- Equity offering should dilute the current shareholders equity by about 6%.
- The negative impact of the offering on the stock price should be short-term.
- The decision to raise cash indicates the company might have lined up another acquisition.
3D Systems (NYSE:DDD) has made strong rally over the last few days. However, the stock started falling in the after-hours trading yesterday as the company announced an equity offering. It is disappointing for the shareholders that as the stock was gaining an upward momentum; this piece of news has brought the share price down. Since the start of the year, the 3-D printing sector has been under pressure and the recent rally by 3D Systems and Stratasys (NASDAQ:SSYS) was being taken as the start of a sustained upward movement by the 3-D printers.
Yesterday, the company announced that it will offer 5.95 million shares of common stock in a public offering. Furthermore, the underwriter has the option to buy 892,500 additional shares in the 30 days after the offering. According to the press release, the proceeds will be used to finance future acquisitions and working capital requirements. At the moment, the company has 103.5 million shares outstanding.
After the new offering, the total number of shares outstanding will go up to 109.5 million - if the underwriter exercises the option of additional shares then the total number of shares outstanding will go above 110 million. The timing of the new offering is a bit surprising - it would have been more effective for the company if 3D Systems had decided to raise cash at the start of the year when the stock was trading at over $95. The decision to raise cash through an equity offering after a fall of about 40% shows that the company might have a deal lined up.
3D Systems has always been active in the sector with its acquisitions and mergers, and the fact that the company clearly mentioned in the press release that the offering was for working capital as well as acquisitions; it shows 3D Systems might be close to another acquisition.
Moving onto dilution - new share issue will amount to about 5.8% of the current shares outstanding, or 6.5% if the underwriter exercises the option of additional shares. In theory, the stock price should come down by the same magnitude. 3D Systems stock came down more than 5% in the after-hours trading as the news hit the market. Since 3D Systems is a high-growth momentum stock, the fall in the price will likely be bigger than the actual dilution impact of the new share issue as emotions often dictate the investor behavior when it comes to momentum stocks.
At the current price levels, the company will be able to raise around $300-340 million ($340 million if the underwriter exercises the option) from the offering. At the end of the last quarter, the company had $306 million in cash and cash equivalents, almost identical to the previous year. So, the new issue will raise almost the same amount the company had at the end of the year. However, as I have said in my previous articles, the cash burn of the company is rising due to the increased spending on the marketing and advertisement activities. 3D Systems will continue to grow its market share by targeting new regions and spending more on marketing and advertisement in the short-term. The cash raised through the equity issue will allow the company to meet these working capital requirements as well as a small acquisition, if the company has something lined up.
As I said above, ideally, the new offering should have the same impact on the stock price as the magnitude of dilution. However, the markets usually consider secondary offerings as negative news and the real impact of the offering is normally more than the actual dilution.
Since the big fall, the stock has established a support price at around $47.50 - I believe the news of the equity offering will bring it close to the support price again. However, I do not believe the stock will go considerably below the support price even if we see Strong reaction from the market.
No one likes to see his/her holdings diluted - but it is the truth that growing companies will raise cash to meet the growth opportunities. There are two ways to raise cash: Debt and equity offering - 3D Systems have chosen equity offering, which will result in dilution for the current shareholders. In my opinion, the impact of the equity offering on the stock price will be short-term and the upward trend will return as the sector continues to makes strong recovery in the second half of the year.