CGB (ASX) Ann: Q&amp;A on the merger of QBL MCL and Medcan

Originally posted by Tomasp ↑

Hi @elit

I was actually reading a book recently "The Warren Buffett Way". In it the author discusses the issue of number of shares outstanding and how it actually does play a crucial role in a company's performance and SP.

I present to you a made up (and very simplistic scenario) to highlight this issue. Suppose you own a company which has 10 shares and currently makes $0. Now all of a sudden, the company makes some great progress and starts generating revenue, assuming they were able to make $10 profit.

Now this $10 profit is split among the 10 shares, and gives every shareholder $1 in their pocket in earnings (dividends). Assuming the 'market' values this company at a P/E ratio of 20, this $10 profit values the company at $20 per share. This means each shareholder gains $1 in dividends and $20 in capital gains for a total gain of $21 per shareholder.

NOW, assume this same company instead of having 10 shares has 20 shares. Now the same $10 increase in profits suddenly gets split among 20 shareholders for a total earning per share of 50c and based on the same P/E ratio a SP of $10. This means each shareholder only gains $10.50 per shareholder for the same increase in profits.

So now consider QBL. A company with currently 1.5bil shares on issue, and post-acquisition becomes 3bil shares on issue. It means any positive steps the company takes is suddenly 'lost' because of the large number of shares on issue. All of a sudden for the company to have the same impact on SP and valuation, it essentially needs to make double the progress it planned to make in the first place. And instead of being a company that generates $100 mil in bottom-line profits, now suddenly needs to generate $200 mil in bottom-line profits - which is a lot harder - to end up in the same position it was before.

Just something to consider for all those people out there who are inclined to think it doesn't matter much about the number of shares on offer.

Expand

But think of it this way - of that $20om in profits - say they issued this all in dividends - 45% of that would still be going to AK and others part of the 45%. AK and co issued shares they still get 45% of the $200m. While if any extra shares issued all share in the dilution where previously that is not the case prior to the issue. I can't quite see the logic of your arguments that issuing shares to get something of value is a bad thing as long as what issuing shares for at least equal to the value of shares issued. Big Daniels post for my mind summed up well this. Ok number of shares on issue a lot but is about % of company that AK and co own in post QBL share register and the number of shares a reflection of that- but suspect they will do a consolidation at some stage and problem solved.

Ann: Q&A on the merger of QBL MCL and Medcan, page-506