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Dangerous Minds

On April 28th, 2006, the shares of Labopharm shot up over 10% on more than average volume. Why did the shares go up? On April 27th, the shares closed at C$9.02 and on April 28th, the shares closed at C$9.99 - up over 10%. The reason for this is quite bizarre and shows how irrational the stock market really is.

Before the market opened on April 28th, the following news was released:

"Labopharm Inc. (TSX:DDS) today announced the public offering of 11,000,000 of its common shares at a price of US$8.00, representing an increase of 1,000,000 shares from the 10,000,000 shares originally proposed to be offered. The total net proceeds to the Company are expected to be approximately US$80,900,000 million."

Now, is this really good news? The company is issuing 11,000,000 common shares instead of the 10,000,000 common shares originally proposed. The 11,000,000 common shares represent 25% of the outstanding common shares of the company. This means that each common share after the offering is completed is worth 25% less than each common share before the offering (because whatever earnings the company earns has to be shared with 11,000,000 more common shares than before)!

I fail to understand why the shares went up 10% on the day the news was released. Maybe the market was happy that the company will have US$80,900,000 more in its pocket? Still, I can't believe the market is happy that their shares are worth less now. What are these people thinking? Dangerous minds are at work here!


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