Citigroup dilutes value in stock sale

Kai Ryssdal Apr 30, 2008
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Citigroup dilutes value in stock sale

Kai Ryssdal Apr 30, 2008
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TEXT OF INTERVIEW

KAI RYSSDAL: The Treasury Department has decided it needs some more cash to keep the government running. The one-year Treasury bill went back on the market today. The White House phased it out seven years ago, when the budget ink was black, not red. Wall Street’s in a similar boat. The credit squeeze has left the big investment banks a bit short, so some of them have been selling off stock to make up the difference. Last night, Citigroup was the latest to ask investors for a little something extra. Michael Holland is the chairman of Holland & Company in New York City. Mr. Holland, nice to have you with us.

MICHAEL HOLLAND: Kai, good to be here, thank you.

RYSSDAL: Citigroup wakes up one day, discovers it needs new money, does it just run out and print new shares of stock and go selling them off to get it?

HOLLAND: Well, that’s what happened. They announced last night, Tuesday, that they were going to do $3 billion of new capital, which was a bit of a surprise to a lot of people, and this morning, the announcement from Citi was that the deal was not $3 billion it was, in fact, $4.5 billion, because the demand was so strong, and they offered a 4 percent discount to where the shares had been trading last night, which is not a big discount, so it looks to be all things moving forward in a good way for them.

RYSSDAL: Good way for Citigroup, but let me ask you this. If I own say, 100 shares of Citigroup before this transaction, aren’t those 100 shares that I have now diluted in the face of this extra sale?

HOLLAND: Absolutely, absolutely. Full-disclosure, I don’t own any Citi and haven’t owned any for a long time, and I know that I as a shareholder, if I were one of Citi, I would be diluted. In fact, I was surprised that the market’s reaction was so benign as it was to the dilution. As you say, the people who are buying the new $4.5 billion worth of new stock have a full piece of the pie, but the people who owned Citi before the offering, they own a little bit less of the equity of the company.

RYSSDAL: But there has to be an upside for shareholders, right? What is it?

HOLLAND: The bet from new, and old shareholders for that matter, is that the action itself will provide them with a stronger franchise to make more money in the future having done it. That’s why people suffer the dilution and stay with the company, because they say they’re doing the right thing that, particularly in these times, companies who are in the financial business have to be strong to compete. If they’re not strong, they don’t survive. It’s very Darwinian right now, so customers, if they can go to JP Morgan or Goldman Sachs, they would go there rather than Citi if Citi didn’t do things like this, so it’s actually a franchise protecting thing, so if I were a shareholder of Citi, I wouldn’t be too ticked off.

RYSSDAL: You make a good point about the times we’re in. In normal credit market times, companies have other options, right? They can float bonds. They can do other things to raise money. Is this equity issue now, just the easiest way for them to do this in this tight credit market?

HOLLAND: Well, it’s a great question. The question is particularly important because in precious cycles, where there have been financial turmoil woes, we’ve had companies unable to raise capital. People just didn’t want to take the risk. I believe that the Federal Reserve’s action, with Bear Stearns and some of the other things that they did, have given people the confidence to be able to buy, whether it’s debt or equity of these companies, which they wouldn’t have done, possibly, in previous cycles, because the confidence wasn’t there.

RYSSDAL: Michael Holland, he runs the investment firm Holland & Company in New York City. Mr. Holland, thanks for your time.

HOLLAND: Great to be with you Kai.

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