[Beginner's Guide to Stock Investment] Hanwha-Daewoo Shipbuilding 'Big Deal'... What is a Third-Party Allocation Paid-in Capital Increase?

[Image source=Yonhap News]

[Asia Economy Reporter Kwon Jae-hee] There was an issue that stirred up the market last week. It was the Hanwha-Daewoo Shipbuilding & Marine Engineering 'big deal.' Regarding the acquisition method, Daewoo Shipbuilding & Marine Engineering announced that it decided on a third-party allotment paid-in capital increase worth 2 trillion won. So, what exactly is a third-party allotment paid-in capital increase?

What is a third-party allotment paid-in capital increase?

There are mainly three methods of paid-in capital increase: rights offering to existing shareholders, third-party allotment, and public offering. Generally, rights offerings and public offerings are quite negative for stock prices because they increase the number of circulating shares due to large-scale fundraising. On the other hand, third-party allotments often act as positive news.

The third-party allotment method, as the name suggests, targets special related parties or other investors who are not existing shareholders.

Why does it act as positive news for stock prices?

On the morning of the 6th, at the temporary shareholders' meeting held at the Korean Air headquarters in Gangseo-gu, Seoul, Woo Ki-hong, President of Korean Air, who presided over the meeting, struck the gavel after presenting the agenda to amend the articles of incorporation to increase the total number of issued shares for a paid-in capital increase. 20201.01.06

A third-party allotment paid-in capital increase is positive because the shares allotted to the third-party investors are subject to a one-year lock-up period (investors participating in the third-party allotment cannot sell those shares for one year), so the number of circulating shares does not increase. While raising funds, the number of circulating shares does not increase, and it also has the effect of investment by a large corporation, which often positively impacts the stock price.

What should you definitely check in a paid-in capital increase announcement?

From an investor's perspective, the first thing to check when a paid-in capital increase announcement is made is the method of capital increase. If it is confirmed to be a third-party allotment, the next step is to check who the issuance targets are. Whether it is a private equity fund, a large corporation, or a foreign company.

Since the new shares are locked up for one year, there is no immediate supply pressure, but after one year, depending on the issuance target, shares may be released into the market. Private equity funds and foreign companies often make short-term investments. If the stock price is above the issuance price after one year, they are likely to sell.

However, large corporations are different. They often participate in third-party allotments to secure part of the shares and maintain a long-term stable partnership. Investment by large corporations is positive for stock prices due to symbolism, fundraising, and limiting the increase in circulating shares.

Even with the same paid-in capital increase, the method of allotment can act as either positive or negative news for stock prices. Do not be intimidated just because it is a paid-in capital increase; I recommend developing a habit of carefully reviewing the announcements. The more you know, the more you see, and the more you see, the more it will help your investment decisions.

Editor's Note [Beginner's Guide to Stock Investing] is a smart investment guide for 'Joorini' (stock + beginner). We will kindly and easily explain stock stories unfamiliar to beginners.