Ron and Thread: An additional 3m shares, while dilutive of near term earnings, does not necessarily dilute asset value. There is clearly a shortage of manufacturing capacity, particularly for anticipated orders of MMC units for music players. There is no way to meet that demand except to build another factory, financed by additional shares.
What are the alternatives? SNDK could have issued exchangeable preferred shares, as QUALCOMM did a couple of years ago. Such shares are generally marketed unregistered, within California, to a single buyer, and offer a yield somewhat below the prime interest rate, in return for the right to convert to common shares later on. This strategy creates a drain on cash flow because the company would have to make distributions on the preferred, and may not be any better than simply issuing more shares of common. The only advantage of a convertible preferred is that it initially doesn't dilute earnings on the common stock.
Based on other comments on the amount of stock available on the market, not held closely by SNDK officers and directors, or by Seagate, I think the strategy of issuing more common stock can be explained by the need for more shares on the market. The present price in the 80's is artificially inflated simply because there aren't all that many shares available for trading. Does that mean a prudent investor would sell now and buy back later, at a slightly lower price? I don't think so because, as long as the company fundamentals, product demand, and management quality remain the same, there is no reason to sell.
About March or April of '88, after the company issued more shares and also was reporting the need to write off old inventory, the stock went from around 30 down to about 6. The drop simply created new buying opportunities, but did not, in my view, constitute a reason to sell. Why? Because, as noted above, there was no real change in the fundamentals. The fundamentals are even better now, with new patents adding to the value of existing intellectual property, and an unanticipated huge demand for MMC. Furthermore, what benefit comes from short term trading, other than the provision of higher tax revenues for Uncle Sam? The optimum long term strategy remains to hold the shares and watch for buying opportunities. |
