On Thursday, December 17, 2009, Citigroup stated that is was going to take in $17 billion by selling stock for use in paying back money it received from the Federal government under the TARP program when the economic crisis hit and its terrible management and investments were exposed.
Each new share will be priced at only $3.15. To raise $17 billion means that the company will have to issue $17 billion / $3.15, or about 5.40 billion new shares! If you bring up a stock quote for Citigroup at Yahoo! Finance and click on Key Statistics, you can see that Yahoo had 22.76 billion shares outstanding (as of its last filing with the government) before the new offering. Therefore, dividing 5.4 billion new shares by the 22.76 billion currently existing shares shows that soon there will be 24% more shares outstanding.
That’s like you and three friends working hard and opening up a restaurant. You’re excited to be one of the four owners, especially when you realize you are entitled to 1/4 of the profits. Next thing you know, a 5th owner shows up! What just happened? Your ownership interest was just diluted!
On December 16, the day before the announcement, Citicorp’s share price ended the day at $3.45. The following day, after the announcement was made of what Citicorp intended to do, the stock opened at $3.16 to reflect the fact that with all these new shares about to be issued, each share was about to become less valuable. It also brought the price in line with what all the new shareholders would be paying.