New shares
Sir: Edgar Palamountain (Letters, 30 May) who usually advocates the cause of wider share ownership is misguided in his de- fence of rights issues.
As a small shareholder I have recently invested in two sales promotions com- panies, Catalyst Communications and KLP. Catalyst I was fortunate to pick up through a placing of 40p when the ordinary price was 45p. The offer of a discount induced me to purchase. When the shares had risen to 66p I noticed that another placement was taking place at 53p., Hoping again to be favoured by the brokers to the issue, I was disappointed to discover that institutions had snapped up all the shares. Clearly I, an existing shareholder, was to be denied a quick profit. However, think- ing the matter through I realised that I was fortunate that the institutions and other new shareholders were now buying these Catalyst shares. Had I taken up further shares it would probably have been be- cause of the certain short-term gain and not as a long-term investment. Now there are further shareholders in Catalyst so that should I wish to sell, there are more shareholders who may wish to buy. The shareholder base has therefore been broadened to my ultimate benefit. On the other hand KLP decided to fund their acquisition by a rights issue. As a result while the Catalyst price has now risen to 73p, KLP has fallen back. Also, the rights issue is a more drawn-out process than a placement. While the management of Catalyst, who are competitors of KLP, can be engaged growing the new business, KLP must wait for a further six weeks before receiving funds and assuming the management. No, Mr Palamountain, placements widen share ownership. While the size of placing discounts can be questioned as can who is to be favoured with the offer to take up shares by this mechanism, what is certain is that there are new shareholders and therefore a broader market. Converse- ly rights issues can cause existing investors to become overweight in the stock and thus potential sellers who will cause downward pressure on the share price until new shareholders are found.
The investment protections committees would thus be wiser to focus on pricing and distribution of placements. They should not deny companies the opportunity to raise funds and widening the shareholder base as this in the long term benefits all shareholders.
D. G. Jones,
Deepdene Drive, Dorking, Surrey
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