Let's take a look at 2 second-stage offerings,
one in a good market and one in a bad market. We'll
look at the companies from IPO to second-stage and
we'll look at them from both a depositor's viewpoint
and a minority shareholder's viewpoint. Understanding
these transactions goes a long way in our uncloaking
the mystery of the process. It doesn't give us the
keys to the kingdom but it will aid us in making an
intelligent decision in any second-stage offering. Once we
see how these worked historically in both types of
markets, we can make reasonable assumptions and
projections for Hudson.
The first one we are going to
look at is Harbor Florida Bancshares (HARB). HARB
IPO'd as a mutual holding company on 1/6/94. On 10/6/97
HARB filed to do a second-stage offering. The price of
HARB had appreciated 470% between those 2 dates. Once
investors had a chance to read the SEC filings for the
second-stage offering the price shot up again. (In hot
markets, the price of minority shares usually goes up just
on the news of the second-stage announcement). The
are two important points to realize in these
second-stage offerings, (1) the price of the minority shares
has absolutely no bearing on the process and (2) our
percentage of ownership as minority shareholders remains the
same. So if we owned 46.5% of the bank before the
offering, we'll own the same percentage after. (* Exception
is, if they had waived dividends. Will discuss that
later.*)
If we are looking for a short term gain,
it's in our best interest to raise as much money as
possible. Remember we own 46.5% of the bank and if they
bring in a ton of money, we still own 46.5% of the new
enterprise. The second-stage conversion is similar to the
thrift's IPO in that at the IPO conversion, capitalization
was determined by the amount of money sent in by the
depositors. In HARB's case the minimum capitalization for the
second-stage resulted in our old shares being exchanged for
3.8899 new shares. At the supermax levels, our old
shares were exchanged for 6.0523 of new shares. It
should be obvious that an arbitrage situation is created
every time a second-stage offering is announced because
almost half the company is already publicly trading.
So what happened to the HARB shares? They shot up
25.7% between the filing date and the closing date for
the second-stage, closing at $71.63 a share. The
second-stage offering price was $10 a share. So what's
happening here? If the offering is very popular, the most
we can get for one old share is 6.0523 new shares
which would be worth $60.52. The price of the old
shares closed at $71.63 which means that the market
assumed that they would get a supermax exchange ratio and
the shares would pop on the first day and that's
exactly what happened. The exchange ratio was just
slightly lower at 6.0094 and the new shares popped 20%
going from $10 to $12 a share. So the market figured
this one out pretty well. What would have happened if
the demand for the shares didn't materialize? What
would have happened if just enough money was raised to
exchange 4 new shares for every old share? Our $71.63
would now be worth only $40 at the opening. We would
have needed a 79% pop just to break even!