Deciphering Corporate Actions: Share Consolidations and Share Splits

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What is Share Consolidation?

 

Share Consolidation is also known as "Reverse Stock Split". It is a corporate action to decrease the total number of outstanding shares and increase the nominal or par value of each share.

After the corporate action, the shareholder will own fewer but theoretically higher priced shares due to the decrease in the total outstanding shares in the market.

There will be no impact on the value of the shareholder's holdings relative to the total market valuation of the company.

Companies undertake share consolidation for three possible reasons:

  1. Increase the company's share price to generate market interest.
  2. Attract institutions investors with a mandate of investing in shares above a specified price point.
  3. To meet the minimum trading bid size of the stock exchange to maintain its listing status.

 

Overall, share consolidation is often taken adversely by shareholders as a mean to meet the minimum trading bid size required by the stock exchange.

 

What is a Share Split?

 

Share Split is the direct opposite of a Share Consolidation. It is a corporate action to increase the total number of outstanding shares and decrease the nominal or par value of each share.

After the corporate action, the shareholder will own more but theoretically lower priced shares due to the increase in total outstanding shares in the market.

Similarly, there is no impact on the value of the shareholder's holdings, or the market capitalization.

 

Companies undertake share split for two possible reasons:

  1. Improve market liquidity and trading activity. - Reduced share price makes it more affordable and accessible for investors.
  2. Increase number of shareholders

 

Overall, share split is often taken positively by shareholders as a mean to increase market liquidity and trading activity. It is viewed as the company is doing well, to be able to undertake a share split.

 

How does it work?

 

The flow of the corporate action goes like this:

  1. The company announces a share consolidation or share split and the reasons for the corporate action.
  2. The key important dates and timings will be announced.

 

Ex-date: refers to the date the corporate action is carried out.

 

Record Date: It is the date set by the company to determine who is entitled to the corporate action in their "books".

 

How do you calculate the Theoretical Price after Share Consolidation?

 

Example

 

 

Noble Group Limited has announced a share consolidation corporate action with the following details.

 

Share Price on 4th May 2017 at closing (retrieved from past records): $0.131

Ex- Date: 5th May 2017

Record Date: 9th May 2017

Corporate Action: Share Consolidation of 1 for 10

 

This means that for every existing 10 shares that you hold, it will be converted to 1 consolidated share.

On 5th May 2017,  the calculations for the theoretical share price on opening is as follows:

 

 

The share consolidation will be carried out on the Ex-Date on 5th May 2017. The number of shares outstanding in the market will be reduced while the share price will increase. However, there will be no change in the value of the company.

On 5th May 2017, if the share price maintains above $1.31, the shareholders will have a capital gain.

If the share prices falls below $1.31, the shareholders will have a capital loss.

 

How do you calculate the Theoretical Price after Share Split?

 

Example

 

 

Singapore O&G LTD has announced a share split corporate action with the following details.

 

Closing Share Price on 8th May 2017 (retrieved from past records): $1.40

Ex- Date: 9th May 2017

Record Date: 12th May 2017

Corporate Action: Stock Split Offer of 2 for 1

 

This means that for every existing 1 share that you hold, it will be converted to 2 new shares.

On 9th May 2017,  the calculations for the theoretical share price on opening is as follows:

 

 

The share split will be carried out on the Ex-Date on 9th May 2017. The number of shares outstanding in the market will increase while the share price will decrease. However, there will be no change in the value of the company.

On 9th May 2017, if the share price maintains above $0.70, the shareholders will have a capital gain.

If the share prices falls below $0.70, the shareholders will have a capital loss.

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