The theory of the firm features a thriving academic debate about whether responsibility to shareholders or responsibility to broader stakeholders should be the founding principle of corporate life.
You can’t fit raising billions of dollars from shareholders merely because the stock price is wildly overvalued into either rubric. Maybe the academics should be following Reddit’s
Entertainment memes, because the movie-theater operator’s maneuver last week to raise $817 million by selling shares into a wild froth—the latest in a series that quintupled its share count since September—adds a third constituency often missing from the theory of the company: the company itself.
The most obvious reason for a company to exist is to benefit its shareholders, and on a basic shareholder-value measure AMC has excelled: Its stock is up 2,494% this year. Social-media savvy Chief Executive
(who bagged the @CEOAdam handle on Twitter) can take some of the credit, hamming up the stock with free popcorn for shareholders and spending an hour being interviewed by one of the self-styled “apes” who bought AMC and call him their “silverback.”
With some twisted logic one could argue AMC was only doing what shareholders really want. Lots of new people want to buy shares (AMC was the most-traded U.S. stock last week), so it is only right that the company should create and sell them. Never mind that AMC, in the prospectus selling the stock, includes an extraordinary boldface warning not to buy it.
Taking a more cynical view, one could argue that AMC is acting for the benefit of the shareholders who will remain after the excess evaporates. Sell shares at today’s elevated prices and use it for something useful, like buying distressed sites or paying off debt, and whoever the owners are after the shares fall back will have the assets. No one was obliged to buy the stock, after all. Caveat emptor.
Really, though, this isn’t about shareholders. View the company as something distinct from its set of owners, and it makes perfect sense. Why is AMC raising cash? Because it can. No one can be surprised that a heavily indebted company making big losses chooses to keep some of the money being thrown at it, even if it isn’t in the best interest of the new shareholders.
The same principle was behind the share issue by Hertz during its bankruptcy, which came with the warning that the shares were likely to be worthless (a warning that turned out to be wrong after Hertz emerged from chapter 11). ViacomCBS announced an opportunistic $1.7 billion share issue in March, after its shares had a senseless price boom. Boom turned to bust after the issue and took down family office Archegos, but Viacom still had the $1.7 billion.
Believers in shareholder value should be outraged by opportunistic stock issues. If you are a shareholder, you only want to be diluted by new shares if it is to save the company from disaster—to be fair, this was the aim of AMC’s earlier emergency fundraising—or to finance new projects that will generate a big enough return to justify the use of capital.
Instead, AMC’s latest issues are essentially trading against its own shareholders, issuing new stock when it is expensive because it is expensive. Investors are providing it with cheap capital, and Mr. Aron is delighted to take it.
“In our view this is not mindless dilution, but rather this is very smart raising of cash so that we can grow this company,” he tweeted. “Watch out naysayers, $AMC is going to play on offense again. Here we come!”
The obsession of institutional investors with corporate governance is in part about preventing boards from thinking like this, something they succeeded in doing in April when they forced AMC to abandon an effort to approve in principle 500 million new shares, although AMC is now trying to get an extra 25 million authorized. Institutional investors don’t want companies to grab every opportunity to issue new stock and go on a spending spree, because it is earnings and dividends per share that matter to investors, not the net income or sheer size that matter so much to CEOs.
Mr. Aron pays lip service to this principle, frequently pointing out that he’s a shareholder too. Aside from anything else, he was given 1 million shares last year after the company concluded there was no chance of reaching prior goals of $12 to $24 a share within 10 years, and waived the conditions of the award. He qualified for another 500,000 thanks to the stock-price run-up this year, which took the price to a high of $72 a share on Wednesday, before dropping back to $55 on Monday.
What should AMC, or Hertz, or any company watching a wild run-up in their stock, do? The first real meme stock, computer-game retailer
did pretty much nothing, seeming to be embarrassed that it was suddenly worth more than most of the S&P 500. Management plugged away at its restructuring plan, getting on with running the company; but nothing the executives do could ever justify such a silly share price.
AMC took the opposite approach by extracting large amounts of cash from the Reddit gamblers, while engaging and giving them the respect they want. Anyone who doesn’t want in has had plenty of time to sell at ludicrous prices, so I’m with Adam: Ditch the theory and go for it. Hey, it might even work out—four months on, GameStop shares are still up there.
Investors who care about long-term returns and earnings per share should keep away, of course. But Mr. Aron should bask in the glory of running a meme stock and raise as much money as he can before the crowd moves on.
Write to James Mackintosh at email@example.com
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