Share:
Capital Increase
Boon or Bane for Shareholders?
Capital increases serve only one purpose: Fresh funds for the company. Even though this instrument is still regularly used today, the low interest rates increasingly lead to borrowing. Loans increase the proportion of external capital, while capital increases are used to build equity, thus this process does not increase the debt.
The requirement:
The capital increase must be approved by the annual general meeting. Typically, the specific measure is not yet voted on; the management board obtains general approval from the shareholders for a limited period.
The process:
Fundamentally, capital increases are carried out with a subscription right for the shareholders. Through a so-called subscription right, they are granted the option, according to their shareholding, to acquire the new shares, thus keeping their stake in the company constant. This legally protects the shareholder from dilution. If they allow the subscription right to expire or sell it (in the case of large capital increases, these are often traded on the stock exchange), their stake in the company decreases accordingly. Under certain circumstances, the management board is also able to carry out capital increases while excluding the subscription rights. Originally, the legislator wanted to create greater flexibility for companies to quickly react to certain market situations. Critics rightly note that this exception is now used far too frequently. For the company, this procedure is, of course, significantly less time-consuming.
When are capital increases beneficial?
Larger acquisitions can be strategically sound and must be paid for. Similarly, expenses in research and development can improve long-term profitability. It is no coincidence that, for example, real estate companies often carry out capital increases when the opportunity arises to purchase or create a lucrative real estate portfolio. Similarly, albeit with more risk, it applies to biotech companies that need to finance their research. In many cases, this measure is therefore sensible and correct.
Warning signs:
If a capital increase must necessarily be carried out because the company’s creditworthiness is insufficient for bank financing, it’s best to steer clear. In general, an increase in share capital appears less trustworthy when the money is needed to repay debts.
The Facts:
- Must be decided by the AGM
- Strengthens equity
- Shareholders usually receive a subscription right and should exercise it
- Non-exercise will correspondingly reduce the stake in the company
- Capital increases are important and correct for acquisitions and investments in the future
- If old debts need to be repaid with a capital increase, it indicates a weak balance sheet
Our Conclusion:
Even though the share price usually reacts with a discount after announcing the implementation of a capital increase, this measure should not be negatively evaluated, as long as the intended use of the funds seems plausible. If you are invested in a quality company, you should exercise your subscription right, if granted, to maintain your stake.
Our Products:
(click to learn more)
Newsletter
Subscribe to our newsletter and receive exclusive content such as compact analyses, investment ideas and more!
Service & Info
Payment
We accept all major credit cards, PayPal and cryptocurrencies.