A new technology company (which shall remain nameless to prove this is not an endorsement) has a free online service it's trying to promote. To bring in registered viewers - which we all know is so important in the Internet world - the company is giving away shares of stock to anyone who registers with the Web site. So register with the Web site and you get three shares of this new company. Great for the company, but just OK for the shareholder.
The company said it would give away a total of 700,000 shares. Because we're talking about a start-up business, those shares are worth nothing more than potential value for the company. In giving all those shares away, the company will pay nothing yet register 233,000 visitors. Then the company can turn around and brag to advertisers or vendors that it has a quarter of a million sets of eyes on its site. The company quickly hits critical mass because advertisers and vendors will pay more to do business with a Web site that has more viewers.
If the company takes off and eventually goes public, it's only expense with this share giveaway is the dilution of other stock.
Now let's look at this from the shareholder's standpoint. Sure, you are spending nothing. But you are holding three shares (an odd lot that would be difficult to sell on the open market) of a company that is trying to buy its way into business with promises.
This scheme will get the company 233,000 visitors, but the company needs the visitors to come back and bring new visitors to
sustain its business. Does that mean the company will create and give away more shares later to get to the next level? If it does, your whopping three shares will lose some of their potential value through dilution.
Creative stock offerings are nothing new. There are offers out there for convertible warrants and for shares sold directly by companies over the Internet and so on.
One interesting initial public offering crossed my desk three years back. The Boston Beer Co., maker of Samuel Adams, went public with a consumer offering. In a typical IPO, the underwriters hand-pick who will get shares at the offering price, offers usually made only to fund managers and wealthy people. Boston Beer's consumer offering was available to John and Jane Q. Public. Just send in your money and get 33 shares at the offering price.
The problem is Boston Beer's stock never rose above the offering price. Since it went public in the fourth quarter of 1995, the stock has lost two-thirds of its value.
So much for creative offerings.
A Side Note
Two issues back, I wrote about insider selling in the technology market and said that such selling is an indication a stock may soon fall. One reader took exception.
He wrote: "I'm always amazed at the way pundits criticize executives for selling their company shares. Virtually every expert on managing portfolios states the single greatest way to manage one's portfolio and to minimize risk is to [diversify]. It is simply foolish for executives to keep so much of their personal worth in a single investment. So these executives continually get trashed for doing the logical and prudent steps in managing their money."
I couldn't agree more. If I were managing the portfolio of a billionaire executive, my first recommendation would be to diversify his or her holdings. That means selling some of the company stock. I never criticize someone for making such prudent decisions.
However, if I were managing that portfolio, I would tell Mr. or Ms. Moneybags to sell the company's stock only when he or she is getting a premium for it. Those executives know better than you or I when their companies are peaking. So when they sell, I may sell, too.
For questions, comments and suggestions, contact Bob Starzynski via e-mail at bobs@pnbi.com.
