What is Assimilation?
Assimilation refers to the absorption of a new or secondary stock issuance by the public after it has been purchased by the underwriter. When a company offers shares of its stock for sale to the public, either through an initial public offering (IPO) or through a secondary offering, the shares will first be allocated to one or more underwriters. It is then the underwriters' job to sell the shares to the public.
- Assimilation is the public absorption of issued shares.
- Shares that are well priced and have been marketed well should be assimilated and easily absorbed.
- If shares are not assimilated or easily absorbed by the public, that could indicate the shares were improperly priced or inadequately marketed.
Shares are issued by a company and then often purchased by an underwriter. It's the underwriter's job to them sell the shares to the public and for those shares to be assimilated. Once all the shares have been sold by the underwriter, the stock is considered absorbed.
Once the new shares belong to investors, they are traded on the secondary market like any other security. A company that is well known, and sets a reasonable share price will be more likely to see its new shares quickly assimilated. Lack of assimilation can be a sign that investors are not confident in the company, or think it has overvalued its shares. Sometimes lack of assimilation may result from buyers not being fully aware of the stock offering, which would suggest an error on the part of the underwriters.
If a company is issuing more shares, the new shares will be absorbed into the existing shares. The new shares will be indistinguishable from the old ones, carrying the same rights and entitlements as the original shares.
In the case of an IPO, the shares will provide the rights and entitlements provided by issuing company.
In the case of a secondary offering where the shares are not the same as formerly issued shares, such as offering Class B shares instead of Class A shares, the rights and entitlements may be different than the other class of shares formerly issued. For example, one class may not have voting rights.
No matter what type of share issuance it is, the goal of the underwriter is to assimilate the shares.
Example of Assimilation
In a rather odd case in Canada, Shaw Communications Inc. (SJR) was a major shareholder in Corus Entertainment Inc. (TSX: CJR.B). Shaw wanted out of their position in May 2019. Instead of simply selling the shares on the open market, Shaw got an underwriter to buy their more than 80 million share stake in a bought deal.
Shaw received $6.80 for their shares from the underwriter, even though the stock closed at $8.06 the day before the deal was announced. Shaw was willing to take the reduced share price in exchange for a clean exit from their position, and not having to unwind the large position themselves. Corus stock was averaging daily volume of about 570,000 shares at the time of the announcement. It would have taken Shaw a considerable amount of time to sell their position themselves.
The $6.80 price tag was also a price the underwriters felt they could sell the shares at, given the price had recently been above $8. It then became the underwriter's job to assimilate those shares into the public's hands. The underwriter will find buyers for those more than 80 million shares.