Corporate Finance, 6th Edition

Chapter 38SHARE ISSUES

There are no victories at bargain prices

The previous chapters have already begun assessing the reasons for equity financing. This chapter analyses the consequences for the shareholder of a share issue (or capital increase). Capital increases resulting from mergers and acquisitions will be dealt with in Chapter 46.

Source: Data from Dealogic

The strong increase in share issues in 2008 and 2009 is mainly explained by the strengthening of financial institutions' balance sheets, which had been negatively impacted by the crisis (UBS, Citi, RBS, etc.), by the financing of external growth (Carlsberg, Inbev, etc.) or refinancing of external growth initially implemented with debt (Lafarge, Pernod-Ricard, etc.), or finally by capital-raising in anticipation of future transactions (CRH).

Section 38.1 A DEFINITION OF A SHARE ISSUE

1/ A SHARE ISSUE IS A SALE OF SHARES …

A share issue is, first of all, a sale of shares. But who is the seller? The current shareholder. The paradox is that the seller receives no money. As we shall see in this chapter, to avoid diluting their stake in the company at the time of a share issue, the shareholder must subscribe to the same proportion of the new issue that they hold of the pre-existing shares. Only if they subscribe to more than that is the shareholder (from the standpoint of their own portfolio) buying additional control; ...