Share Consolidations And Share Splits

What are Share Consolidations?

Share Consolidation, also known as “Reverse Stock Split”, is an exercise undertaken by the company to reduce the total number of shares in issue while simultaneously increasing the nominal or par value of each share.

In a Share Consolidation exercise, the number of consolidated shares which existing shareholders are entitled to is in proportion to their existing shareholdings. After this exercise, they will own fewer but proportionately higher priced shares due to the reduction in the number of shares in issue. Thus, Share Consolidation has no effect on the value of the individual shareholder’s overall shareholdings relative to the total market valuation of the company.

Companies pursue Share Consolidation primarily to increase the company’s share price so as to generate greater interest in the company’s shares, in particular from institutional investors who may have a mandate to only invest in shares above a certain price point.

Another reason for Share Consolidation would be for companies to meet the minimum trading bid size to ensure its listing status on the stock exchange.

What are Share Splits?

On the other hand, Share Split, also known as “Share Subdivision”, is an exercise undertaken by the company to increase the total number of shares in issue while simultaneously decreasing the nominal or par value of each share. Hence, similar to Share Consolidation, the overall equity or market capitalisation of the company remains unchanged while the market price per share will fall accordingly to reflect that each share is now worth a smaller part of the company.

Companies pursue Share Split to improve market liquidity and trading activity of the company’s shares as the reduced share price makes the shares more affordable and accessible to retail investors as well as to broaden the company’s shareholder base.

How do Share Consolidations and Share Splits work?

After the announcement on the Share Consolidation or Share Split, the shares will be trading on a “cum- entitlement” basis which entitles an investor who holds the company’s shares to receive additional new shares in a Share Split or to be offered a reduced number of shares in a Share Consolidation.

Once the shares trade on “ex-entitlement” basis, an investor who then purchases the shares will no longer be eligible to participate in the Share Consolidation or Share Split as declared by the company.

Source: ShareInvestor.com

The details of the Share Consolidation or Share Split are made available under the Events Calendar section of the Factsheet at www.ShareInvestor.com.

Last Cum Date [Tth Trading Day]

This is the last trading day on which the stock is still trading with the entitlement recently declared by the company attached to it.

Ex-Date

The trading day commencing which the stock trades without the previously declared entitlement to participate in the Share Consolidation or Share Split.

Record Date (Also known as the Books Closure Date) [T+3th Trading Day]

The date at the close of the business on which the securities accounts of shareholders must be credited with the company’s shares in order to determine the shareholding adjustment in accordance with the exchange ratio.

Example (Share Consolidation)

Metech Int recently announced a 1-for-10 Share Consolidation with Ex-Date: 22/05/2012 and Record Date: 24/05/2012 (3 trading days after the Last Cum Date).

For every 10 shares with an assumed par value of S$0.10 each Mr. Z owns in Metech Int as at the Record Date, he will own 1 consolidated share with a par value of S$1.00 each post-Share Consolidation.

With the Share Consolidation, the number of shares in issue decreases while the value of the company remains unchanged. The stock market will, on the Ex-Date, will adjust the share price proportionately to account for the decreased number of shares in issue.

Theoretical Ex-Entitlement Price
(A theoretical price which does not take into account other corporate or market factors)

= (A x Market Price Per Share before Ex-Date)
                                    B
= (10 x S$0.003)
               1
= S$0.030 per share on Ex-Date

Despite owning lesser Metech Int shares post-Share Consolidation, the value of Mr. Z’s shareholdings in view of the proportionately higher share price, remains the same before and after the exercise.

Assuming Metech Int has 8,000,000,000 shares in issue with a market capitalisation of 8,000,000,000 shares x S$ 0.003 = S$ 24,000,000 pre-Share Consolidation, its market capitalisation will remain unchanged at 800,000,000 shares x S$ 0.030 = S$ 24,000,000 post-Share Consolidation.

Example (Share Split)

Q&M Dental recently announces a 2-for-1 Share Split with Ex-Date: 09/05/2012 and Record Date: 11/05/2012 (3 trading days after the Last Cum Date).

For every 10 shares with an assumed par value of S$0.10 each Mr. Z owns in Q&MDental as at the Record Date, he will own 20 subdivided shares with a par value of S$0.05 each post-ShareSplit.

With the Share Split, the number of shares in issue increases while the value of the company remains unchanged. The stock market will, on the Ex-Date, will adjust the share price proportionately to account for the increased number of shares in issue.

Theoretical Ex-Entitlement Price
(A theoretical price which does not take into account other corporate or market factors)

= (A x Market Price Per Share before Ex-Date)
                                     B                                  
= (1 x S$0.745)
             2
= S$0.3725 per share on Ex-Date

Despite owning more Q&M Dental shares post-ShareSplit, the value of Mr. Z’s shareholdings in view of the proportionately lower share price, remains the same.

Assuming Q&M Dental has 250,000,000 shares in issue with a market capitalisation of 250,000,000 shares x S$ 0.745 = S$ 186,250,000 pre-Share Split, its market capitalisation will remain unchanged at 500,000,000 shares x S$ 0.3725 = S$ 186,250,000 post-Share Split.

Effects of Share Consolidations and Share Splits on Historical Price Data and Per Share Ratios

As illustrated in the above examples, both Share Consolidations and Share Splits have an effect on the price of the share when it trades on ex-entitlement basis following the conclusion of the corporate action. Hence, price adjustment on historical data prior to the Ex-Date will be applied as at market close on the Last Cum Date. The purpose of the historical price adjustment is to allow for comparability between prices on the Ex-Date and Cum Dates.

Source: ShareInvestor.com

The financial ratios adjusted to account for the effects of Share Consolidation or Share Split are made available under the Financial Ratios section of the Factsheet at www.ShareInvestor.com.

Since both Share Consolidation and Share Split only entail a change in number of shares in issue without any inflow nor outflow of funds into or out of the company, the company’s equity as well as net profits remain unchanged. Hence, per share ratios such as the Earnings Per Share (Net Profits Attributable to Shareholders / Number of Shares in Issue), Net Asset Value Per Share (Shareholders’ Equity / Number of Shares in Issue) as well as Dividend Per Share will increase proportionately in the former and decrease proportionately in the latter. Despite the change in per share ratios, the overall value of the investment remains the same before and after the exercise.

How do Share Splits and Bonus Issues differ?

Despite the similarities between Share Splits and Bonus Issues, there are characteristics which differentiate Share Splits from Bonus Issues:

So, rejoice when you are entitled to Bonus Shares for free.

Share Consolidations and Share Splits – Are they attractive value propositions for shareholders and prospective investors?

As mentioned above, companies undertake Share Consolidations which bring about an increase in share price for various reasons. Investors ought to exercise caution when dealing with stocks where the pick-up in share price is solely as a result of a reduction in the number of shares in issue as opposed to a real improvement in the company’s fundamental outlook. Investors should seek to examine the company’s performance prior to its announcement on the Share Consolidation to ensure that the share price is not artificially inflated.

On the contrary, Share Splits are generally perceived positively by the market as they are exercises usually undertaken by companies after experiencing a period of growth in an attempt to lower their highly priced shares to make them more affordable and hence accessible to the general retail investors.