CORPORATE ACTIONS
MAY2014
1
What Are Corporate Actions
2
Kinds of Corporate Action
3
Stock Splits
4
Dividends
5
Right Issues
6
Mergers and Acquisitions
7
Spin Offs
8
Conclusion
2
What Are Corporate Actions?
When a publicly-traded company issues a corporate action, it is initiating a
process that will bring actual change to its stock. By understanding these
different types of processes and their effects, an investor can have a clearer
picture of what a corporate action indicates about a company's financial affairs
and how that action will influence the company's share price and performance.
This knowledge, in turn, will aid the investor in determining whether to buy or sell
the stock in question.
Corporate actions are typically agreed upon by a company's board of directors
and authorized by the shareholders. Some examples are stock splits, dividends,
mergers, and acquisitions, right issues and spin offs. Let's take a closer look at
these different examples of corporate actions.
3
1
What Are Corporate Actions
2
Kinds of Corporate Action
3
Stock Splits
4
Dividends
5
Right Issues
6
Mergers and Acquisitions
7
Spin Offs
8
Conclusion
4
Kinds of Corporate Actions
The following are kinds of Corporate Actions:
Stock Splits
As the name implies, a stock split (also referred to as a bonus share) divides each of the
outstanding shares of a company, thereby lowering the price per share - the market will adjust
the price on the day the action is implemented. A stock split, however, is a non-event, meaning
that it does not affect a company's equity, or its market capitalization. Only the number of
shares outstanding, change, so a stock split does not directly change the value or net assets of a
company.
A company announcing a 2-for-1 (2:1) stock split, for example, will distribute an additional share
for every one outstanding share, so the total shares outstanding will double. If the company had
50 shares outstanding, it will have 100 after the stock split. At the same time, because the value
of the company and its shares did not change, the price per share will drop by half. So if the presplit price was N100 per share, the new price will be N50 per share.
So why would a firm issue such an action? More often than not, the board of directors will
approve (and the shareholders will authorize) a stock split in order to increase the liquidity of the
share on the market.
5
Stock Splits contd…
The result of the 2-for-1 stock split in our example above is two-fold: (1) the drop in share price will
make the stock more attractive to a wider pool of investors, and (2) the increase in available
shares outstanding on the stock exchange will make the stock more available to interested
buyers. So do keep in mind that the value of the company, or its market capitalization (shares
outstanding x market price/share), does not change, but the greater liquidity and higher
demand on the share will typically drive the share price up, thereby increasing the company's
market capitalization and value.
A split can also be referred to in percentage terms. Thus, a 2 for 1 (2:1) split can also be termed a
stock split of 100%. A 3 for 2 split (3:2) would be a 50% split, and so on.
A reverse split might be implemented by a company that would like to increase the price of its
shares. If a N1 stock had a reverse split of 1 for 10 (1:10), holders would have to trade in 10 of
their old shares for one new one, but the stock would increase from N1 to N10 per share
(retaining the same market capitalization). A company may decide to use a reverse split to shed
its status as a ”penny stock” . Other times companies may use a reverse split to drive out small
investors.
6
1
What Are Corporate Actions
2
Kinds of Corporate Action
3
Stock Splits
4
Dividends
5
Right Issues
6
Mergers and Acquisitions
7
Spin Offs
8
Conclusion
7
Dividends
There are two types of dividends a company can issue: cash and stock dividends. Typically
only one or the other is issued at a specific period of time (either quarterly, bi-annually or
yearly) but both may occur simultaneously. When a dividend is declared and issued, the
equity of a company is affected because the distributable equity (retained earnings and/or
paid-in capital) is reduced. A cash dividend is straightforward. For each share owned, a
certain amount of money is distributed to each shareholder. Thus, if an investor owns 100
shares and the cash dividend is N0.50 per share, the owner will receive N50 in total.
A stock dividend also comes from distributable equity but in the form of stock instead of cash.
A stock dividend of 10%, for example, means that for every 10 shares owned, the shareholder
receives an additional share. If the company has 1,000,000 shares outstanding (common
stock), the stock dividend would increase the company's outstanding shares to a total of
1,100,000. The increase in shares outstanding, however, dilutes the earnings per share, so the
stock price would decrease.
The distribution of a cash dividend can signal to an investor that the company has substantial
retained earnings from which the shareholders can directly benefit. By using its retained
capital or paid-in capital account, a company is indicating that it can replace those funds in
the future. At the same time, however, when a growth stock starts to issue dividends, the
company may be changing: if it was a rapidly growing company, a newly declared
dividend may indicate that the company has reached a stable level of growth that it is
sustainable into the future.
8
1
What Are Corporate Actions
2
Kinds of Corporate Action
3
Stock Splits
4
Dividends
5
Right Issues
6
Mergers and Acquisitions
7
Spin Offs
8
Conclusion
9
Rights Issues
A company implementing a rights issue is offering additional and/or new shares but
only to already existing shareholders. The existing shareholders are given the right to
purchase or receive these shares before they are offered to the public. A rights issue
regularly takes place in the form of a stock split, and can indicate that existing
shareholders are being offered a chance to take advantage of a promising new
development.
10
1
What Are Corporate Actions
2
Kinds of Corporate Action
3
Stock Splits
4
Dividends
5
Right Issues
6
Mergers and Acquisitions
7
Spin Offs
8
Conclusion
11
Mergers and Acquisitions
A merger occurs when two or more companies combine into one while all parties
involved mutually agree to the terms of the merge. The merge usually occurs when
one company surrenders its stock to the other. If a company undergoes a merger, it
may indicate to shareholders that the company has confidence in its ability to take
on more responsibilities. On the other hand, a merger could also indicate a shrinking
industry in which smaller companies are being combined with larger corporations.
In the case of an acquisition, however, a company seeks out and buys a majority
stake of a target company's shares; the shares are not swapped or merged.
Acquisitions can often be friendly but also hostile, meaning that the acquired
company does not find it favorable that a majority of its shares was bought by
another entity.
A reverse merger can also occur. This happens when a private company acquires
an already publicly-listed company (albeit one that is not successful). The private
company in essence turns into the publicly-traded company to gain trading status
without having to go through the tedious process of the initial public offering. Thus,
the private company merges with the public company, which is usually a shell at the
time of the merger, and usually changes its name and issues new shares.
12
1
What Are Corporate Actions
2
Kinds of Corporate Action
3
Stock Splits
4
Dividends
5
Right Issues
6
Mergers and Acquisitions
7
Spin Offs
8
Conclusion
13
Spin Offs
A spin off occurs when an existing publicly-traded company sells a part of its assets
or distributes new shares in order to create a newly independent company. Often
the new shares will be offered through a rights issue to existing shareholders before
they are offered to new investors (if at all). Depending on the situation, a spin-off
could be indicative of a company ready to take on a new challenge or one that is
restructuring or refocusing the activities of the main business.
14
1
What Are Corporate Actions
2
Kinds of Corporate Action
3
Stock Splits
4
Dividends
5
Right Issues
6
Mergers and Acquisitions
7
Spin Offs
8
Conclusion
15
Conclusion
It is important for an investor to understand the various types of corporate actions in
order to get a clearer picture of how a company's decisions affect the shareholder.
The type of action used can tell the investor a lot about the company, and all
actions will change the stock itself one way or another.
16