Sounds like: stock price is high so use its value to its full extent while the price is high and more valuable. Allows selling/granting of fewer shares of stock too.
I think the idea is that if they think they are "undervalued", they can buy the stock back now for X and sell it for >X later to raise more cash for when they need it.
> However, if the stock is under pressure (below its “fair” price), say 50 cents in the above example, then by buying the stock back, you are creating true value for your investors.
Which means that your company just gambles its money at the stock market by betting on its own price.
> that knowingly lower the stock price for more than 2Q.
The question alone is a bit loaded, because stock price is meant to reflect the future prospects of the company -- its long term profitability. A better example might be making decisions that knowingly lower the profits for multiple quarters.
Well technically a company's stock value is supposed to represent the discounted present value of all future profits. So you can interpret a reduction in stock price as an indication that the market expects profits to be lower in the future.
Lets say your company is valued at $100 and all stock is claimed for current employees. Now you want to raise money by selling 50% of your company to investors.
So you create $100 more and now they own 50% (at $200 valuation). This means the investors either over-paid (2x what they were worth!), or you were strongly under-valuing the stocks that existed before.
If you dilute, they get 50% at $50, and the existing stocks are now worth 50% their value. Because you literally sold half the company.
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The first is pretty obviously ridiculous. Nobody would pay 2x the worth, that's the point of deciding on a value. If they paid 2x, it just means you didn't agree on the value.
But if they don't over-pay, it's the same as the second: prior to the sale, your company's value was actually $200 (you were just claiming otherwise), and after the sale your employees only have $100, i.e. half the company's value. Their stocks were still diluted.
What people are getting at is that if at the same time as the dilution the market places a greater value on shares (due to what they think a company can do with the money). Then they don't necessarily have to lose value over the short term.
> In a perfect market, the market value of the company will go down when company buys back stock
Consider a company worth $100 with ten shares of stock with $10 of cash on their balance sheet. Each share is worth $10. They company uses the $10 to buy back one share of stock. The company is now worth $90 and has 9 shares outstanding. Each share is still worth $10.
> can you go to amazon headquarters and exchange an AMZ share for an office chair?
If the total value of share prices drops below the value of the assets, you can buy all the shares, take the company private and sell off all the assets to make money.
Assets (vs liabilities) thus can put a floor on the value of a stock price.
> More important than dilution is the shares multiplied by price.
But even with an "up round", where ownership percentage is diluted but your n-shares * price goes up, liquidation preferences can reduce or eliminate your value.*
As the GP said, there's always that "one more thing" that can wipe out your value.
It's not punishment. Stock price * shares != actual value of the company. As more shares go onto market, demand naturally decreases as supply satiates existing demand, thus causing the price to decrease. I'm sure this is covered in some basic economics course that I never took.
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