GrubHub shares were down more than 8% on Monday after the company announced that it would issue about 10 million additional shares.
The offering is comprised of about 8.7 million shares being sold by members of the company’s board and management, and 1.25 million shares sold by the company. The proceeds from stock being sold by company insiders won’t go to the company.
When companies issue more stock, they are said to be “diluting” their shares, as the greater number of outstanding shares spreads earnings thinner, often leading to a decline in the price of the outstanding shares. You could also think of this as “watering down” the stock.
This discounting has a mathematical origin, of course, but the origins of the phrase are rooted in Wall Street lore.
In Benjamin Graham’s “The Intelligent Investor,” The Wall Street Journal’s Jason Zweig, who updated and annotated the most recent version of Graham’s book, gives us the origins of “watering” or “diluting” a stock’s float.
“And, in earlier days, a company that drastically diluted its shares (with large amounts of convertible debt or multiple offerings of common stock) was said to have ‘watered’ its stock. This term is believed to have originated with the legendary market manipulator Daniel Drew (1797-1879), who began as a livestock trader. He would drive his cattle south toward Manhattan, force-feeding them salt along the way. When they got to the Harlem River, they would guzzle huge volumes of water to slake their thirst. Drew would then bring them to market, where the water they had just drunk would increase their weight. That enabled him to get a much higher price, since cattle on the hoof is sold by the pound. Drew later watered the stock of Erie Railroad by massively issuing new shares without warning.”
So that’s where we get the phrase.
However, GrubHub told us they were selling shares, and so investors today, unlike those in the 1800s, are able to discount shares accordingly, instead of getting stuck buying water-logged cows.
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