Rights Offering (Issue)

Categories: Derivatives, IPO

Think: "a right to buy." And buy at a discount.

Companies may be fearful of a hostile takeover, or some other big bad event, and they want to give existing shareholders preferential treatment over external non-shareholders. So they might say, "Okay, pals, for the next 60 days, you have the right to buy an additional share of our stock, which is currently trading for $312/share for $200/share...note the discount, wink wink...and you need to currently own 5 shares for every 1 that you'll then buy. Sound like a plan?"

That is, the company is offering those rights to buy at a discount—and the shareholders can sell those rights to other non-shareholders for cash. In essence, it's kind of a funky, one-time dividend that actually hurts both would-be external hostile takeover people...but unfortunately also employees who have stock options, not actual shares, so they then suffer the dilution of this rights offering.

And you may ask, “Is there such a thing as a, uh...hostile takeunder?”

Related or Semi-related Video

Finance: What is a Rights Offering?6 Views

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finance a la shmoop what is a rights offering all right people think a right

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to buy and buy at a discount kind of companies may be fearful of a hostile [Woman pointing at woman behind reception desk]

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takeover or some other big bad event that harms them and they want to give

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existing shareholders preferential treatment over external non shareholders [Shareholders at a night club]

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this rights offering is essentially a hostile takeover defense so they might [Bear attacking rights offering]

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say ok pals for the next 60 days you have the right to buy an additional

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share of our stock which is currently trading for 312 dollars each for $200 a [Man discussing company stock at presentation]

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share and note the discount wink wink and you need to currently own 5 shares

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for every one that you'll then buy sound like a plan well that is the company is [Man throws rights offering to woman]

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offering those rights to buy at a discount and the shareholders can sell

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those rights to other non shareholders for cash in essence is kind of a funky

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one-time dividend that actually hurts both the would be external hostile [Metal anvil land on a bear]

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takeover people but unfortunately also hurts the employees who have stock

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options not actual shares so then they suffer the dilution of this rights [Anvil lands on employees]

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offering with nothing to show for it yeah and you may ask is there such a

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thing as a hostile take under mmm wondering about that [People protesting outside metal fence]

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