Company A's share price in the market continues to rise while at the same time, the company keeps announcing that they are issuing new shares for multiple M&A transactions. How is this possible ? Isn't it true that new shares will generally dilute the existing share value? Or is it because the market expects that the M&As will soon/immediately increase the total market cap ? Are there other explanations for this phenomenon ?
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This is the same scenario discussed in How does a public company issue new shares without diluting the value held by existing shareholders? except that the increase in assets comes from the acquisition, not cash. – Ben Voigt Mar 18 '19 at 02:19
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Or is it because the market expects that the M&As will soon/immediately increase the total market cap ?
Yes. The total number of shares outstanding has increased, making each share a smaller fraction of the company, but the company itself has grown as a result of the transaction, so it is entirely possible for the shares to maintain their value.
If company A acquires company B and compensates B's shareholders with ownership of x% of the combined company (by issuing new A shares), the existing shareholders of A now own (100 - x)% instead of 100%. So they have lost x% of the existing company A, but they have gained (100 - x)% of B which wasn't part of the company's value previously. If the price of the acquisition is fair, it's a wash.
The negative effect of dilution occurs when the company "over-issues" its shares, obtaining too little in return or squandering what it does obtain (cash or acquired company).
nanoman
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