re: Why price subscription rights at a 30% discount?
I'm reading through the paper on the underwritten rights issue but haven't finished it yet. Before I make comments on the paper itself it should be noted that if everyone takes full advantage of the subscription rights, we will all own the same percentage of Arcam shares as we did before the rights issue. So, GE does not have a hidden share percentage advantage in this transaction if we all buy the maximum allowed. An equation will show that clearly.
I've paraphrased a lot from "the paper" in what I've written below.
I'm assuming this is an offensive rights offering, not a defensive rights issue. Arcam is developing, they are not paying debt or keeping itself out of financial trouble. That's clearly stated in the link Arcam provides.
Rights issues associated with risk means Arcam has an appetite for risk. From what we know about their technology, it's a risk worth taking. But to reduce risk (risk to the underwriters), discounting the stock reduces the chance that underwriters have to buy any of the stocks they underwrote. In the worst case, companies are selling discounted shares to underwriters while paying compensation for it. I believe our case is better than that, Arcam is developing by selling discounted shares to underwriters while paying compensation for it.
By buying into the rights issue, shareholder's money increases Arcam's cash balance. Shareholder value comes from a company investing in value creating projects. Arcam is investing in value creating projects with this offering. So shareholder value is in the works. What's written below seems most related to the case of issuing rights to reduce debt, but, it seems clear that anyone not involved in the underwriting is at a disadvantage to the underwriters. That does not mean we don't have a chance at profiting!!!
"However, there is a conflict of interest regarding underwriting agreements as it is only the large shareholders, private investors and institutions who receive compensation from the company to underwrite issues (Handley, 1995). All but the smaller shareholders benefit from this system. If an issuing company are making a rights issue to reduce its debt, then the banks that have lent money to the issuing companies obviously are very keen that the issue are underwritten as it ensures that the companies are receiving the money to reduce its debt burden. Managers are also ready to do a lot of sacrifices to ensure that a rights issue gets fully subscribed, like setting the subscription price at a high discount for instance, as a not fully subscribed rights issue is seen as a failure (Cooney et al, 2003; Kunimura & Iihara, 1985). This means that it is only the smaller shareholders who can criticize the choice of using underwriters and the compensations the company pays for it. In the end it is also the smaller shareholders who are paying the price for the unused and expensive underwriter agreements."
