Corporate Actions (Share Consolidation)

Source: BURSA ACADEMY | Published: June 2020

Corporate actions are decisive events or changes initiated by publicly listed companies that might affect itself. Typically, these actions happen when a public company is changing materially – and these changes might reflect positively or negatively on the equity or debt securities issued by it.

In other words, a corporate action directly impacts its shareholders, stockholders and bondholders. Hence, decisions to make such changes must have the approval of the company's directors.

Corporate actions include rebranding, spin-offs, mergers, acquisitions and rights issues as well as important financial decisions such as issuing dividends. Another kind of corporate action is share consolidation.

Share consolidation (also called a 'reverse stock split' or a 'reverse share split') is a corporate action initiated by a company to combine a set number of shares into one share. This consolidation reduces the number of shares trading on the stock exchange without reducing their combined value.

Although share consolidation leaves shareholders with numerically fewer shares, the shareholding's value and rights remain unchanged.

For example, if the consolidation – or the reverse split – is 10 to 1, then every 10 shares will be reduced to 1. Hence, if you are holding 50,000 shares of a company, it will be divided by 10 and your new holding would be 5,000. However, the worth of your investment will remain unchanged although your holding has changed. When a share is consolidated, the price per share will be valued to the number of reverse splits and, in this case, your investment will be multiplied by 10. Therefore, if before consolidation the price per share was RM0.01, it will now be worth RM0.10 per share after consolidation.

As this kind of corporate action might affect its image, a company must have a solid reason to go in for share consolidation. When the value of the company's stock drops to a point near or below the minimum price of shares, the only way to drive it up is by increasing the price per individual share through share consolidation. Increasing the price ensures the survival of the company's shares in the exchange.

To some companies, having a high price per share is important to attract many mainstream investors as not many would be keen to deal with a company whose stock is below the minimum price.

Planning a spin-off is another reason for share consolidation. A spin-off happens when a company creates a new and independent company from one of its existing divisions or business activities. The new shares in the new company are expected to be worth more when sold or distributed. The share price of the existing company usually increases due to the impact of the consolidation.

Share consolidation was popular in the post dot-com bubble era (at the turn of the century) when many internet-related companies saw their stock price decline to worthless levels. It is also common for many small, non-profitable research and development companies around the world to undergo share consolidation simply to maintain their listing on a premier stock exchange.

In general, share consolidation is perceived negatively, especially by investors. When investors see the stock price plummet, share consolidation will be seen as an accounting tactic to save the image of a company that is not performing well. As a result, they usually sell the company's shares, which eventually brings down the price again.

However, as bad as it seems, share consolidation might be able to boost the stock value and the company's prospects. This, quite frequently, attracts new investors to the company and helps resurrect its fortunes.

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Tags: COMPANY CHANGES, CORPORATE ACTIONS, DECISIVE EVENTS, PUBLIC LISTED COMPANIES, SHARE CONSOLIDATION

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