Raising Cash

Rights issues have become a common topic of conversation amongst many companies during the credit crisis and they are being used within the satellite industry too. Just lately, I have heard of several companies that have raised rights issues in an attempt to counter the effect of the economic downturn. After all, there is no money coming from the banks so it seems like a good idea to turn to another way of raising much-needed cash. A company might need more capital for various reasons. It could be to fund a new venture, to expand, or to initiate a takeover; or it could be required to literally raise capital to keep afloat.

We all know just how important it is for a company to keep their shareholders happy. In fact, it is not just important – it is critical. Without the shareholders, there is no business, as they collectively own the company. You don’t want to make these people unhappy.

But what is a rights issue and what must be taken into consideration?

A rights issue basically means that a company turns to its shareholders to help them to raise more money by selling them new shares at a very reasonable price. The shareholders are happy because they are getting more shares at a considerably cheaper rate and they are ‘involved’, and the company is happy because it has raised more money. It seems very straightforward and simple, and it can work out very well for all involved, but it can also have a downside and this is really something that companies must take into account before venturing into a rights issue.

It sounds like the perfect solution; but there is no such thing as a free lunch. The City will often mark down the prices of the existing shares of a company that has initiated a rights issue. If a shareholder takes up their rights and decides to go ahead and purchase more shares at a knockdown price, their percentage holding will not be affected as such, but the original investment that they made will be worth less. Of course, the shareholder can go ahead and sell their rights to make up for this loss, but will the proceeds cover it?

This is something that any company thinking about initiating a rights issue must consider in great detail before proceeding as it could impact negatively on their shareholders. Companies that do proceed could be in a strong position but just need that extra capital to help push them forward – to expand and develop. However, it could also be a sign of general weakness where the balance sheet is simply not adding up. Whatever the reason, the most important thing is that the shareholders are kept happy. In this day and age, there is nothing more important.

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