Accretive Acquisition

finance a la shmoop. what is dilution? ownership is a pie.

here's 100% of pie. it's divided into 20 million slices, there there you just [man holds pie]

can't see them. each is a share of ownership in the company whatever.com

well one day the CEO of whatever.com decided she wanted to buy her hated

competitor something.com for 2 million shares. then she wanted to buy her

marketing vendor sell my butt off.com for a million shares. well her stock had

been trading at 12 bucks a share for a total market valuation of 240 million

dollars .see we get that 12 times 20 million. but then after printing 3 [equation]

million more shares to buy her competitors,

well she now has 23 million slices of pie .and yes that's how it works!

companies can essentially just go to the Xerox machine and print shares of their

own stock, that they didn't formerly own. but now she has 23 million shares [printer prints shares]

outstanding and not 20 million. so at $12 a share the stock market is valuing her

company at a meaningfully higher price. 12 times 23 million is 276 million. it's

saying that the value of the three million share dilutions she took in

buying something dot-com and Sell my butt off.com [woman waves to camera]

was the difference between the 276 million in the 240 million or 36 million

bucks. but let's say the market value had stayed flat at 240 million. well now with

23 million shares out the stock is only worth 10 dollars and 43 cents a share,

instead of the previous $12 a share. in other words shares have been diluted

each share of whatever com is no longer worth as much as it used to be. that pie

isn't looking quite as appetizing now is it? [man frowns in kitchen wearing apron]