The Age of Grand Dilution

Accepting dilution while raising cash is an admission of failure and a mark of embarrassment—like pawning the family silver to pay off gambling debts. "It is not something that we are proud of," said National City's Raskind. But for shareholders, there is something of a silver lining. Investors, employees and politicians alike were outraged when former CEOs like Chuck Prince of Citigroup and Stanley O'Neal of Merrill Lynch, who presided over financial train wrecks that required dilutive capital-raising efforts, walked away with mammoth retirement packages. Raskind, who owns 287,617 shares of National City, has suffered the same proportional financial harm as an investor with 50 shares.

Raskind also owns options on more than 1 million shares of National City. Investors value stocks by placing a multiple on a company's earnings per share. Since National City is effectively tripling its number of shares, any future earnings will be distributed across a much broader base. In order to report earnings of $1 per share, predilution, the company would have had to earn $635 million. Now it'll have to make $2 billion. According to National City's proxy filing, Raskind's options, some of which expire in 2010 and 2011, will generally have value only if the company's stock hits $30. If the stock doesn't quintuple in the next three years, many of Raskind's options won't be worth the pixels they're stored on. In this case, at least, there's no diluting the toll shareholder dilution will take on the CEO's personal finances. "The stock options that I may have been granted in the past are way, way out of the money, and probably will be for a long time," Raskind said. "And that's the way it should be."

© 2008