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Ballard Power Systems Inc. Message Board

  • Tyreds_Tale Tyreds_Tale Aug 23, 2005 6:12 PM Flag

    Shares Outstanding?

    Can anyone please explain what shares outstanding are?

    It appears that gas prices will be going higher and with labor day weekend coming up, I think Ballard will have a few days in the sunlight. Fuel cells sound darn good right now!

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    • <Can anyone please explain what shares outstanding are?>

      Glad to explain, as long as you are a Packers fan and think the Bears still suck......

      In the articles of incorporation, a company specifies how many shares are authorized. Authorized is a lot different than outstanding. A company may have 100MM shares authorized, but only 36 actual shares outstanding, or it may have 99MM shares outstanding. The number of shares outstanding cannot exceed the number authorized, and IIRR, it takes shareholder approval to change the number of shares authorized. The Board of Directors (BoD) determines what those authorized shares are to be used for.

      After incorporation, the company starts selling shares. Suppose BoD of our 100MM authorized share company decides to sell 25MM shares to some investors and the public. They then have 100MM authorized but only 25MM outstanding.

      The company then does a share swap to buy out another company with 10MM shares. It then has 35MM shares outstanding.

      The board of directors then decides to buy back 5MM shares, after they do that, then then have 30MM shares outstanding. Sometimes the buybacks are sort of temporary, when those bought back shares are still outstanding, but held in the Treasury of the company. Or bought back shares may be retired, and then not considered outstanding anymore.

      The number of shares outstanding is crucial to understanding the value of the shares. If a company has earnings and/or assets to support an overall company-wide valuation of $50 million, then if they have 10MM shares outstanding, hopefully you and the market value each share at around $5 each ($5 per share x 10MM shares = $50 million valuation).

      Before securities legislation required a lot of disclosure, unethical companies (railroads were famous for this) would keep on selling shares into the market, and nobody really knew how many were outstanding at any given time. This leads to dilution - so many shares of stock are issued, the stock is essentially "watered down" much like an unscrupulous barkeep would "water down" (add water) to the expensive liquors. Imagine what happend if the market thinks there are 10MM shares outstanding for a company worth 50 million, but then all the sudden the management says "Uh....we've secretly sold 10MM more shares into the market". The price per share then drops instantly, and ALL the stockholders are screwed. That is why the number of shares outstanding is a required disclosure, and also pending sales and buybacks.

      Another form of dilution is if the shares are valued by the market at $5 each, and the board decides to sell more at $4 each. Suppose our $50MM value, 10MM share company (each share worth $5) decides to sell 10MM more shares at $4 without having a brillant plan for utilizing the new cash, it's just going to sit on it. The company would probably be valued by the market at around $90MM, divided by 20MM shares now oustanding, each share is only worth $4.50 now, and all the original holders just saw their holdings value get diluted down from $5.00.

      Questions? Pop quiz sometime next week....

 
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