asset mix between stocks and cash and could change it back with a sell order. Only by the stock changing value over time do you gain or lose net worth. PS: Starting your comments with "No." doesn't really add much to the discussion.
      - tacos 12y ago
        At the moment of the transaction there is a very specific change -- the number of shares changes! You keep ignoring this for some reason while you talk about meaningless balance sheet offsets. While it does not affect the line item "shareholder's equity" it very much does affect individual shareholders. It is not a magic wash covered by some "perfect market" force and shareholders will very much complain about dilution. This was OP's question and you've repeatedly talked in circles around it.
        12y ago
URSpider94 12y ago
That would only be strictly true if the company is trading at 1x book value, which is rarely true. If the company is trading at a high multiple of book value, then issuing more shares means that current shareholders get a smaller stake in the ultimate payout, in return for a relatively small increase in current assets, which almost certainly reduces share price. As any startup founder knows, the art is to issue just enough shares to fund the company to grow to success -- and in fact, to do this in stages, each time issuing only enough shares to make it to the next milestone. In practice, for large companies, the quantity of shares issued is generally small and gradual enough that any dilution is factored in gradually to the share price.
- pedrocr 12y ago
  I think in this discussion two things are being confounded: 1) The mechanism by which you move money in/out of a company. At the moment of the transaction you add/remove X$ in cash to the company and add/remove the same X$ in shareholders. You could turn around and use that same cash to do the opposite transaction and be back to square one. That's what I mean by the transaction being neutral to shareholders. 2) The situations in which you are incentivized to do these share issues/buybacks and their long term impacts. If you believe that your company is currently valued at Y but is really worth 10Y then you want to raise as little as possible to get a bigger share of that 10X increase in value. Conversely if you think your share is overpriced you want to raise as much as possible because you are paying it with inflated shares. The transactions themselves are neutral to the shareholders at that point in time, they're just ways of moving cash in/out of the company, you do them more or less and in one direction or another depending on your evaluation of how mispriced the company is.

by pedrocr 12y ago

tacos 12y ago

No. That's not how dilution works. Common sense: if issuing stock were neutral to shareholders, then buybacks would also be neutral to shareholders. (Splits are neutral to shareholders.)

pedrocr 12y ago
> Common sense: if issuing stock were neutral to shareholders, then buybacks would also be neutral to shareholders. (Splits are neutral to shareholders.) Buybacks (and dividends) are indeed neutral to shareholders. You have a company that's worth Y and you buyback X$ using company cash, the shareholders now have in their hands a company that's worth Y-X and X$ in cash, for a total of Y.
- tacos 12y ago
  No! OP is talking about shareholder dilution, not balance sheet shareholders' equity. Also, dividends reduce shareholder equity so even by your perverse definition they're certainly not "neutral."
  - pedrocr 12y ago
    Dividends reduce shareholder equity and give shareholders the same amount of cash so they are indeed neutral if you ignore taxes. The same is true for the market value of a company. If a company has a market cap of Y and pays out X in cash the market cap will tend to reduce by roughly X in any normally functioning market.
goodcanadian 12y ago
If you believe your stock is overvalued, sell it (or issue new stock). If you believe it is undervalued, buy it. If, however, you believe that the market is 100% efficient and the price is always just right, then both of these actions will be neutral to shareholders.
- tacos 12y ago
  No. The market is saying one thing. You believe another. So you bet against the market and the end result is... no change that affects shareholders? If that were true, why would a corporation do this?
  - pedrocr 12y ago
    > The market is saying one thing. You believe another. So you bet against the market and the end result is... no change that affects shareholders? At the moment of the transaction there's no change, you've just swapped money for stock and could swap it back the moment after and be back to square one. If you are right and the market is wrong you'll make money on the transaction in the long run. It's just like buying stock for your own account. The moment you buy your net worth doesn't change you've just changed your asset mix between stocks and cash and could change it back with a sell order. Only by the stock changing value over time do you gain or lose net worth. PS: Starting your comments with "No." doesn't really add much to the discussion.
    - tacos 12y ago
      At the moment of the transaction there is a very specific change -- the number of shares changes! You keep ignoring this for some reason while you talk about meaningless balance sheet offsets. While it does not affect the line item "shareholder's equity" it very much does affect individual shareholders. It is not a magic wash covered by some "perfect market" force and shareholders will very much complain about dilution. This was OP's question and you've repeatedly talked in circles around it.
      - 12y ago

URSpider94 12y ago

That would only be strictly true if the company is trading at 1x book value, which is rarely true. If the company is trading at a high multiple of book value, then issuing more shares means that current shareholders get a smaller stake in the ultimate payout, in return for a relatively small increase in current assets, which almost certainly reduces share price. As any startup founder knows, the art is to issue just enough shares to fund the company to grow to success -- and in fact, to do this in stages, each time issuing only enough shares to make it to the next milestone. In practice, for large companies, the quantity of shares issued is generally small and gradual enough that any dilution is factored in gradually to the share price.

pedrocr 12y ago
I think in this discussion two things are being confounded: 1) The mechanism by which you move money in/out of a company. At the moment of the transaction you add/remove X$ in cash to the company and add/remove the same X$ in shareholders. You could turn around and use that same cash to do the opposite transaction and be back to square one. That's what I mean by the transaction being neutral to shareholders. 2) The situations in which you are incentivized to do these share issues/buybacks and their long term impacts. If you believe that your company is currently valued at Y but is really worth 10Y then you want to raise as little as possible to get a bigger share of that 10X increase in value. Conversely if you think your share is overpriced you want to raise as much as possible because you are paying it with inflated shares. The transactions themselves are neutral to the shareholders at that point in time, they're just ways of moving cash in/out of the company, you do them more or less and in one direction or another depending on your evaluation of how mispriced the company is.