View Full Version : Stock offerings and buybacks; effects on valuation
2009-06-25, 07:49 PM
TransCanada Corporation (TRP ... probably familiar) recently completed a stock offering. Elsewhere I've read bits about buybacks (i.e., buybacks = yay!). The TRP offering corresponded with a dramatic price fluctuation, which is understandable given the impact on valuation offerings and buybacks often have. But why do offerings (and buybacks) have that effect on valuation? What are offerings and buybacks all about?
I've searched around for reasonably comprehensive discussion about this and come up empty. Thought I would ask here; would appreciate links to further reading.
2009-06-26, 12:38 AM
Throwing a dart here, because I don't know. But if a company is offering shares they are putting more into the market place, thus diluting the value of existing shares, conversely, buying back shares implies the destruction of individual shares, making those remaining more rare and thus more valuable.
2009-06-26, 10:43 AM
When issuing shares, the company probably has a reason, probably an investment that theoretically should increase revenues... so even though issuing more shares might be dilutive on a per share basis, the entire pie might become a lot bigger so everyone benefits. The problem, of course, is that noone knows the future, so someone who thinks the odds that the new investment will pay off are 80% would be willing to pay more for a piece of the action than someone thinking it only has a 30% chance of paying off... so for a short time there might be a lot of up and down activity... the 30% chance guy buying shares until it gets to high for him... the 80% guy is buying, the 30% guy selling... other people are busy trying to work out their own odds and will start buying/selling later... it would take a while to find equilibrium.
With the buyback, you'd assume it would be more straightforward, because normally what they are saying is that they have lots of cash, and can't find anything productive to do with it, so they may as well give it to shareholders. Not only does that decrease the number of people splitting the pie as byron said, but it should also theoretically increase the profits, since you aren't averaging your 15% returns from operations with 1% returns on sitting on a lump of cash, so the more stock the company buys back, the higher the stock should theoretically go, but to me that would seem more of a straightforward thing less likely to lead to a lot of fluctuation.
2009-06-26, 11:25 AM
The market price is simply what the marginal buyers and sellers are willing to trade TRP at. Let's simplifly the stock market down to 100 people, and line them up based on their personal valuation on TRP.
1st -thinks TRP's worth $100/share;
50th - $30.05
51st - $30.00 <-- Market price
52nd - $29.95
100th - $25
TRP wants to buy back more shares, but only 1 person is willing to sell at $30/share. To intice more people into the buyback, TRP must offer $30+ depending on how large the buyback program is.
Stock offering is the opposite. Only 1 person is willing to buy at $30/share. To get the volume needed for the offering, TRP would have to sell below $30/share.
(Again, I know I'm overly simplying the stock market in this example.)
2009-06-26, 01:46 PM
When issuing shares, the company probably has a reason, probably an investment that theoretically should increase revenues... so even though issuing more shares might be dilutive on a per share basis, the entire pie might become a lot bigger so everyone benefits. .
Sometimes , but other times companies will issue new stock for no other reason than they need capital , maybe to service old debt coming due , or ?
In that case a lot of people can see it as a negative and stock price will suffer.
Sometime they will pay whatever is necessary , maybe buying up shares to prevent a percieved hostile takeover bid in the near future , or just to prop up lagging share price and improve public perception to stimulate more investment.
There are a million reasons that companies will do either , and share prices can react either way depending on the public perception of the reason.
Some see buybacks as a companies faith in itself and will hold on for a longer term , others will see it as a quick way out at a decent price , especially if you own large quantities and hope to unload them all at once.
2009-06-29, 11:52 AM
buybacks = yay! I would disagree. In depth discussion of equity transactions (http://members.shaw.ca/retailinvestor/truths.html).
2009-06-29, 12:16 PM
I would disagree. In depth discussion of equity transactions (http://members.shaw.ca/retailinvestor/truths.html).
Did a quick scan at the article. My thoughts are scattered all over, so I'll outline them in point forms:
* Share buybacks are good ... FALSE
Share buybacks are bad ... also FALSE
I think we have to examine each company case by case.
I also believe share buybacks are knee-jerk reaction by all management is also FALSE.
* Book value is based on acquisition price, not market value. P/B = 2.0 is only meaningful if company can travel back in time to acquire the same equities in the original price.
* The best candidates are ones that can can grow their business despite being parenial shares buyers. Exxon is a good example of a company that has been buying back shares (without additional debts) for at least the past 9 years, and still grew top line by 150+%; bottomline 460%.
Powered by vBulletin® Version 4.1.11 Copyright © 2013 vBulletin Solutions, Inc. All rights reserved.