 Personal Finance PowerPoint Presentation Corporate Actions Prepare to get financially fit by practicing personal finance. Most of this information can be found at Investopedia. What are corporate actions which you can find online? Take a look at the references, resources. Continue your research from there. This is by Reem Hakal, updated January 19, 2022. In prior presentations, we've been taking a look at investment goals, investment strategies, investment tools, keeping in mind the two primary categories of investments, one being the fixed income, typically bonds, two being the equity, the stocks. Now we're looking at what are corporate actions? When a publicly traded company issues a corporate action, it is doing something that will affect its stock price, which is of course important to us as stockholders. If you're a shareholder or considering buying shares of a company, you need to understand how an action will affect the company's stock. A corporate action can also tell you a great deal about the company's financial health and its short-term future. So you also can think about, well, why would they be taking these types of actions? What does that mean for the company's health as a whole? So examples, corporate actions include stock splits, dividends, mergers and acquisitions, rights issues and spinoffs. All of these are major decisions that typically need to be approved by the corporate's board of directors and authorized by the shareholders. So remember the structure of owning stocks. We as the stocksholders will typically own an equity interest, the capacity and having the capacity to say vote, for example, for the board of directors, individual stockholders typically having, you know, not much voting power right in a similar kind of way as an individual voting in a republic doesn't have a lot of individual power over the function of the republic. However, you do have that voting capacity to vote for basically the board of directors, the board of directors then acting kind of like agents, kind of like politicians in a republic, board of directors acting on the owner's behalf in order to hire management, upper management, typically CEOs and so on. And then the CEOs are going to be there hiring the individuals and the employees of the corporation. So they're going to be the ones that are going to be making these types of decisions, right, for things like a stock split, a dividend, mergers and acquisitions, rights and issues and spinoffs. So we've got to get our mind in their head and think about what are they thinking, what does that mean to my investments. So the stock split, let's take a look at the stock split. First here, the stock split sometime called a bonus share divides the value of each of the outstanding shares of a company. So a two for one stock split is most common. So you've got two for one stock split. It is basically what it sounds like an investor who holds one share will ultimately own two shares each worth exactly half the price of the original share. And that's what we would expect to be happening on the market, right, because the stock price you would think would be reflecting the value that kind of the equity value assets minus liabilities in essence of the company. So if you had one stock and then all of a sudden the corporation is going to say, I'm going to take all those stocks and split them. So now you have two stocks. Well, those two stocks you would think now would be worth half as much as they were before leaving you basically in the same position but now owning the two stocks that are worth half as much. So the company has just cut its own stock price in half. So you can think about why would they do that? You could say, well, what have they done? They've put you in the same position generally, but now the stocks themselves are half the price. So why would that be? Well, maybe they think that's going to be better valued for trading for example or something like that at a half a price to be more in alignment with the optimal price level of stocks. So the market will adjust the price upwards the day the split is implemented. So the effects current shareholders are rewarded and potential buyers are more interested. So notably there are twice as many common shares out there than there were before the split. So clearly you have twice as many because they split all the stocks. Nevertheless, a stock split is a non-event because the stock split is a non-event because it does not affect the company's equity or its market capitalization. In other words, normally if they issue the stock that's one way for them to generate capital. They issue the stock in order to get money from people and that's going to increase the equity assets minus equity. In this case, you've got twice as much equity or stock out there. You've got twice as much stock, but they didn't issue the stock. They just had a stock split. So there's no impact say on the cash that is involved or anything like that. So only the number of shares outstanding changes. The stock split are gratifying for shareholders both immediately and in long term. Even after that initial pop they often drive the price of stock higher. So you can think why would they do it? Well maybe now that they do the stock split maybe that they have a more optimal kind of price level and maybe that will be helpful in driving the price of the stocks higher. Cautious investors may worry that repeated stock splits will result in too many shares being created. So when you're thinking about the corporation itself you would think that there's some kind of more optimal levels of how many shares basically should be outstanding and what might be the optimal price for maximizing trading potential and the value of the stocks. For example, the reverse split. A reverse split would be implemented by a company that wants to force up the price of its shares. So you could have a situation where the stocks look too low. People are saying, hey the price is quite low. Maybe this stock is getting in danger of not even being on the exchange anymore because they're going to go below a certain threshold. So they might say, how can I up the price in the shares? Well you could do better job in the corporation and people might want to buy it more. Or you could try to do a reverse split. So that for example, a shareholder who owns 10 shares of stock valued at $1 each will have only one share after a reverse split of 10 after a reverse split of 10 for one but that one share will be valued at $10. Let's do that one more time. For example, a shareholder who owns 10 shares of stock valued at $1 each will have only one share after a reverse split of 10 for one. So a 10 for one reverse split, your 10 shares have now been reduced to one share but instead of that one share being worth $1 it's now worth $10. So again, you're in the same kind of position you were before in theory even though the numbers have changed in terms of how many shares you own and then the price of the shares. So a reverse split can be a sign that the company stock has sunk so low that its executives want to shore up the price or at least make it appear that the stock is stronger. So it's usually not a good sign so you can see why they would want to do it because they want to bring the stock price up to that sweet zone of where stocks they think should be an optimal trading zone and doing that usually looks bad on the market so they could be hit negatively perception-wise for that. So the company may even need to avoid getting categorized as a penny stock so if they go below a certain level they'll get kicked off the exchange and that wouldn't be good. So in other cases the company may be using a reverse split to drive out small investors. So what are corporate actions? So we've got the dividends. So a company can issue dividends in either cash or stock. So a company can give dividends typically we think of like cash dividends but they can give of course stock dividends too. Typically they are paid out at specific periods usually quarterly or annually. Now note if you're the owner of the corporation you have stocks but you don't have enough stocks to really influence the activities of the corporation unlike a sole proprietorship or partnership you can't tell the corporation hey you're making money give me some of that money that would be for a sole proprietorship. The corporation could give you money they might give the shareholders money but they would have to decide from the management and the board of directors as to whether they're going to be giving dividends out or not and part of the reason of that is that the shareholders are owning equal shares so the shareholders can't get dividends that are unequal the dividends have to be given equally as opposed to a partnership you know you might be drawing out different drawings than the other partners and stuff like that which is more complex and therefore the dividend amounts of the dividend have to be determined uniformly and then given out uniformly to all the owners or all the stocks. So essentially these are a share of companies profits that are being paid to owners of the company of the stocks all right they're earning money so what do you want to do with that money as the company if you're the owner of the stock what do I want the company to do with it if they were acting in my best interest either give it to me in the form of a dividend or put it back in the company so that you grow buying more capital and more machinery so that the value of the stock goes up and I could sell it for more so dividend payments affect the equity of a company the distribution equity retained earnings and or paid in capital is reduced so when you think about the books of the company assets minus liabilities is the equity in the company you would think the valuation of the stock would be derived from at least in large part the equity in the company if the company pays out some of the dividends to the owners they're reducing the equity in the company assets minus liabilities which you would expect reduces the stock price to some degree but of course on the other side you're getting some money from it in the form of dividends if you're the stock owner so a cash dividend is straightforward each shareholder is paid a certain amount of money for each share if an investor owns 100 shares and a cash dividend is 50 cents per share their owner will get $50 so a cash dividend just says we're going to give out a certain amount of money for each of the shares that are owned if you own multiple shares you're going to get some multiple of that amount that we're going to give out so a stock dividend also comes from distribution distributable equity but in the form of stock instead of cash so it gets a little bit more complex when you're looking at the stock dividend because they're not going to give you cash they're giving you stock so if the stock dividend is 10% for example the shareholder will receive one additional share for every 10 owned so if the company has a million shares outstanding the stock dividend would increase outstanding shares to a total of 1.1 million so now you can see that this has an impact on the number of shares that are outstanding in a little bit possibly a little bit different way than like the stock split situation because they're actually giving you new stocks that are being issued out with value instead of basically having a stock split where each stock that you had is now doubled but you would think in theory worth half as much so notably the increase in shares dilutes the earnings per share so the earnings per share is now less because there's more shares out there at this point in time so the earnings per individual so the stock price would decrease so you would think the stock price would decrease because it's a dividend and so that would be similar to a cash dividend as well because the equity is going down as they distribute value this case not in the form of cash but in the form of stock the distribution of a cash dividend signals an investor that the company has substantial retained earnings from which shareholders can directly benefit so if they're giving out tax or cash dividends that's usually a good sign that they're healthy because they can afford to give out cash dividends now also just note that companies that are growing are less likely to give out a dividend because they're trying to generate capital in order to grow and that could be good for investors because they might be growing at a higher rate but if they have the capacity to give out cash dividends that should signal to the economy or may signal to the economy and the market that they're healthy and they have the capacity to do that which could be a good sign for the stock price so by using its retained capital or paid in capital account a company is indicating that it expects to have little trouble replacing those funds in future so their revenue should be strong their thinking so however when a growth stock starts to issue dividends many investors conclude that a company that was rapidly growing is settling down for a stable but unspectacular rate of growth so if you're investing in a growth stock you're expecting them to take the money and reinvest it because they're in a growth rate they're putting that money into more facilities machinery and equipment in order to grow faster and that's why you're there if they start giving dividends out you're thinking okay now they've achieved their growth phase maybe they're flattening out at this point in time and don't have the same kind of growth potential so you might see that as a good sign because they're healthy they've got money but you might see it as a bad sign in terms of they're not going to be growing at the same rate that they were growing before and if that's what you're investing in you might move to another growth stock so rights issues a company implementing a rights issue is offering additional or new shares only to current shareholders so the existing shareholders are given the right to purchase or receive these shares before they are offered to the public so they might give then a rights issue to the existing shareholders note that this gives the existing shareholders the capacity to buy the shares possibly before others because if they were to issue more shares outside it dilutes the existing shareholders' shares because now if you put more shares out there and the shares represent ownership of the value of the company assets minus liabilities or equity and they just keep on issuing shares while they're diluting the shares that you have so they might then give you the opportunity to purchase shares first so that you can hold your current position relative to the total shares that are out there so on so a rights issue regularly takes place in the form of a stock split and in any case can indicate that existing shareholders are being offered a chance to take advantage of a promising new development mergers and acquisitions a merger occurs when two or more companies combine into one with all parties involved agreed to the terms so now you've got companies basically combining together merging and acquiring notice that these two terms they sound like you kind of put them together because a lot of things that are quoted there's a lot of discussion or you can dive into the details in terms of well was that an actual merger of two equals coming together or was it really an acquisition most of these mergers and acquisitions come down to basically a dominant company and another company one swallowing the other one but they don't want to call it an acquisition possibly because that would make the it might be harder for the deal to go through for the company that's being swallowed on that one but in any case you get into the details of that mergers and acquisitions so usually one company surrenders its stock to the other so when a company undertakes a merger shareholders may welcome it as an expansion so you might say merger acquisition great because now there's going to be growth maybe in that particular area hopefully there's some synergy that happens it's going to increase the stock on the other hand they could conclude that the industry is shrinking forcing the company to gobble up the competition to keep growing so maybe they've got no you might interpret it as to say they've got no more innovative power themselves the only way for them to grow is to like conquer other territories like a country that can't doesn't have any innovation but they just are trying to swallow territory to increase the growth or something like that which might not be as healthy so in an acquisition a company buys a majority stake of a target company shares the shares are not swapped or merged acquisitions can be friendly or hostile a reverse merger is also possible in this scenario a private company acquires a public company usually one that is not thriving so the private company has just transferred itself into a publicly traded company without going through the tedious process of an initial public offering it may change its name and issue new shares so then we have the spinoff the spinoff occurs when an existing public company sells a part of its shares or distributes new shares in order to create a new independent company so that you might be saying there was a trend at some point where all companies were becoming these big conglomerate type of companies and the theory was that size with better economies of scales was good and that management if they were good they could manage anything because it's all the same and then later on it seemed like the theory started to say hey look maybe some people are actually better at managing these particular industries these conglomerates that aren't tied together in any particular way other than just trying to be big aren't giving us the economies of scale that we were looking for and so you get this kind of spinoff environment where you're saying hey maybe we should spin off this particular component and focus in on it of itself but you could also have spinoffs that are there because that component of the company is not doing well and that would be a bad sign for that particular part of the company they offer through a rights issue to the existing shareholders before they are offered to new investors so again you as the existing shareholder might be saying well that's going to change the value of the company and so they might try to give you the initial capacity to buy the shares if you so choose a spinoff could indicate a company ready to take on a new challenge or one that is refocusing the activities of the main business so some classic examples it will like Edison or something where they're going to say I'm going to refocus all of our energy on the core of the business and stop this conglomeration just for conglomeration's sake and sometimes that could be a healthy move depending on your perspective