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!