TOM WINNIFRITH – THE TWO GREAT LIES TYPICALLY USED TO JUSTIFY SHARE PLACINGS
Why do companies issue shares? Because they need cash. Why do they say they are issuing shares? Er….well it is never because they are running out of cash, of course! There are two standard excuses which you see in RNS after RNS and they just do not wash.
The first is that the company is issuing shares “in response to institutional demand.” The most laughable RNS in this vein in recent weeks in this vein came from K3 Business Technology (KBT). Its shares had halved in value and it was issuing shares “in response to institutional demand.” Pull the other one…
If a company does not need cash, then why the hell issue new shares (at a discount) to fund managers just because they want them and so diluting the rest of us. It is a pointless exercise. If funds want shares they should go buy in the market like the rest of us.
The second monster whopper that you see on AIM almost every day is that a company has issued fresh shares “in order to raise working capital.” Hmmmm. Just occasionally this is true. A company has a large order book and in order to fulfil it, there is a need for cash. In the olden days this could be obtained via debt financing but these days banks are not in the business of helping businesses grow and thus this can be a legitimate call.
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But so often this is just a smokescreen. The reality is sometimes that a company’s products are not very good and so its customers are not paying. In reality it should therefore not be booked as revenue which effectively leaves it in the same camp as those companies that are loss making. When such companies say that they are “raising money for working capital” what they mean is that they are raising money to pay the wages because they are running at a loss.
How often do you see a statement where a company explicitly says:
“We are issuing new shares. There was no real institutional demand but by offering them at a whopping discount we managed to get the placing away. The money will go to fund our ongoing losses which are, in good part, down to bloated boardroom pay packages as well as the excessive costs of maintaining a PLC listing – we have an army of parasites to fund.”
Although I cannot remember such a statement, that is the reality behind most fund raisings on AIM today. I offer a prize of a bottle of champagne for the first AIM Company to be honest about why it has to dilute shareholders and issue such an RNS. I do not expect to have to award that prize any time soon.