Let’s fully assess WIND’s decision to sell 3.3 million shares with a secondary, which includes 1.6 million shares by stockholders, of which 900,000 shares, or 1/3 of his position, will be offered by Jerry Fiddler, a co-founder of Wind River Systems.
Earlier I had guessed that the selling stockholder(s) were venture capitalists needing to exit the company. While that guess still may be somewhat valid, the primary selling stockholder turns out to be a co-founder lessening his position. What does that mean for the company, and what does it mean for WIND to be offering more shares?
Nothing bad. The fact that WIND is selling more shares, raising an estimated $52 million for their war chest is excellent news. Consider the following:
I was surprised to discover Jerry Fiddler is lessening his position, but he is acting optimal no matter what he thinks about the future of the company. To understand this, you have to understand the concept of the utility of money. Believe it or not the value, or utility, for money changes with amount. For example, my utility for a marginal dollar changes depending on how many dollars I have. To see this, suppose I offer you the following choices, and you may pick one or the other. Which do you pick?
1. I will give you $20,000,000 cash and give you a chance to pick a random number between 1 and 100. If you pick any number but a pre-determined one, I will give you an additional $600,000,000. If you pick the wrong number, you get nothing extra.
2. You get nothing for certain, but you may pick any number between 1 and 100. If you pick any but the pre-determined one, I will give you $1,000,000,000 dollars. If you pick the wrong number, you get nothing.
Hint: The second choice has the greatest expected return by far, namely $990,000,000. The first is only expected to return $614,000,000. Does this mean you pick the second one?
The answer is: it depends. If you are Bill Gates, then your utility for money in the range of $500,000,000 to $1,000,000,000 is linear, and the optimum choice (which is always to maximize your expected utility) is to pick the second choice. If you are everybody else, save Warren Buffet, you would choose the first choice. The theoretical reason is that your utility for $20,000,000 is greatly different than your utility for $0, but your utility for $1,000,000,000 is only slightly greater than your utility for $600,000,000. Thus, the expected utility of the first choice far exceeds the expected utility of the second choice.
In other words, Jerry should take some money off the table to guarantee a minimum return that is substantial, no matter what happens to the company. This is true even if the chance that something catastrophic occurs is extremely small.
Conclusion: Jerry is acting optimal, but then we always knew he was smart.
Second issue: What about WIND making a secondary offering?
WIND gains lots from the secondary offering, and it is good for the existing stockholders. The main benefit is the $52 million will add to the war chest, enabling them to succeed in what may become a winner-take-all contest to dominate the Embedded Systems marketplace. The money could be used to sponsor research and development, increase marketing, or to acquire capability to extend their dominance. Existing shareholders need to encourage the company to expend any effort or dollars to gain absolute market share supremacy.
Another benefit is the offering will increase the number of analysts/companies following the company. This is important as the company breaks into the mid-size category with hopes of being noticed by institutions and being exposed to many more retail investors. In particular, the company will be exposed to European investors, which is exciting and has a nice ring to it, especially since the company is multi-national with a serious European presence (not only sales but development).
Finally, the float will increase even more, making the company more attractive to institutional investors who demand liquidity.
Any comments? If so, please be advised I am out again, this time trying to hold up my end of golf tournament.
Allen, |
