DEFINITION of Add-On
Add-ons are additional shares issued by a company that has already gone public. Companies use add-on financing to raise cash for existing operations, expanding into new markets or funding a new project. Add-ons are useful mechanisms for raising capital but in truth, they often agitate shareholders. Issuing additional shares can reduce the current stock price and change the ownership percentage of existing investors. This is a common problem called stock dilution. The end result is a slight drop in the existing market value.
BREAKING DOWN Add-On
Add-ons are often looked at with a negative slant by investors and the finance community. From the existing shareholders' perspective, the issuance of add-on stock is a bad thing because it usually reduces the value of the stock they own. More shares mean existing shareholders will hold a smaller percentage of ownership in the company. They may also see earnings per share decline.
In other words, profitability doesn't move linearly with the number of outstanding shares. So each additional share represents lower earnings power before the original share offering.
Furthermore, add-ons have a dilutive effect on existing shareholders positions, meaning several things; control dilution, earnings dilution, or value dilution. Control dilution describes the loss of a controlling stake in an investment, earning dilution deals with diminished earnings per share and value dilution focuses on any decline in stock price. In theory, shares will decline in value by a function of the original number of shares, current share price, amount of new offering and the new issue price.
Benefits of an Add-On Offering
In some cases, though, the add-on is capable of lifting earnings and shareholders over a long time frame. When a company uses the capital infusion to exploit untapped markets, it can create greater profit potential going forward. But that doesn't happen overnight. It can take months or even years for an investment to materialize into bottom line gains.
Many investors believe this will happen with Tesla, which continually taps the financial markets to finance new projects. In the past few years, the electric car maker has raised millions to billions of dollars in multiple series of offerings. The funding is aimed to expand Model 3 production and cover ongoing operative expenses like payroll and rent. Shares have since traded sideways but not as a direct result of the add-on. Investors have been lukewarm on the car maker after some bad publicity around the self-driving functions.