There were a number of questions when Shopify did another money raise. In the Nutanix conference call yesterday there was a question about why THEY had done a raise when they really didn’t need to. Here’s the response (abridged) which will give you an idea about how these guys are thinking:
Question - Q2 was a pretty strong cash generation quarter, and you already had a pretty solid cash balance on hand. Just wondering if you can help us understand a little bit more the motivation behind the issuance and just how you’re thinking about using the proceeds over time?
Answer - The motivation was simply the markets were in an outstanding period of time to raise some good quality capital at a remarkably effective rate in cost. And we took the opportunity to do that. There’s no dilution to any shareholder until the stock appreciates 100% from when we did the deal. And we look forward to the day that happens. And then, even after that, it’s minimal dilution from there. So, it was a great time to go do the transaction.
They said the’d probably use the proceeds for little bolt-on acquisitions like the one they just did.
Best,
Saul
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Answer - The motivation was simply the markets were in an outstanding period of time to raise some good quality capital at a remarkably effective rate in cost. And we took the opportunity to do that. There’s no dilution to any shareholder until the stock appreciates 100% from when we did the deal. And we look forward to the day that happens. And then, even after that, it’s minimal dilution from there. So, it was a great time to go do the transaction.
I don’t buy that! If there are 100 shares outstanding and the company makes $100 in profit then each share gets $1. Add 100 shares, earnings don’t change and each share now earns $0.50. How is that not dilution? While the cash sits in the bank it’s dilution! If they were to buy a sufficiently productive asset then it would not be dilution.
If they calculate dilution by book value you get entirely different results and you can claim no dilution provided the market CAP exceeds book value.
Denny Schlesinger
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The motivation was simply the markets were in an outstanding period of time to raise some good quality capital at a remarkably effective rate in cost. And we took the opportunity to do that. There’s no dilution to any shareholder until the stock appreciates 100% from when we did the deal. And we look forward to the day that happens. And then, even after that, it’s minimal dilution from there. So, it was a great time to go do the transaction.
I don’t buy that! If there are 100 shares outstanding and the company makes $100 in profit then each share gets $1. Add 100 shares, earnings don’t change and each share now earns $0.50.
Hi Denny, perhaps you misunderstood. This was Nutanix that I was writing about, as I believe I explained clearly. They floated a zero interest convertible senior note. They were correct in what they said. I just used them as an example of why companies were raising money, even if they didn’t need it, in this market.
Saul
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Of course I misunderstood, selling a zero interest convertible senior note is not the same as selling stock – the dilution happens on conversion!
Denny Schlesinger
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Of course I misunderstood, selling a zero interest convertible senior note is not the same as selling stock – the dilution happens on conversion!
True, I didnt read the prospectus, but most offerings have a call feature that company may choose to exercise.
You cant blame a company for raising cheap debt, whether through debt or equity offerings. Many times the best time to raise cheap money is whenever you can, rather than when you absolutely need it.
It pisses everyone off, I know… tis the nature of corporate finance.
Matt