Types of Corporate Actions

Instructor: Natalie Boyd

Natalie is a teacher and holds an MA in English Education and is in progress on her PhD in psychology.

Organizations take actions all the time that can influence stock price. In this lesson, we'll go over some of these basic corporate actions including splits, buybacks, tender offers, exchange offers, rights offers, mergers and acquisitions, and see how they can affect stock prices.

Corporate Actions

Amira is an investment advisor. She receives lots of notices of corporate actions coming in from different companies and wants to better understand how they might impact stocks so that she can invest accordingly.

Corporate actions are things that a company does that may impact stock price. They can be voluntary, voted on by shareholders, involuntary, or decided on by the board and/or CEO without a shareholder vote. Either way, corporate actions can impact investors like Amira, as stock price can change with the action.

Splits & Buybacks

Say Amira owns 25,000 shares of AMJ Company. Each share is worth $100, so Amira owns $2,500,000 worth of stock in AMJ Company. But one day, she finds out that AMJ Company is going to split their stock.

A split is when a company increases the number of outstanding shares without changing the valuation. However, a split can boost price shares as investors become interested and the new, low share price increases.

If AMJ Company does a 2-for-1 split, Amira will now own two shares for every one she had before. How much her total investment is worth in terms of dollars and percentages of the company will stay the same. She'll have 50,000 at $50 each instead of 25,000 shares at $100.

If her original 25,000 shares were 20% of the company, then her new 50,000 will still be 20% of the company. After the split, if other investors become interested and start buying the new $50 shares, the stock price might go up to $60 per share, increasing Amira's investment to $3,000,000.

A reverse split, also called 'consolidation', is when the company decreases the number of shares without changing the valuation. Amira's investment would remain the same, but she would have fewer shares worth more each.

A reverse split can drive out small investors and can boost share price on a stock that is particularly low. For this reason, consolidations are often used on penny stocks.

Another way that a company can reduce the number of outstanding shares is through a buyback or 'share repurchase'. This happens when a company offers to buy back stock from existing shareholders to reduce the overall stocks out there.

Say YMZ Company has 100,000 shares on the market trading at $20 per share. They might offer to buy back 25,000 shares at $22 per share. This will reduce the number of shares on the market to 75,000 and boost the share price.

Rights Offers & Dividends

Every few months, Amira gets notices from different companies saying that they are going to distribute dividends. A dividend is when a company shares part of its profits with shareholders. They can be paid out in cash or additional stock, and are often paid quarterly.

AMJ Company might pay a dividend of $2 per share after a particularly good quarter. If Amira held 25,000 shares, she'd receive a dividend of $50,000. In contrast, YMZ Company might pay a dividend of 1 share per 100. If Amira owns 1000 shares in YMZ Company, after the stock dividend, she would own 1010 shares.

A rights offer is when a company wants to issue new stock, so they offer current shareholders a way to buy new stocks. This is about being able to keep the same percentage of the company that they own before the new stock is issued.

Say Amira's 1000 shares of YMZ Company represents 1% of the company. That means that there are 100,000 shares out there right now. But YMZ Company wants to issue 50,000 new shares. They might offer Amira the chance to purchase 500 additional shares. If she took the offer, she would now own 1500 shares of YMZ Company, which would still be worth 1% of the company.

Mergers & Acquisitions

Remember AMJ Company? Amira owns 20% of it. Say that AMJ is an investment firm, and Amira is one of its founders. AMJ Company has decided that their company and YMZ Company should combine.

Mergers and acquisitions involve two companies coming together and merging into one, usually when one company acquires the other. In a merger or acquisition, shareholders might be offered stock in the new merged company or in the acquiring company in place of previous stock holdings.

Say that AMJ Company is merging with YMZ Company. The new company, A-Y Company, might issue new stock to replace the stock held by AMJ shareholders and YMZ shareholders. There's an entirely new company.

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