TOWER RIGHTS ISSUE
Tower is one of the leading financial services companies in New Zealand. On 24 August 09, it announced an important news, company will raise $81.3m by offering rights issue. The proportion is 5:16, for each 16 shares held, existing shareholders can apply for 5 new shares. 60,686,427 shares were issued to meet the expected capital raising $81.3m, hence the offer price is set at $81.3m / 60,686,427 = $1.34. Goldman Sachs JBWere Limited underwrote the offer with the full entitlement from Guinness Peat Group Plc, the largest shareholder of Tower who owns 34.9% shares. (Media release). This essay will analyze effects of the offer on share prices, benefit and views of three sides which are shareholders, underwriter and issuer.
In some cases, raising capital can be a bad signal, companies meet difficulties like they are in debt, so they need more money to pay debt and interest, hence taking the rights will be a bad decision for share holders, cause the share’s price will decrease later due to bad performance of company or even worse, company goes bankrupt and can not pay all shares. But in Tower case, it is a good signal, marking a bigger step of company. Due to the report, Tower has a healthy financial situation and the fund will be invested in new operating computers, which is a good signal, long term investment.
Standing on shareholders’ view, they need to consider financial history of company to decide whether this announcement is good or bad signal. Tower is specializing in insurance and financial services, and is heading in this field in New Zealand. There are many types of insurances which include individual and corporate insurances such as vehicle, home, travel or commercial insurances. It possess 7.66% NZ’s market share. Therefore, company’s market is wide and diversified, which is the reason why company need to raise capital in aiming at expanding company’s operation.
Healthy financing before issuing rights issue is one of the...