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Firms Race to Raise Cash. Article Summary Report

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Updated: May 15th, 2022

Introduction

This article by Telis Demos, in the Wall Street Journal, highlights how some companies are taking advantage of their positive performance in the stock market to source for more cash. These corporations are motivated to sell their shares to improve their performance. They use the cash obtained to invest more in their operations to take advantage of new market opportunities (Demos). This is a turnaround for many companies because they had experienced adverse effects of the financial crisis which impacted negatively on their operations.

Increase in Value Of Stocks

The Dow Jones Industrial Average went beyond its peak for two consecutive days recently. This has made many companies to position themselves to cash in on the interest by investors to purchase more shares. These investors are attracted by the high increase in the value of stocks being witnessed at the moment. Public firms have managed to obtain more than 35.1 billion dollars from secondary sales of stock since early 2013, according to Dealogic , a data research company (Demos).

This trend has been caused by a bullish forecast of the market in the short term. The strong rally by the market offers investors an opportunity to contribute positively to the growth of these companies which may lead to an increase in their stock prices. More companies are able to access capital and this confirms there is a resurgence in economic performance in the country (Demos). Many firms have been encouraged by postive indicators in the stock market to raise more cash to enable them increase their rates of returns.

Reasons for Selling

KB Home, a home building firm, has obtained more than 115 million dollars from stocks it sold in January. This was the first time the company had offered stocks in the market since its IPO in 1986. The firm intends to seize opportunities which are opening up in an improving house market to increase its market share (Demos). The firm’s stock price has risen by more than 14% and this surpasses the previous mark at which its stocks were trading a year ago.

Large corporations do not like selling stocks at a discount because it portrays them as weak. Their shareholders do not like such actions as they feel this weakens the value of their shares. However, companies which cannot access debt markets, prefer selling their stock to obtain more capital to boost their operations. For instance, Saw Seed Company which produces farm seeds, managed to obtain 11 million dollars from stocks it sold early this year (Demos). According to the firm’s chief financial officer, the cash raised will enable the firm to expand its operations into new ventures.

The performance of companies that sell stocks to acquire more funds varies. Research shows that these companies’ stocks perform better compared to stocks of related companies, six months after selling their stocks. Stocks are either sold through major shareholders of a company or through venture capital firms. An estimated 25% of companies that sold their stock recently are private equity firms. These private equity firms desire to cash in on their stock portfolios before the impending increase in tax rates in 2013 (Demos). Cash obtained from private equity sales is used to finance new ventures and investments. For instance, Great West Lifeco Inc. has raised more than one billion dollars which it intends to use to purchase Irish Life Group Ltd.

Works Cited

Demos, Telis. “Firms Race to Raise Cash.” Wall Street Journal, 2013. Print.

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IvyPanda. 2022. "Firms Race to Raise Cash. Article Summary." May 15, 2022. https://ivypanda.com/essays/firms-race-to-raise-cash-article-summary/.

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