Wednesday, October 13, 2010

Surreal Headline of the Day - The Onion?

It's that time again - one of these headlines is from satirical fake news site The Onion, and the other one is from The  

Tough one, right?  I mean, could The really think that MGM stock would trade higher on a 69mm share secondary offering?  Seriously?  Yes - they did think that - the MGM story is the real one from The  Sadly. 

Perversely, the author seems to be trying to use some sort of Bizarro Keynesian logic whereby MGM can increase the value of its equity by decreasing its debt load by issuing more equity to pay off the debt.  Of course, issuing more equity - wait for it... DILUTES THE VALUE OF THE EQUITY!

Whenever you need a good laugh today, just reread the headline "MGM Stock Offering Not Enough to Lift Stock."


disclosure: no MGM positions.


Onlooker said...


I agree that this is bizarro and seemingly stupid. But over the last year and a half that's exactly the response that the market has had all too many times to the issuing of more stock. Especially for financials and REITs, and especially in '09. I guess the and others have been conditioned to expect that response.

This market is completely dysfunctional and terribly distorted by all the govt intervention of the last number of years (too friggen many now, that's for sure).

Al said...

It doesn't seem to be especially mysterious. The stock price includes some bankruptcy expectation, so if the market views the company as solvent, then an issuance might lift the price simply by reducing the bankruptcy risk.

Kid Dynamite said...

Yes, Al, I understand that. Surely you can take the next logical leap and figure out why it's largely paradoxical: if the stock price implies a high probability of bankruptcy, then additional offering don't raise much capital (because the price is low). If the stock price implies a low probability of bankruptcy, then equity investors aren't worried...

Anonymous said...

how does issuing more equity dilute the value of the equity? when they issue more equity, they get cash, and the equity holders own the residual value of the company, which includes the cash they just got from new shareholders. if they issued shares and gave them away, yes, that would be something else.

perhaps it's just a liquidity thing, if they issue more shares and people buy them at the current price or higher, that serves as a kind of market data bit on liquidity -- ie that liquidity exists.

Al said...

KD, you are assuming that the market anticipates a frictionless share issuance and the speedy application of proceeds to the bankruptcy factors, in which case the depressed share price also represents expected meager results from a hypothetical issuance.

But there are specific cases where the market price implies doubt regarding access to skilled underwriters, and management's focus and sense of urgency with respect to the bankruptcy factors.

I've seen a few cases in that past 2 years in which the market seemed to be surprised that management would issue shares with the express purpose of reducing debt, or adequately capitalizing volatile assets for a spin-off.

One might argue that such price adjustments were the result of surprise shifts in corporate strategy, rather than to the specific financing instrument, but I didn't parse the difference for the sake of this discussion.

Kid Dynamite said...

Anon, Al, you both have valid points, certainly in Econ class or stock valuation models, but what I'm saying is that the MGM bull equity thesis isn't about that - it's about the (non-existent) recovery in Vegas that people are dreaming off, and the cash flow that such a recovery will bring to such a levered company - MGM is the leveraged play on a Vegas recovery.

Of course, when they issue more shares to pay down debt, that thesis breaks down - the value isn't there anymore, even if it does reduce the bankruptcy odds. (what you have to realize is that in some sense, the debt is seen as a good thing by the MGM stock bulls - they value it as if it can be rolled in perpetuity - thus, and this is the important part, when MGM issues stock to pay back debt, it serves as a majorly dilutive factor in the valuation model)

Al - I don't recall ever seeing a case where a company did a size secondary and the shares rose. I'm sure it may have happened once or twice, but the headline is moronic, and the expected reaction 99 times out of 100 is a selloff in the stock.