Ideaya Biosciences(NASDAQ: IDYA) stock is falling in Wednesday's trading. The company's share price was down 8.1% as of 11 a.m. ET, according to data from S&P Global Market Intelligence.
Ideaya Biosciences published a press release after the market closed, announcing a new public stock offering. While the move will help the company raise funds, it will also dilute the holdings of existing shareholders.
Why do investors hate Ideaya's stock offering?
Ideaya stock closed out yesterday's daily trading session priced at $27.25 per share. After the market closed, the biotech specialist announced that it would be raising roughly $125 million in funding through the sale of 5.32 million shares and prefunded stock warrants at a price of $23.50 each. This price was significantly below where the stock had been trading the previous day.
Other than creating a new source of funding, issuing new stock through a public offering doesn't do anything to change the material conditions of the business. If the company's stock price were to remain exactly the same before and after the offering, the company would have exactly the same market capitalization.
New stock offerings increase the total number of shares that a company is divided into. While selling new stock can be a necessary or prudent way for a business to raise capital, it means that people who already owned shares suddenly find themselves owning a smaller overall piece of the company. As a result, large stock offerings are often followed by significant declines in a company's share price.
What comes next for Ideaya stock
Ideaya expects the new stock offering to close on or around Oct. 27. Priced at roughly $25.50 per share as of this writing, the stock is still trading significantly above where shares and warrants are expected to be priced in the near future. But that doesn't mean that the company's share price will necessarily drop to the $23.50 price outlined in the company's recent press release.
In order to sell a large number of shares at one time, it's not unusual for a company to find buyers for the stock at a price that is below its recent market close. These deals are often conducted through third-party underwriters in order to prevent a large amount of stock from hitting the market and driving prices down even further.
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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
