What's going on?
British retailer Marks & Spencer and upstart finance firm Metro Bank both announced plans on Wednesday to issue new shares – and saw their stock prices fall (tweet this).
What does this mean?
Companies looking for cash sometimes create new shares via a “rights issue”. These shares are sold only to existing investors, and at a discount to the current market price. That helps compensate for the shares investors already hold getting “diluted” and becoming worth less – in the same way killjoys water down the jungle juice at a punch party.
Metro Bank needs the extra cash to prop it up after yet more accounting issues – and M&S needs it to take a $1 billion leap into online grocery retail with specialist Ocado. While Metro Bank is also planning to sell new bonds later this year, raising cash by selling new shares is a handy quick fix for both companies.
Why should I care?
For markets: Same demand + greater supply = lower price.
Metro Bank’s stock slid by 27% and M&S’s by 12% on Wednesday. Even before the new shares hit the market, a rights-issuing company’s stock price often drops due to the negative connotations of such a move – which include shaky financial footing and risks surrounding the successful use of the cash raised.
The bigger picture: Power to the people.
There are many other ways for companies to generate cash. While most investors have little input when it comes to a firm borrowing money from banks or spinning off parts of its business, rights issues offer existing shareholders the power to further back the company (or not!) while funding it in a relatively cheap manner, without any interest payable. The idea is that this gives the company the best possible chance of maximizing future returns for those very shareholders who’re taking a hit to the value of their existing shares. And if they don’t like it, they can always sell… albeit perhaps not in ideal circumstances.