The Money Machine: How the City Works by Philip Coggan

Author:Philip Coggan [Coggan, Philip]
Language: eng
Format: epub
ISBN: 9780141907093
Publisher: Penguin Books Ltd
Published: 2009-07-01T20:00:00+00:00

RIGHTS ISSUES

A new issue normally takes place in the early years of a company’s existence. As companies attempt to expand, however, they need more funds than were provided by the original sources. There are many avenues open to raise funds in the form of debt. However, too much debt makes a company unbalanced. At some point, the company will need further equity capital.

The traditional means of raising new equity is a rights issue. Shares are offered to existing shareholders in proportion to their holdings – a typical offer might be one share for every four owned. The shareholder may then take up the rights and pay for the new shares or sell his rights to do so to another investor.

Rights issues are a fairly expensive way of raising new money. They have to be underwritten and the shares usually have to be offered at a substantial discount to the market price. Such are the costs that some companies have tried to find alternatives to the rights offer. But the institutions have stood firm in defence of their rights. It is a general principle of UK companies’ legislation that existing shareholders should have a pre-emptive right to subscribe to any new shares on offer. Without that right, the original shareholders’ stake in the company would be eroded. So except for quite small issues, UK companies can still only place shares with new investors if the existing shareholders agree.

Some companies make so many acquisitions, using shares as their means of payment, that constant rights issues are out of the question. A compromise method is called a ‘vendor placing with clawback’. It works like this. Company A wants to buy Company B and would rather pay in shares than in cash. But Company B’s shareholders want cash rather than shares. So Company A issues shares to Company B and then immediately arranges for the shares to be placed with outside investors, thereby getting Company B its cash. To protect the rights of Company A’s shareholders, they are given the entitlement to apply (to ‘claw back’) any or all of the placed shares.

When considering a rights issue, the main questions facing the company and the bank or broker advising it are when to make the issue and at what price. The shares will normally have to be offered at a discount to the market price for the company’s existing shares, otherwise those shareholders who want more shares will simply buy existing ones on the market. The bigger the proportion of new shares on offer (say, one to four), the heavier the discount will have to be, in order to attract the amount of funds needed.

The company will also have to allow a grace period, usually five to seven weeks, to allow shareholders time to decide whether or not to take up their rights. This is a weakness in the process since it leaves the company vulnerable to bad news, or a change in the fortunes of the stock market. If the price of the

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