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By Mark McSherry
NEW YORK Dec 13 Securities experts have a
message for shareholders of pressured financial firms who worry
that their interests may be diluted when their companies seek
big capital injections: Get used to it.
As the global credit crisis deepens, other financial firms
are expected to follow the examples of Citigroup (C.N), E*Trade
(ETFC.O) and UBS UBSN.VX by securing big infusions of capital
in exchange partly for a stake in the firm.
When companies issue new shares or convertible securities,
a reduction in earnings per share can be the result. Increasing
the number of shares outstanding can reduce the value of
existing shareholders' investments.
"It's a big negative, but it's better than the
alternative," said Sean Egan, managing director of independent
credit-rating firm Egan-Jones Ratings Inc. "These times are
more trying than normal."
The worldwide credit squeeze took a drastic turn on
Wednesday, when the U.S. Federal Reserve and counterparts in
Europe, Canada and Britain got together to provide funds to
boost liquidity in their first coordinated action since terror
attacks shut U.S. financial markets on September 11, 2001.
"In the case of all the (financial firms), market
perception is critical," said Egan. "When problems arise, they
need to address them fairly rapidly, and you worry about those
companies which haven't been able to address their problems in
a substantial way."
Massive mortgage-related problems and the credit market
crisis are forcing more and more financial firms to urgently
Last month, Citigroup sold up to 4.9 percent of itself for
$7.5 billion to the Abu Dhabi Investment Authority, and E*Trade
got a $2.55 billion infusion from investors led by Citadel
Investment Group, which gained about 18 percent ownership of
On Dec. 10, The Government of Singapore Investment Corp
(GIC) injected about $9.75 billion into UBS for a stake of up
to 9 percent in the Swiss bank, and an unnamed Middle East
investor agreed to buy a further stake in UBS of about 1.5
One securities expert said some financial firms will prefer
private injections of cash to public offerings, partly because
public deals can entail disclosure of financial details that
might spook investors.
"These are firms that are distressed and may have trouble
meeting regulatory requirements," said professor John Coffee of
"And it would be extremely difficult to go public having a
public offering because you were disclosing that you were short
of the capital needed to meet your regulatory requirements."
Coffee said fourth-quarter results should be watched
carefully for more write-downs and that more banks can be
expected to seek capital injections.
"Even when it is dilutive, there might have been worse
alternatives," said Coffee. "If you had to go for a public
sale, that could have had an even more depressing effect on the
Despite the threat of dilution to shareholders' interests,
the big capital injections have on the whole been well received
by the markets.
Another experts thinks he knows why.
David Easthope, senior analyst at financial consultancy
Celent, said he views the capital injections fairly
Easthope said that while long-term investors are usually
very disappointed by dilution of their interests, another set
of investors can get very excited.
"When you see the write-offs and you see the dilution you
have a whole new set of investors to come in and say maybe the
worst is over ... maybe now is the time to jump in," said
"Some of those investors could be very excited ... it sends
a nice signal that there are these white knights willing to
(Editing by Brian Moss)