In this chapter, we will discuss some of the common corporate exercises undertaken by listed companies, starting with Share Split and Share Consolidation.
Share split is a very common exercise that involves the company splitting its shares into more units. For instance, if a company announced that it is splitting its shares on a 1-to-2 basis, means each share will be split into two shares. If it’s 1-to-5, this means each share will be split into five shares.
The share price will be adjusted accordingly. A 1-to-2 split will result in the share price being divided by half, whereas a 1-to-5 split will result in the share price being divided by five.
At the end of the day, the value of the investment will not increase, i.e. shareholders will not get richer from share split. It is like cutting a pizza into 10 pieces instead of 5 but the total pizza size ultimately remains the same. We will give an example to illustrate this.
In 2011, Digi.Com Bhd (“Digi”) announced a 1-to-10 share split, with ex-date falling on 21 November 2011 (Ex-date refers to the date that the entitlement expires). As long as investors hold on until ex-date, any entitlement, be it bonus issue or dividend, the existing investor would still be eligible for the entitlement.
On 20 November 2011, the day before the ex-date, Digi’s closing price was RM34.96. On the ex-date, the reference price for Digi’s closing price the day before is adjusted to RM3.496 (ie RM34.96 ÷ 10). At the same time, the number of Digi’s shares increases by 10 times.
Assuming you invested in 1,000 Digi shares and held on until the ex-date.
Value of your investment in Digi on 20 Nov 2011:
= 1,000 shares x RM34.96
Value of your investment in Digi on 21 Nov 2011 (ex-date):
= 10,000 shares x RM3.496
If there is no apparent value increase to shareholders, why then would companies choose to split their shares?
There are two benefits that the company can derive by splitting the shares. First, as share split increases the number of shares, it can improve the liquidity of the shares. For instance, if the daily volume traded of a company is 500,000 shares a day, by splitting the shares into two, the daily trading volume increases to 1 million shares traded a day.
Second, there are some investors in the market who still measure the price of a listed company by whether or not it is “cheap” and “expensive” in terms of absolute share price. In the case of Digi, by splitting its shares from one to ten, the share price effectively fell from RM30 a share to RM3 a share, which becomes “cheap” to some investors. It is only “cheap” in absolute price but the more important question is what is the investor getting in return? Is there value for money?
Share consolidation is the opposite of share split. A 2-to-1 consolidation involves consolidating two shares into one, while 5-to-1 involves consolidating five shares into one. Compared with share split, share consolidation decreases the number of shares in the market (thus making the shares less liquid) and makes the value of the share price higher (thus being viewed as more “expensive”). Why then would a company want to do it?
One of the most appealing reasons is to increase the absolute value of the share price. Generally, penny stocks, i.e. companies with share prices in the range of below RM0.30, are viewed as speculative stocks (stressing on “viewed as”, as the nature of the company may not be such). By consolidating the shares and bringing the absolute price of the shares higher, the perception will change. The volatility of the share price movement will also decrease when the value of the share price is higher.
In 2012, Time dotcom Bhd (“TDC”) announced a 5-to-1 share consolidation, with ex-date falling on 11 May 2012. TDC’s closing share price on 10 May 2011 was RM0.655. TDC’s reference price on ex-date would be RM3.275 (i.e. RM0.655 x 5 shares).
Next week, we will take a look at Bonus Issue, Rights Issue, and Warrants.