(d) When deciding between a rights issue and a public issue of shares as a means of raising new equity,the following factors might be taken into account:
Costs
Public issues are made following a highly regulated procedure, which can incur costs upwards of
10% of the amount of finance raised. Such costs would include accountants', legal advisers' and
stockbrokers' fees, prospectus publications costs, advertising, management time etc. Rights issues
do not incur such high compliance costs, with less regulation and lower costs of publicising the
issue to a more restricted audience.
Control
If a rights issue is made, and the existing shareholders take up all rights, shareholder control is
unchanged. If a significant number of rights are sold, or a public issue is made, the existing
shareholders' control will be diluted. This may or may not be advantageous – it depends upon the
objectives and current circumstances of the company. A wider shareholder base may be sought, for
example, if the company feels vulnerable to a takeover by one, or a consortium of, its existing
shareholders.
Cost of capital
If the company is an attractive investment option, a public issue allows the greatest degree of
competition for the shares, which may result in a higher price being obtained. This would result in a
lower cost of equity for the company than if a rights issue is undertaken with its lack of an open
market.
Effect on wealth of existing shareholders
The issue of new shares at a discount to the current market value, be it by rights or a public offer, will
generally result in a fall in price of existing shares. Where a rights issue is taken up by its existing
shareholders, this will have no overall effect on their wealth, but in any other case they could lose out
(though it should be noted that in the UK existing shareholders have a 'pre-emptive' right to buy any
shares issued for cash).
Speed
A rights issue, having fewer regulatory procedures, will usually raise finance quicker than a public
issue. |
