To the uninitiated, the almost-9% decline in value for the shares of U.K.-based banking group Barclays (NYSE:BCS) over trading this Thursday would very likely appear to stem from a really bad piece of news that is going to impact the bank’s value considerably over the future. Especially since the bank has been quite prone to such pieces of bad news from time to time (remember how the LIBOR manipulation scandal started off?).
Thankfully, this wasn’t the reason why the bank’s shares tanked. The bank’s decision to raise £5.8 billion ($8.9 billion) in fresh capital is to blame for the fall. The rights issue had 18th September as the cut-off date for new allotments, so the share price simply fell to factor in the effective increase in the number of shares. But then, shouldn’t the prices have fallen in late July itself when Barclays first announced its decision to raise more cash through the rights issue? (see Huge Rights Issue Proposal And Poor Q2 Results Sinks Barclays’ Shares) Well, they did. But the rights issue process gave investors a way to make more profits between then and now – something they obviously did not pass up.
On July 30, Barclays announced that it will offer shareholders rights to purchase one additional share for every four shares they hold. The dilution reflected in the bank’s share price immediately. But with the final cut-off date for new allotments being set as September 18, investors had an opportunity to buy more of Barclays’ shares in the meantime to benefit from the discounted price at which the right to additional shares will be issued. As this date drew closer, the demand for Barclays’ share increased, driving up the price from under $17.20 apiece in late August to almost $19.60 per share at the close of trading on Wednesday – a 14% leap in a fortnight.
When the deadline had passed, the shares no longer commanded the premium they enjoyed over preceding days, and the price reverted to $17.90 – in line with what we believe is the intrinsic value of Barclays’ business.