By  on February 22, 2005

According to Joseph Stein, a banker at the investment banking firm of Peter J. Solomon Co., “A secondary offering is a [subsequent] offering once a company has gone public.”

He pointed out that public companies can raise cash in a number of ways, such as borrowing money from a bank and issuing a bond. Going to the equity markets is another avenue in which a company can raise additional capital.

Stein also noted that secondary offerings can be used as a liquidation strategy by investors who hold restricted stock, but want to sell some of it in order to put the cash into other investments. The key difference in this scenario is that the “proceeds from the sale go to the selling shareholders instead of the company,” he explained.

Another difference is that new company-issued shares dilute the value held by existing shareholders. When a secondary is offered for existing shares, dilution is not a factor since it is only ownership of those shares that changes hands.

Polo Ralph Lauren did a secondary public offering in 2002. What was sold were the 11 million Polo shares owned by Goldman, Sachs, which the investment bank acquired in 1994. In 1997, when Polo went public, Goldman sold 2.2 million shares and retained 22.7 million.

Wall Street perceives secondary offerings as a plus since it allows larger “institutional investors to buy into a company,” Stein said. The institutional investors tend to buy in bulk, in blocks involving millions of shares and larger blocks provide for more liquidity in the markets.

Stein, who has no knowledge about what the Smith family members may be contemplating regarding their shares, said secondary offerings “are an option for wealth transfer reasons. It can be an important estate planning tool or help in wealth diversification.” He added that in order to help stabilize the stock price of Neiman Marcus Group, one option is for an intermediary to help the family sell the shares on a systematic basis instead of flooding the market with a huge chunk of shares at one time.

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