Capital market dudes from investment banks are back, casting a long shadow on the doorsteps of many companies. They are persuading managements to take advantage of the current downturn and scoop up truck-loads of capital from the system. The rhetoric intensifies when it is a bank, which is forever capital-hungry. The logic: you’ll never get capital in such abundance in a long, long time to come. Stock up and use it during the go-go days (which are bound to come back, never mind all this talk about brown weeds). The hidden logic: after a dismal 2008, time for some fee-generation and ensure some year-end bonus.
On the other hand, the broking guys are watching carefully – the moment you raise additional equity capital (through whatever form, whether it is warrants or convertibles), they ready to put a sell on your stock. Reason: any capital raising exercise dilutes the shareholding of every large shareholder, an event that is unlikely to go down smoothly.
What’s more, here’s the dilemma within a dilemma: even assuming you bite the bait, and you do pick up equity capital from the market today, then is your company in a shape to service this additional capital? So, should companies raise capital just because liquidity is sloshing around in the system or should they wait till they are ready to put to those funds to good use? Conversely, premium might be low today, than some unpredictable time in the future, making servicing of capital easier. In the end guys, here is what this column feels is necessary: don’t fall into the trap of the smooth-talking, silver-tongued, cloven-hoofed, snake-oil salesmen. Remember they sold derivatives of derivatives of derivatives…and see where it’s got us today. Raise capital only if you need it; if it has no immediate deployment strategy, it’s going to sit on your books and force people to ask questions.