Imagine you're the chief exec of a carmaker - should you finance your new yottafactory via selling shares, or should your instead borrow money from the bond market?
As a competent chief exec you will be telling the public frequently and often that your company is well worth its share price, and then some. You will sing grand songs about the future, about chatbots, about self-driving cars, blockchains, generative AI, whatever. Anything to support the share price. Or better yet, increase it.
But your finance director (who is dour, and keeps tweeting about IFRS guidelines on revenue recognition) will have an internal model for what the company is really worth. If your market cap is much higher than his private valuation, he will advise you to issue shares instead of issuing bonds.
A high share price relative to your true value constitutes the defacto ability to finance cheaply.
Companies do tend to recognise when their shares are overpriced. They start doing funny things, like acquiring other companies in "all-share" transactions. Those are the kind where you buy someone, but pay with your own shares.
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One of the companies most successful at optimising its own financing was Teledyne.
The 1960s were a time of huge hype for "conglomerates" - companies consisting of many different and unrelated subsidiaries. The theory at the time was that there were big synergies between these constituent businesses.
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Teledyne bought a lot of stuff during this area, inhaling over a 100 other companies and bloating up itself substantially. At the highest point in the bubble period Teledyne's share price was $130.
The bubble popped around 1970. It had become clear to all that there was no specific reason for you to buy your dinner from the man who'd sold you your microwave.
Responding to its new, post-bubble, lower share price, in 1971 Teledyne disbanded its mergers and acquisitions team. Unable to pay with its own overvalued shares, it never bought anything again.
Instead, with its internal models showing that Teledyne's own stocks were now dramatically undervalued, it started to buy them back at the new, lower, price of $15 a share. In fact Teledyne even took out loans in order to fully capitalise on its own low share prices.
From the article:
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