Yesterday Axion Power International (NASDAQ:AXPW) announced a direct registered offering of 28,571,429 common shares at a price of $0.35 per share. The price fell to a low of $0.38 before recovering to $0.47 by the close. Once again the dilution bogeyman raised his ugly head and once again the reaction was overblown.
There are basically two ways people can account for dilution.
New investors who pay more per share than the company's tangible book value per share suffer the classic dilution discussed in every prospectus. Axion's prospectus disclosed the dilution to new investors as follows:
|Book value at September 30th||$0.155|
|Increase in book value from offering||$0.040|
|Pro forma book value after offering||$0.195|
|Dilution in book value to new Investors||$0.155|
Existing stockholders also argue that their proportional interest in the enterprise has been reduced so their shares are worth less. While I've always preferred the bartenders approach that one can't dilute a beer by adding a shot of whiskey, I'm going to take a look at the issue from the other side and show why the reaction was overblown.
On Tuesday afternoon Axion's stock closed at $0.62, which gave the company a market capitalization of $53.0 million based on 85.5 million outstanding shares. The offering injected $9.25 million of hard net cash into the company and resulted in the issuance of 29.4 million shares, including about a million shares that will be issued to brokers as compensation. From the perspective of an existing stockholder the following calculation is a worst case presentation.
|Market capitalization before offering||85.5||$0.62||$53.02|
|New shares issued in offering||29.4||$9.25|
|Market capitalization after offering||114.9||$0.54||$62.27|
I think the second calculation is overly simplistic because in corporate finance the whole is always worth more than the sum of its parts. But even that simplistic analysis says that if Tuesday's price of $0.62 was fair and reasonable, the price after the offering should not have fallen below $0.54.
Disclosure: I am long AXPW.