The term consolidation could be simply explained as gathering forces at the right moment. But how exactly does it work in investment?
Consolidation happens in the stock market, too. If a public company wants to increase its share price, it goes for share consolidation. In a nutshell, instead of having 100 shares 5GBP each, it makes 50 shares 10GBP each. As you can see from this simple equation, the total value of shares in circulation stays the same as does the ownership proportion of each shareholder.
Could be helpful to know: The term consolidation is also known as reverse split, stock merger or even share rollback.
Takeaways for a company
Here are some of the concerns that may prompt company management to consider share consolidation:
- A principal reason as to why a company would want to artificially initiate the per-share price bumping is to prevent removal from the exchange due to the stock falling below the bid price.
- The other significant reason for consolidation could be an attempt to be increasingly viewed as an attractive investment destination for many investors that have policies against taking positions in a stock which price is below a minimum value.
- Companies considering a spinoff may also consider share consolidation in order to gain attractive prices.
- Other concerns of corporate finance.
Most importantly, none of the above is why you’d have to worry about your shares in the company. The total proportion of your holdings won’t change after share consolidation. However, an individual’s shareholding (the number of shares they have) could reduce so they have fewer shares in the company but the percentage of ownership and value of their investment remains the same.
Takeaway for you
There is one thing, though. If a share price rises, it becomes more expensive. Therefore, technically, it becomes less affordable after share consolidation than before. That’s why, depending on the resulting price change, it may affect your decision to purchase the stock. For example, while a share value change from 5GBP to 10GBP is a 100% increase, you’ll unlikely change your mind if you were planning to buy it. However, if it’s the same percentage of growth but from 500GBP to 1000GBP, that’ll be a point to consider, won’t it? Thus, consolidations, such as the example described, are unlikely to cause concern during your investment journey.
Back from Asia
For example, Tesco has recently completed a successful sale of its businesses in Malaysia and Thailand and will carry out a special dividend payout related to it. The company also announced the commencement of a share consolidation. In keeping with this, there will be “15 new ordinary shares with a nominal value of 6.33 pence for every 19 existing ordinary shares”. What does it mean for you? If you hold Tesco stock, the number of shares in your possession after the share consolidation would be multiplied by 15/19 – with the corresponding share value increase. Also, fractional entitlements emerging from the Tesco share consolidation will be aggregated and sold so the proceeds then will be donated to the Trussell Trust, a Tesco-supported foodbank charity.
A share consolidation is something that happens from time to time in the stock market, and it doesn’t necessarily make a particular stock any less interesting for investment.
Analyze stocks, invest wisely – and Orca will keep providing you with anything you may require on the way. Remember your capital is at risk, therefore always consult a financial adviser if you are unsure. Orca does not provide any investment advice.