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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

by 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.
      - ghshephard 12y ago
        The number of shares have no impact, if, simultaneously, you do a cash transaction for fair market value. Think of the simple case - a company with $100 cash, and 100 shares, with a value of $1/share. You buy 75 shares for $75. You now have 25 shares outstanding, and $25 cash. Still, $1/share. Alternatively, you can issue 100 shares @ $1/each. You now have $200 cash, and 200 shares outstanding. Share Buybacks/Share Issues (not including tax consequences), are neutral transactions.

by 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.
    - ghshephard 12y ago
      The number of shares have no impact, if, simultaneously, you do a cash transaction for fair market value. Think of the simple case - a company with $100 cash, and 100 shares, with a value of $1/share. You buy 75 shares for $75. You now have 25 shares outstanding, and $25 cash. Still, $1/share. Alternatively, you can issue 100 shares @ $1/each. You now have $200 cash, and 200 shares outstanding. Share Buybacks/Share Issues (not including tax consequences), are neutral transactions.