Fernando MonteiroThere are Free Lunches
June 18th 2009 07:46
When you go to business school they tell you certain things. One of them, which I never cease to laugh at, is this: there are no free lunches. Not meaning to discount the reader’s intelligence, and willing just to state it plainly, this means that, every time you get something, you have to give something for it. But, really? I doubt. Let’s see.
In recent times quite a few companies have been raising equity from investors, both institutional and retail. If you read the news you would know that the prices practiced were well below the market price for the same shares. Just from the top of my mind these are a few examples:
• Macquarie Group (MQG) recently issued his shares to investors at around $26.00, while the market price is today $36.97
• Rio Tinto (RIO) is preparing a rights issue of 21 shares for each 40, at around $29.00, while its price today is $52.52
• ANZ Bank (ANZ) is offering an SPP for $14.40, while today’s price is $16.35
Consider the practicalities of these deep discounts to shareholders. If you subscribe for $2,000 of Rio shares you will be allocated 68 shares. The moment you get them, supposing it is now, they are worth immediately $3,571.36, an automatic gain of $1,571.36.
This gain of $1,571.36, whether you realise it or not, obviously comes as the rain – fallen from the sky. Would anyone still like to say that in the financial world there are no free lunches?
In recent times quite a few companies have been raising equity from investors, both institutional and retail. If you read the news you would know that the prices practiced were well below the market price for the same shares. Just from the top of my mind these are a few examples:
• Macquarie Group (MQG) recently issued his shares to investors at around $26.00, while the market price is today $36.97
• Rio Tinto (RIO) is preparing a rights issue of 21 shares for each 40, at around $29.00, while its price today is $52.52
• ANZ Bank (ANZ) is offering an SPP for $14.40, while today’s price is $16.35
Consider the practicalities of these deep discounts to shareholders. If you subscribe for $2,000 of Rio shares you will be allocated 68 shares. The moment you get them, supposing it is now, they are worth immediately $3,571.36, an automatic gain of $1,571.36.
This gain of $1,571.36, whether you realise it or not, obviously comes as the rain – fallen from the sky. Would anyone still like to say that in the financial world there are no free lunches?
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