No. of Recommendations: 6
From an SVB board perspective, what were the advantages of raising a portion of the suddenly-needed capital via convertible preferred stock? (Presumably with the alternative being just immediately issuing more common shares from their treasury?)
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I would summarize the tactical (but existential) mistake this way:
1) SVB did the math in its head to determine it needed X dollars of new equity investment to make up for the loss in valuation of the securities it was having to sell to make up for depositor outflows.
2) They COULD have immediately issued standard votable shares worth $X billion to close up the gap and presumably return to solvency.
3) Instead, they decided to split the sourcing of the $X billion needed between traditional common share sales and CONVERTIBLE shares, which may provide a higher assurance of dividends but also typically provide zero voting rights. Had SVB survived, this approach would have reduced the dilution of voting power of the existing shareholders, including presumably the board.
4) A convertible offer requires more logistics (hence, TIME) to be coordinated to define legal terms, etc. This was time that SVB did not have.
5) By publicizing the plan, SVB leadership a) clearly identified the size of the hole in its books, b) that further spooked local start-up depositors who were over the FDIC limit, c) conveyed to the public that TWO separate sales were required to plug the hole and that one of the two sales efforts would be delayed which triggered MORE panicked withdrawals.
6) The extra time required to originate the convertible sale provided an extended window for more depositors to pull their money the next morning which further widened the insolvency, triggering the FDIC to close the doors.
In essence, by being greedy by trying to close the gap with a portion of shares that did less to dilute control of the firm by existing shareholders, SVB execs accelerated its complete failure.
WTH
