How An IPO Is Valued
But companies benefit in various ways from a higher stock price.
- Companies can and do issue "secondary offerings" - the company (and thus shareholders, indirectly) sells new stock for cash. Existing shares are diluted, but the company may be more valuable since it has more cash.
- Companies can use their stock to make acquisitions or other deals.
Higher stock price means fewer shares are paid for the same cash value.
- Companies dilute shareholders by issuing stock compensation to employees, which shows up (these days) as an expense on the financial statements, lowering EPS to reflect the harm to shareholders.
If the stock price is higher, fewer shares are needed to make employees happy.
- A company with a high stock price is not as vulnerable to a takeover. In a takeover, shareholders might receive less than the company is worth.
Though generally at least some parties will feel the takeover is a good deal that gives shareholders more than the company is worth - after all shareholders are getting more than the stock price.
One way a high stock price can hurt a company is that many companies do share buybacks when the price is too high. Economically speaking, a company should only buy back shares when those shares are undervalued.
But, management may have incentives to do buybacks at irrationally high prices.
answered Apr 27 '11 at 3:49
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