Nintendo's Secondary Not Necessarily A Bad Thing

An earlier article in SeekingAlpha, Questioning Nintendo's Secondary Offering, blames Nintendo for requesting that the Japanese government sell its stake in the company.

Nintendo probably didn’t really request the sale, even though it said so in its press announcement. Honda has recently also announced that the government will sell its approximately 2% share in the company in a similar secondary offering. The company said that it hoped the sale would increase the number of long-term individual shareholders, the same reason offered by Nintendo. It seems more likely that this is standard language for any company being sold by Japan’s Banks' Shareholdings Purchase Corp., and that the government is trying to use the generally high market now to reduce its holdings.

But is it a bad thing? Not if you are a long-term investor, and not if you are in Nintendo management, because extreme volatility is not really favorable to these groups.

Nintendo’s stock has been run up to near the target prices set by many major brokerages. At levels between 36 and 40 for the US pink-sheets traded stock (NTDOY.PK), it is likely that we will see some major profit taking, sending the stock down again quickly.

Steven Towns of SeekingAlpha reported the target prices for Nintendo as of Jan 11: “Both Merrill Lynch and UBS placed a ¥33,000 ($34.29 ADR equiv. at ¥120.3/$1) target on Nintendo (NTDOY.PK), while Nikko-Citi was most bullish with a ¥36,000 ($37.41) target.”

On Jan 26, he reported that Merrill Lynch Japan raised its target price: “Shareholders will be pleased wi!
th the ¥40,000 ($41.32 ADR equiv. at ¥121/$1) target share price hike from ¥33,000 ($34.09) previously.”

As the share price already briefly reached 35,600 on the Japanese exchange on Jan. 31, we can expect a lot of volatility as the price moves between conservative targets and more ambitious targets. Calling the top is dangerous and makes the stock prone to panic selling during dips. And if it goes above even the ambitious targets, it could become a stock that is held up only by expectations, and one that drops hard.

The secondary offering will act as an antidote for such volatility by holding the price under its targets until good earnings reports and guidance from the company can catch up and give a firm basis for further upward revised targets.

Disclosure: Author has no position in NTDOY.PK