What is Assimilation?
Assimilation is the absorption by the public of a new or secondary stock issuance after the underwriter has acquired it. Consider, a company offers a particular share as stocks through an initial public offering (IPO) or a secondary offer. These shares will then be assigned first to one or more underwriters who will then be responsible to sell the shares to the public.
When a company brings new stocks or secondary stocks as an offer to the market, they are primarily purchased by an underwriter who then takes on the responsibility to sell these shares to the general public. Once all the shares have been sold, the stock is regarded as absorbed. This entire process is referred to as assimilation.
When the underwriter sells these shares to the public, they are traded just like any other asset on the secondary market. A well-known company that sets a fair share price will have a greater chance of seeing its new shares assimilated quickly. In the case of in-absorption or when shares are not easily absorbed or assimilated, there is an indication that shares were improperly priced or inadequately marketed.
Example of Assimilation
ABC Ltd is a major shareholder in XYZ Corp and ABC Ltd wants out of its current market position. Instead of simply selling their shares in the open market, ABC Ltd got an underwriter to buy their shares, which were greater than 100 million shares, in a bought deal.
ABC Ltd received Rs. 1100 per share from the underwriter even though the stock closed at Rs. 1192 the day before the deal was announced. ABC Ltd was willing to take the reduced share price in exchange for a clean exit from their position and not having to unwind the large position themselves.
XYZ Corp’s stock was averaging a daily volume of about 580,000 shares from the start of the year through the time of the announcement in April. It would take ABC Ltd a considerable amount of time to sell their position themselves. The Rs. 1100 price tag was also a price at which the underwriters felt they could sell the shares, given the price had recently been above Rs. 1192. It then became the underwriter's job to assimilate those shares into the public's hands by finding buyers for those 100 million-plus shares.
Effects and results of Assimilation
If there is a lack of assimilation, it could be a potential sign of distrust in the company or the investors believe that the company’s stocks are overvalued. This lack of assimilation can also occur due to limited knowledge and awareness of the stock bid. This would be a mistake on the part of the underwriter and has nothing to do with the position or perception or trust level of the company itself.
If further shares are issued by a particular corporation, the new shares will be merged into existing shares possibly resulting in dilution. The new shares, bearing the same rights and entitlements as the initial ones, will be different from the present. In the condition of an IPO, the shares will provide the rights and entitlements given by the issuing company.