Capital increase, a critical source of funding

Every business needs capital , both to be born only to develop or survive. Money is the sinews of war . A company must have the necessary investment capital without which it is destined to disappear more or less imminent . Two main sources of funding are available to companies. On the one hand , debt . A debt owed to a bank, a State or investors , which must be repaid . On the other hand , own funds . Equity is not intended to be repaid but imply a right to dividends , voting rights or the right to liquidation .

It is appropriate here to distinguish the capital increase to obtain financing and capital increase only to facilitate the reading of the balance sheet . Indeed, in the second case, the reserves of the company are simply converted into share capital by a set of scripts to enhance it without increasing the funding of the company. Such increases are reflected in the distribution of bonus shares or by increasing the par value of shares . It does not change the actual value of the company or its cash .

The capital increase , transferring funding may be in the form of a classic issue in cash. The company issues shares , and investors acquire its shares. The money from this purchase goes directly to the company’s balance sheet . So when you buy a stock to another investor for example , the company perceives nothing of this transaction. Only the capital increase directly benefits the company . This type of capital increases diversifies its funding sources , and thus influencing the negotiations with the banks. It is also possible to carry out a capital increase through contribution in kind , particularly in the context of small structures through a contribution of shares , through a merger , for example , through the conversion of debt into equity , a supplier that is claims on a company may have an interest in seeing her transformed into action in an attempt to collect claims – dividend .

The capital increase is a desire to increase funding for the company , for several reasons:

investment
The new capital could help to develop a new project or encourage hiring managers. Prospective investors should therefore judge the quality of the project in question before whether to participate in the capital increase ;

establish its financial strength
Strong equity can be a way for the company to ensure better credit rating from rating agencies. The latter are based primarily on the ability of the company to repay its debts. Sufficient capital is one of the aspects of this notation ;

recapitalize
Significant losses can result in a lower level of equity legislation . In fact , the company is obliged to recapitalize quickly. Investors should then cover the losses of the company. Shareholders therefore have a choice between disappearing all their initial investment or invest more ;

deleverage
Too high debt can cripple a business. Repay its debts can therefore enable the company to regain financial flexibility and room for maneuver. However, increase its capital to pay off debt is often misunderstood by the financial community ;

have sufficient cash
With a constantly evolving business environment , the company may have a need for a bloated cash to take advantage of acquisition opportunities . Strong cash and can afford to quickly acquire a competitor if the need arises .

The reasons are manifold in a capital increase , and they demonstrate the importance to be given to a listed company ‘s share price . Indeed, the capital increase for a listed company performs at levels close to the last market price . Thus, a company may not be able to benefit sufficient funds if they did not provide enough in previous years . Good communication and a consequent recovery are ideal weapons for future successful capital increase .

The capital increase has a direct impact on the distribution of capital , its composition . Indeed, between two former shareholders , the share may change if one of the shareholders participating in the capital increase and the other not. Let’s take a simple example. X is a company owned by two shareholders at 50 % each. The company is 100 euros. It wishes to proceed with a capital increase of € 25 . Following this increase, the value of the company will be schematically 125 euros. One of the shareholders do not participate in the offer, while the other will subscribe in full. Following the capital increase , the shareholding will be 40% for the former shareholder, and 60 % for shareholders who have subscribed to the capital increase . The weight of each shareholder can thus be seen reduced or increased at each change of capital. But today some decisions may also have an impact in several years in the capital. And the issuance of convertible bonds , redeemable in shares or even stock option plan obligations may have important consequences on the composition of capital in five or 10 years.

The price of the capital increase is often less than the current price of the stock price in order to stimulate the interest of investors. It therefore should not discriminate against former shareholders versus new . The former shareholders will therefore receive subscription rights to participate in the capital increase. If they do not wish to participate , they can then sell them and they will be used by other investors who want to participate in the capital increase.

Also note that there are capital increases reserved say . One or more major shareholders participate in the capital increase but only they have this right. The other shareholders can not participate . This type of operation is common for employee shareholders. Also note that in extreme cases , in particular to avoid the bankruptcy of the company , no subscription is distributed to shareholders in order to encourage a little more the arrival of new capital essential to the survival of the company .

Any capital increase is a decision of the extraordinary general meeting. It meets all the shareholders and decide whether the capital increase. However, AGE can delegate some of the responsibility for certain capital increases within certain limits . This delegation is made to the Board or the Executive Board, and may include, for example on stock option plans limited by example .

The choice of the capital increase at the expense of debt is not a neutral element financially. Certainly, the financial burden will not become , but the average cost of capital is greater than the cost of debt . Indeed, the rate of return required by shareholders is higher than the interest rate charged by banks. Leaders must constantly balance their balance sheets based on their borrowing capacity and the required rate of return .

The capital increase is an important element in the life of a company . The success of a capital increase may determine the future of a company, listed or not. As for your decision to purchase or not there , it will directly depend on your confidence in company management .

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