alt Hacker NewsWhy? There’s $80B of dilution from new shares issued, so to keep share prices constant market cap would have to increase by $80B. Simultaneously, there $80B in additional assets on the balance sheet, so if the company was previously correctly valued at $N market cap it would now be correctly valued at $N+$80B market cap, right? My intuition is that capital raises, just like stock buybacks, should be first-order (“mechanically”) share price neutral.
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But stock buybacks shouldn't be price-neutral by default? The entire point is to increase the unit price of the remaining shares.
And in this specific case, selling shares to Berkshire at a 5% discount has a pretty clear signalling effect.
Don't forget that the denominator (total number of outstanding shares) will be increased by this as well. So even if the market cap reacted exactly one to one like you're proposing the per share price wouldn't stay constant necessarily.
Ok but GOOG also has a ~$70B per year stock buyback program for that. It's a little goofy to be buying back and issuing $80B of new shares at the same time.
Maybe the market price drop has less to do with dilution, and more to do with suspending share buybacks for a while.
Supply and demand of Google equity. The fundamental value of a share doesn't change, but you now need more investor capacity to hold the equity. So you need to sell to investors who weren't quite willing to pay the previous price.
It's not based on the fundamental value of the stock so maybe you wouldn't consider it "first order," but I think you can still call it "mechanical."
This is true in a "yes but" sense. Typically equities of the mega caps benefitted from debt issuance on the expectation it would accelerate growth. The change to equity value loss is what is interesting: the market no longer sees this as generating growth, at least not like it used to.
First-order, yes.
In practice there's a lot of issues with asymmetric information. The company knows its own operations and financial position better than random traders on Wall Street. It is rational for it to buy back stock when the market value is lower than the true intrinsic value of the company, and to sell stock when the market value is higher than the true intrinsic value of the company. Therefore, traders often treat buybacks as a signal that the company is "cheap" (at least in the company's own view) and pump up the price accordingly, and treat stock issuances as a sign that company management believes that the stock is "expensive" and push it down accordingly. Company management has more inside information than market participants do, but is usually prohibited from trading on it. Stock issuances and stock buybacks are one of the few cases where insider-initiated trading is legal, because the benefits accrue to the company as a whole rather than a few individuals.