Investors are usually worried when a company takes a decision to either reconstruct or split its shares. Most times they are left in the dark as to the impact on the value of their shares and returns on investment.
Down memory lane, share reconstruction by Sterling Bank in 2008 generated bags of dust from the investing public and recently, C&I Leasing Plc share reconstruction and paid-up share capital from N808 million being 1.6 billion ordinary shares of 50 kobo each to N202 million being 404 million ordinary shares of 50 kobo each by consolidating every four (4) ordinary shares currently held into one(1) new share in the company.
Share reconstruction, also known as reverse stock split is a mechanism used by companies to reduce the number of outstanding shares and increase their share price proportionately without affecting the total book value of those shares. It reduces the number of shares, but not the value of shares held by shareholders.
A company with 1million shares of N1 each and trading for N2 per share may decide to reduce the number of shares outstanding by 1 share for every 2 shares held. This means the number of shares held will be halved and the company will now have 500,000 shares of 2kobo each but now trading for N4 each.
Companies carry out share reconstruction to attract investors by reducing the number of shares outstanding investors the company may suddenly look attractive to investors. The fewer the number of shares outstanding the better more confident investors are about the value of the shares being easily controlled.
Some companies have billions of shares outstanding either due to a scheme of mergers and acquisitions or issuance of bonus shares etc. This makes shares of the company very liquid and by being very liquid the share price can be subjected to a lot of price movement.
Companies also, embark on a scheme of Share Reconstruction when they think their share price is stagnant for too long. For example, a company that is trading at 50kobo per share for too long may undertake a 1 for 2 share reconstruction which will reduce the number of shares outstanding by half and increase the share price to N1 per share.
Share reconstruction gives companies an opportunity to issue more bonus shares in the future. A Company with 10billion outstanding shares, for example, may find it harder to issue a 1 for 1 bonus issue compared to that of a company with just 1billion outstanding shares.
A stock split is a process whereby a company splits a unit of its shares to make it more available and affordable. For a shareholder, stock splits will result in no change to the ownership structure of a company, however, this may or may not translate to increase in value.
A stock split may translate to increase in value due to the increased availability and affordability of the stock. The increase in demand can help push up prices of the stock and ultimately the value of the company.
On the other hand, the increase in the liquidity of the stock may soon make it so tradable and attractive to sellers and because it is now available in tradable quantities a situation where it has more sellers than buyers may affect the share price negatively.
It also results in a huge cost to the company as it has more shares available for the Registrars to manage. This cost is typically passed on the shareholders as it reduces profitability.
In theory, stock splits do not affect the value of companies, however, market sentiments and perception can make post stock split value of companies rise or decrease. It is also more associated with companies with highly illiquid stocks and higher than average industry share price.
