Rights Offers The Case of Time Warner

Rights offers have become less and less common in the United States. However, as media giant Time-Warner's 1991 $2.76 billion offer indicates, they are far from dead. The Time-Warner offer was the largest equity sale of any type in U.S. history, and it was the largest rights offer since AT&T's $1.4 billion issue in the 1970s. The offer was controversial when it was originally proposed because the subscription price varied depending on what percentage of the issue actually sold. This feature was later dropped, and the stock was sold using a straight rights offer.

In the Time-Warner deal, the stock was trading in the $90 range just before the offer became effective, and each right entitled the holder to purchase .6 new shares. The subscription price was $80 per share, so 34.5 million shares were sold. Approximately 56 percent of the stockholders in Time-Warner exercised their options directly and purchased stock. Another 42 percent sold their rights on the open market; these rights were standby underwriting

The type of underwriting in which the underwriter agrees to purchase the unsubscribed portion of the issue.

standby fee

An amount paid to an underwriter participating in a standby underwriting agreement.

oversubscription privilege

A privilege that allows shareholders to purchase unsubscribed shares in a rights offering at the subscription price.

Ross et al.: Fundamentals VI. Cost of Capital and of Corporate Finance, Sixth Long-Term Financial Edition, Alternate Edition Policy

16. Raising Capital

© The McGraw-Hill Companies, 2002

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