Treasury Offering: An Overview
A treasury offering is a sale of stock by a publicly-traded company from its own inventory. These are shares that have been registered with the Securities and Exchange Commission (SEC) for sale but were not actually sold, or were repurchased by the company.
Public companies often withhold a number of shares from the total they are authorized to sell. These shares then become treasury stock and can be held in reserve until the company decides to sell them.
- A treasury offering is a sale of company stock that has been approved for sale but was not previously sold.
- For companies, it's a relatively quick and cheap way to raise money to invest in the business.
- For investors, it causes a dilution of their shares' value.
Understanding the Treasury Offering
Unlike common stock or preferred stock shares, treasury stocks are not indicated as outstanding shares in the company's financial statements. Therefore, they are not included in calculations of dividends or earnings per share.
However, even though treasury stock is not in circulation, investor awareness of the existence of these shares can affect market sentiment and activity in the firm's publicly traded shares.
Companies have the option of "retiring" treasury stock, though they may well decide to hang onto them in case they need or want to raise new cash.
The Case for a Treasury Offering
Treasury offerings are undertaken in order to raise capital for new projects or investments in the business. They are generally less expensive and less time-consuming than similar methods of raising money, such as issuing new common shares or preferred shares. These involve hiring an investment bank to manage the process as well as filing with the SEC.
Treasury offerings also allow the company to avoid issuing debt to raise capital. Taking on new debt can be particularly troublesome and expensive during a downturn in the business cycle or a period of high interest rates.
By issuing a treasury offering of stock already owns, the company does not incur additional costs to create shares.
The Downside of a Treasury Offering
Treasury offerings are particularly tempting when a company's shares are trading at historically high valuations. However, investors are watching, as always.
Like stock sales by executives, a company's treasury offering may be taken as a sign that the company's outlook is not altogether positive and it is looking to sell shares while the market price is high.
Impact on Existing Shareholders
Additionally, treasury offerings cause dilution in the holdings of existing shareholders. Treasury stock that is sold becomes outstanding stock, and its owners are entitled to the same pro-rated amount of earnings and dividends as all other shareholders. The company's earnings and dividends must be divided among a greater number of shares.
So, the process inevitably results in a smaller claim on a company's earnings and dividends for investors who held shares prior to the treasury offering. This is referred to as the dilution of existing shares.
A stock buyback has the opposite effect. It reduces the total number of outstanding shares in a company, increasing the value of each share.