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Before they can get to the stage of making money, many ASX-listed companies need to shake the tin at investors and ask for money from time to time.
It’s generally referred to as ‘capital raising’. But maybe you’ve got shares in a company that’s raised money and you’ve been a little taken aback because the value of your shares then took a hit. The announcement of a successful capital raise is often followed by a drop in share price, But why? We’ll get to that in a moment.
In 2022, there were 1060 capital raising’s on the ASX for a total of $40 billion.
Since the start of COVID, the Australian bourse has been the world’s best place to be for a capital raise, with our market clocking the highest volume compared to any other country.
If you have a shareholding in a company before a capital raise. When that company raises funds – often at a price below what someone can buy on the share market – it’s adding more shares to the pool. If you don’t take part in the raise, your holding in the company is ‘diluted’. Thus making my shares, weaker. The company’s current and potential value is spread over a great number of shares.
The opposite of this is called a consolidation – but we’ll get to that another time.
So.. when a company needs to shake the tin, questions need to be asked…
– What price is the company raising funds at?
– How does that compare to the market price?
– Is it at a large discount to the current price?
– Will this raise ultimately lead to a boost in the company’s overall worth?
Why do companies raise?
- Companies will raise when they’re looking to list on the ASX through an initial public offering, or, an IPO.
- They may have to raise to fund an acquisition of another company or, purchase equipment.
- To pay for drilling programs or exploration activities
- Funding trials of new treatments or
- On the other hand, a company may ask for money to simply just keep operating
Examples of capital raising by the big end of town
- ANZ raised $3.5 billion last year to buy Suncorp Bank with shares priced at $18.90 which was a 12.7 per cent discount to the previous closing price – despite this, the raise did not dampen the big bank share price.
- This could be because the shareholders see this as a positive move for the company, acquiring competitors to eventually lead to financial gain. It shows the company to be in a strong standing, and the big banks will always be trusted more than small miners.
- But more recently Star Entertainment Group raised more than $500m to strengthen its balance sheet and offload debt. And shareholders knew about it… the stock lost nearly 20 per cent on the news.
- This was because shareholders saw this as a negative move from the company due to poor performance or mismanagement of funds – it doesn’t help the company keep getting told off in Canberra, either.
Capital raises are a necessary part of building publicly-listed companies.
The higher the discount applied to the share price for the raise, the greater the impact tends to be on the market. The market reaction tends to align with immediate information – “Someone is getting a better deal than me” But ask yourself, is the raise going to mean better outcomes in the long run? Is this company going to use this money for potential growth or has it mismanaged it?
There are so many variables, it’s always important to research, ask the right questions and of course, invest responsibility.
