Raising shares could be costly for Merrill Lynch

By Dan Wilchins
July 8, 2008

Merrill Lynch raised more than $12 billion in December and January, but the capital offerings included an unusual feature: a promise to protect the investors from future capital raising.

Those provisions are limiting Merrill Lynch’s choices now as it looks to raise capital. If Merrill were to try to offer more than $1 billion of equity capital at its current share price, it would have to raise an additional $4 billion under the provisions of the December and January deals, to compensate those investors.

That’s why Merrill Lynch is much more likely to try to sell assets, analysts said.

Below is a table that shows how much additional capital Merrill Lynch would have to raise if it tried to sell at least $1 billion of common stock or securities convertible into common stock. The top table assumes that Merrill sells shares at its current share price.

The interactive calculator below that allows you to input a share price, to see how much more Merrill would have to raise.

The calculation is based on the approximate number of shares Merrill sold in its December 24 offering, and the number of shares that its January 15 convertible offering can convert into. If Merrill issues shares at a price below the “share price embedded in those offerings,” it must compensate the December and January investors. The additional payment Merrill must make is essentially equal to the “share price embedded in those offerings” minus the current share price, times the approximate number of shares sold.

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