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Why the AVEVA share price plunged 20% on Wednesday

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The AVEVA (LSE:AVV) share price plummeted on Wednesday 25 November to hit a low not seen since April. 

The frightening drop saw the FTSE 100 software firm lose a total of £1.36bn from its market cap. Outside of a wider market crash, it’s extremely rare to see the share price of stable FTSE 100 companies fall this much.

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And with stock markets building intense bullish pressure in recent days, shareholders might be concerned to see such a steep drop.

So what exactly happened?

Making it right(s)

In early November, it announced a £2.84bn rights issue to help it fund a buyout of US software group OSIsoft

Three months earlier, AVEVA said it had agreed a total £3.8bn takeover bid for the US real-time data producer. 

CEO Craig Hayman said this at the time the takeover bid was announced: “Combining AVEVA and OSIsoft is yet another significant milestone in our journey to achieving the ambitious growth goals that we have set.”

When companies grow to a multi-billion market cap, they often find it difficult to grow organically. Even quite large increases in sales or profits can make little difference to the share price. So that’s why they tend to take over rival companies. That is, if they are able to find a willing participant.

The firm’s growth has been steady, rather than spectacular, over the past decade. In that time the AVEVA share price has grown by around 105%, from 1,500p to today’s price.  

AVEVA share price down

In order to pay for the massive buyout, AVEVA said it would need to issue 125 million new shares at 2,255p each. Current investors would be allowed to buy seven of these rights issue shares for every nine existing AVEVA shares they own. So if they currently hold 900 of the shares, investors will be entitled to buy 700 new ones.

This complex calculation is similar to that faced by Rolls-Royce shareholders recently. In order to raise £2bn to help shore up its balance sheet, the FTSE 100 defence and engineering firm said it would issue 6.4bn new shares. So, for every three shares an investor held, they could buy 10 more at a cheaper price. 

Heavy discount

The rights issue price of 2,255p came at a 32% discount to what is called the ‘ex-rights issue’ AVEVA share price of 3,338p. That was the value of the share price at the close of business on 5 November 2020, when the plan was announced. 

So these new shares officially started trading on the morning of Wednesday 25 November. And  markets priced it in. That’s the main reason why the share price fell by 20%.  

AVEVA’s largest shareholder is French data-centre provider Schneider Electric. In 2017 the two companies agreed a £3bn merger. Schneider then took a 60% stake in the enlarged business. And it said it would take part in the new rights issue in full.

AVEVA said it would find the rest of the money it needs for the OSIsoft takeover by using cash reserves and by issuing shares to OSIsoft co-owner Estudillo Holdings.

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TomRodgers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.