Today I’ll try to clear up some of the profound confusion that runs rampant in the minds of retail investors.
Every bartender knows you can’t dilute a beer by adding a shot of whiskey. The boilermaker is always stronger. The same is usually true when a public company sells new stock for cash. The company is stronger and better funded after the transaction than it was beforehand. Frequently, however, the existing stockholders recoil in terror from a vague threat of dilution and bail out instead of celebrating.
For astute investors, these are great buying opportunities.
Most readers know I’m rarely bullish about A123 Systems (AONE), or for that matter any pure-play lithium-ion battery developer. Since I believe that it’s critically important for my readers to understand what dilution is, I’ve decided to break away from tradition, jump to A123′s defense, and explain why A123 is a far better risk today than it’s ever been.
Every IPO prospectus is filled with dire warnings of dilution because IPO investors always pay a price per share that’s higher than the book value of the stock owned by the pre-IPO stockholders. In A123′s IPO, its pre-offering book value was $2.34 per share, the IPO investors paid $13.50, and
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