Stock split

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Stock split

  1. 1. Stock splitAll publicly-traded companies have a set number of shares that are outstanding on the stock market.A stock split is a decision by the companys board of directors to increase the number of shares thatare outstanding by issuing more shares to current shareholders. For example, in a 2-for-1 stock split,every shareholder with one stock is given an additional share. So, if a company had 10 million sharesoutstanding before the split, it will have 20 million shares outstanding after a 2-for-1 split.A stocks price is also affected by a stock split. After a split, the stock price will be reduced since thenumber of shares outstanding has increased. In the example of a 2-for-1 split, the share price will behalved. Thus, although the number of outstanding shares and the stock price change, the marketcapitalization remains constant.A stock split is usually done by companies that have seen their share price increase to levels that areeither too high or are beyond the price levels of similar companies in their sector. The primary motiveis to make shares seem more affordable to small investors even though the underlying value of thecompany has not changed.A stock split can also result in a stock price increase following the decrease immediately after the split.Since many small investors think the stock is now more affordable and buy the stock, they end upboosting demand and drive up prices. Another reason for the price increase is that a stock splitprovides a signal to the market that the companys share price has been increasing and peopleassume this growth will continue in the future, and again, lift demand and prices.Another version of a stock split is the reverse split. This procedure is typically used by companies withlow share prices that would like to increase these prices to either gain more respectability in themarket or to prevent the company from being delisted (many stock exchanges will delist stocks if theyfall below a certain price per share). For example, in a reverse 5-for-1 split, 10 million outstandingshares at 50 cents each would now become two million shares outstanding at $2.50 per share. In bothcases, the company is worth $5 million.The bottom line is a stock split is used primarily by companies that have seen their share pricesincrease substantially and although the number of outstanding shares increases and price per sharedecreases, the market capitalization (and the value of the company) does not change. As a result,stock splits help make shares more affordable to small investors and providesgreater marketability and liquidity in the market.WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF THEREVERSE STOCK SPLIT?Advantages.
  2. 2. • By completing the Reverse Stock Split, and assuming we are permitted to deregister our shares and eliminate our obligations under the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and our periodic reporting obligations under the Exchange Act, we expect to save approximately $170,000 per year. • Assuming we can deregister the Common Stock, we will save the significant amount of time and effort expended by our management on the preparation of SEC filings and in compliance with the Sarbanes-Oxley Act. • The Reverse Stock Split will have a limited effect on the relative voting power of our continuing shareholders.Disadvantages. • Shareholders owning less than 75 shares of our Common Stock will no longer be shareholders of the Company following the Reverse Stock Split and will not receive dividends or participate in any future success of the Company. • The terms of the Reverse Stock Split were not negotiated on an arms-length basis, but were approved by the Special Committee and the Board of Directors, and the price for fractional shares to be cashed-out in connection with the Reverse Stock Split Amendment was determined fair pursuant to the opinion of McFarland Dewey & Co., LLC, our independent financial advisor. See “Reports, Appraisals and Negotiations” below. • Shareholders receiving cash in lieu of fractional shares following the filing of the Reverse Stock Split Amendment will pay taxes on any gain realized over their tax basis (usually their initial investment) in their shares. • If successful in suspending the Company’s reporting obligations under the Exchange Act, we will cease to file annual, quarterly, current and other reports and documents with the SEC, and continuing shareholders will have access to less information about the Company and our business, operations and financial performance. However, for the protection of our continuing shareholders, we will continue to maintain certain corporate governance measures for a period of five years following the Reverse Stock
  3. 3. Split, provided that there are unaffiliated shareholders during such period. These measures include making publicly available to our continuing shareholders annual audited and quarterly unaudited financial statements, and, on an annual basis, providing disclosure to our shareholders in accordance with applicable SEC rules for smaller reporting companies regarding the Company’s executive compensation, the names of holders of 5% or more of the Company’s capital stock, ownership of the Company’s capital stock by directors and executive officers and dividend history. The Company will also maintain a majority of independent directors and an independent audit committee of the Board of Directors. In determining the ownership of the Company’s capital stock, we will rely on the records of our transfer agent.• We will no longer be listed on the AMEX; however, it is a condition to the delisting of our Common Stock from the AMEX that we make application for our Class A Common Stock to be listed on the OTCQX following deregistration. If our application for listing on the OTCQX is accepted, we will be required to have quarterly and annual financial reports posted on OTCQX.com or EDGAR if we are unable to deregister under the Exchange Act. All annual reports must be audited and prepared in accordance with US GAAP. Furthermore, in order to list our Class A Common Stock on the OTCQX, we will be required to appoint a Designated Advisor for Disclosure, which advisor must issue a letter upon us making application for listing on the OTCQX and annually thereafter to Pink OTC Markets Inc. confirming that we have made adequate current information publicly available and meet the tier inclusion requirements of the OTCQX. There is no guarantee that the Class A Common Stock will be approved for listing nor is there any guarantee that if approved for listing, how long our stock will be listed on the OTCQX. Furthermore, while we will not seek to have our Class B Common Stock listed for trading, shares of Class B Common Stock will be freely convertible at anytime into an equal number of shares of our Class A Common Stock.• We will no longer be subject to the provisions of the Sarbanes-Oxley Act, the liability provisions of the Exchange Act or the oversight of the AMEX.• Our executive officers, directors and 5% shareholders will no longer be required to file reports relating to their transactions in our Common Stock with the SEC. In addition, our executive officers, directors and 10% shareholders will no longer be subject to the recovery of profits provision of the Exchange Act.
  4. 4. Print this article1. Common Splitso The most common stock splits are 2-for-1, 3-for-2 and 3-for-1. If a company has a 2-for-1 stock split, one share valued at $200 would become two shares valued at $100 each. If the company chose a 3-for-1 split of that same stock, each share would be worth $66.67 each. Why Do This?o One of the primary goals of a stock split is to make shares more attractive to individual investors and stimulate buying. A company can split stock to increase liquidity. When a companys shares soar in value, there can be large disparities between the bids for the stock and its asking price. Splitting the stock closes that gap and can increase the number of potential investors.o Sponsored Links Trading on Mobile Trade on-the-go with Metatrader App Forex, Commodities, Indices, CFDs. www.4xp.com/Mobile Advantages and Disadvantageso There is division among market experts on the merits of a stock split. There is a belief that the impact of a stock split is purely psychological, as it tends to create the perception that the stock is more valuable. That may be enough to spur new buying. Some newsletters focus exclusively on stocks that have or could split. Critics say a split doesnt always result in new sales and is superfluous because the capitalization of the company is not affected. Brokerage Commissionso Stock splits no longer affect brokerage commissions because most brokerages now charge flat fees on trades, no matter how many shares are involved. Historically, brokerages charged commissions based on the number of shares traded, so a stock split helped boost their profits. Reverse Splito In a reverse split, a company combines a number of shares to create one share. Companies whose share prices are sliding can do a reverse split to avoid being dropped from a stock exchange or to prevent its stock from becoming classified as a penny stock
  5. 5. Understanding Stock SplitsBy T.L. Chancellor, eHow ContributorWhen a company splits its stock, the number of outstanding shares increases while thevalue of each share decreases in equal proportion. In most stock splits, one share of stockbecomes two and the value of each share is halved, leaving the companys overall valueunchanged. In some instances, a company executes a reverse split, in which the number ofshares is decreased and the value of each share is increasedCommon SplitsThe most common stock splits are 2-for-1, 3-for-2 and 3-for-1. If a company has a 2-for-1stock split, one share valued at $200 would become two shares valued at $100 each. If thecompany chose a 3-for-1 split of that same stock, each share would be worth $66.67 each.Why Do This?One of the primary goals of a stock split is to make shares more attractive to individualinvestors and stimulate buying. A company can split stock to increase liquidity. When acompanys shares soar in value, there can be large disparities between the bids for the stockand its asking price. Splitting the stock closes that gap and can increase the number ofpotential investors.Advantages and DisadvantagesThere is division among market experts on the merits of a stock split. There is a belief thatthe impact of a stock split is purely psychological, as it tends to create the perception thatthe stock is more valuable. That may be enough to spur new buying. Some newsletters focusexclusively on stocks that have or could split. Critics say a split doesnt always result in newsales and is superfluous because the capitalization of the company is not affected.Brokerage CommissionsStock splits no longer affect brokerage commissions because most brokerages now chargeflat fees on trades, no matter how many shares are involved. Historically, brokeragescharged commissions based on the number of shares traded, so a stock split helped boosttheir profits.
  6. 6. Reverse SplitIn a reverse split, a company combines a number of shares to create one share. Companieswhose share prices are sliding can do a reverse split to avoid being dropped from a stockexchange or to prevent its stock from becoming classified as a penny stock.What Is a Stock Split?A stock split is a corporate action that increases the number of the corporations outstandingshares by dividing each share, which in turn diminishes its price. The stocks market capitalization,however, remains the same, just like the value of the $100 bill does not change if it is exchanged fortwo $50s. For example, with a 2-for-1 stock split, each stockholder receives an additional share foreach share held, but the value of each share is reduced by half: two shares now equal the originalvalue of one share before the split.Lets say stock A is trading at $40 and has 10 million shares issued, which gives it a marketcapitalization of $400 million ($40 x 10 million shares). The company then decides to implement a 2-for-1 stock split. For each share shareholders currently own, they receive one share, deposited directlyinto their brokerage account. They now have two shares for each one previously held, but the price ofthe stock is split by 50%, from $40 to $20. Notice that the market capitalization stays the same - ithas doubled the amount of stocks outstanding to 20 million while simultaneously reducing the stockprice by 50% to $20 for a capitalization of $400 million. The true value of the company hasnt changedone bit. Advertisement - Article continues below.The most common stock splits are, 2-for-1, 3-for-2 and 3-for-1. An easy way to determine the newstock price is to divide the previous stock price by the split ratio. In the case of our example, divide$40 by 2 and we get the new trading price of $20. If a stock were to split 3-for-2, wed do the samething: 40/(3/2) = 40/1.5 = $26.6.It is also possible to have a reverse stock split: a 1-for-10 means that for every ten shares you own,you get one share. Below we illustrate exactly what happens with the most popular splits in regards tonumber of shares, share price and market cap of the company splitting its shares.
  7. 7. Whats the Point of a Stock Split?So, if the value of the stock doesnt change, what motivates a company to split its stock? Goodquestion. There are several reasons companies consider carrying out this corporate action.The first reason is psychology. As the price of a stock gets higher and higher, some investors may feelthe price is too high for them to buy, or small investors may feel it is unaffordable. Splitting the stockbrings the share price down to a more "attractive" level. The effect here is purely psychological. Theactual value of the stock doesnt change one bit, but the lower stock price may affect the way thestock is perceived and therefore entice new investors. Splitting the stock also gives existingshareholders the feeling that they suddenly have more shares than they did before, and of course, ifthe prices rises, they have more stock to trade.Another reason, and arguably a more logical one, for splitting a stock is to increase a stocks liquidity,which increases with the stocks number of outstanding shares. You see, when stocks get into thehundreds of dollars per share, very large bid/ask spreads can result (see Why the Bid/Ask Spread IsSo Important.). A perfect example is Warren Buffetts Berkshire Hathaway, which has never had astock split. At times, Berkshire stock has traded at nearly $100,000 and its bid/ask spread can oftenbe over $1,000. By splitting shares a lower bid/ask spread is often achieved, thereby increasingliquidity.None of these reasons or potential effects that weve mentioned agree with financial theory, however.If you ask a finance professor, he or she will likely tell you that splits are totally irrelevant - yetcompanies still do it. Splits are a good demonstration of how the actions of companies and thebehaviors of investors do not always fall into line with financial theory. This very fact has opened up awide and relatively new area of financial study called behavioral finance (see Taking A Chance OnBehavorial Finance.).Advantages for InvestorsThere are plenty of arguments over whether a stock split is an advantage or disadvantage toinvestors. One side says a stock split is a good buying indicator, signaling that the companys shareprice is increasing and therefore doing very well. This may be true, but on the other hand, you cantget around the fact that a stock split has no affect on the fundamental value of the stock andtherefore poses no real advantage to investors. Despite this fact the investment newsletter businesshas taken note of the often positive sentiment surrounding a stock split. There are entire publicationsdevoted to tracking stocks that split and attempting to profit from the bullish nature of the splits.Critics would say that this strategy is by no means a time-tested one and questionably successful atbest.Factoring in CommissionsHistorically, buying before the split was a good strategy because of commissions thatwere weighted by the number of shares you bought. It was advantageous only because it saved youmoney on commissions. This isnt such an advantage today because most brokers offer a flat fee forcommissions, so you pay the same amount whether you buy 10 shares or 1,000 shares. Some onlinebrokers have a limit of 2,000 or 5,000 shares for that flat rate, but most investors dont buy thatmany shares at once. The flat rate therefore covers most trades, so it does not matter if you buy pre-split or post-split.ConclusionThe most important thing to know about stock splits is that there is no effect on the worth (asmeasured by market capitalization) of the company. A stock split should not be the deciding factorthat entices you into buying a stock. While there are some psychological reasons why companies willsplit their stock, the split doesnt change any of the business fundamentals. In the end, whether youhave two $50 bills or one $100 bill, you have the same amount in the bank.
  8. 8. Insolvency & Restructuring - SwitzerlandMerger as a Restructuring MeasureJune 17 2005Mergers under the ActMerger as Restructuring MeasureConflict with Corporate Rules on InsolvencyIn 2004 the new Merger Act entered into force. The act contains the legal framework for mergers and similartransactions (eg, spin-offs and asset transactions) for Swiss corporations, foundations and certain unincorporatedbusinesses, as well as specific public law institutions. This update considers the issue of mergers involving distressedcompanies.Mergers under the ActBefore the enactment of the Merger Act, mergers of corporations in Switzerland occurred by one company merginginto another (absorption), or two or more companies merging into a new company (combination). This basic set-uphas not changed under the Merger Act. However, aside from regulating in detail the prerequisites of a merger, the actintroduced a simplified procedure for affiliated companies and small caps, and also introduced specific provisionsgoverning companies in distress or liquidation. While in some respects the prerequisites for a merger have becomestricter, in others mergers have become much simpler.A merger that does not fall into the simple merger category involves the following steps: The companies involved must submit to a merger agreement and issue a merger report, and these documents, together with the merger balance sheet, must be verified by an appropriately qualified auditor. A period of 30 days must be set aside during which shareholders have the right to inspect the merger documents. Prior to a resolution on the merger being taken, employees have the right to be consulted in accordance with employment law rules. After these consultation periods, the shareholders meetings of the merging companies may resolve on the merger. This resolution will be entered into the Commercial Register, at which point the merger becomes effective Finally, creditors may generally request that their claims be secured.The simplified procedure mainly applies to the absorption of a subsidiary by the parent company or to a mergerbetween sister companies. If the subsidiary to be merged into the parent or the two sister companies to be mergedis/are held 100% by the parent, the merger agreement is simpler than normal and a merger report and verification arenot required. While employees still must be consulted, there is no need for shareholders to inspect the mergerdocumentation.If a subsidiary is held not 100% but 90% or more, the procedure will be simplified in part only. In general, a mergerreport and resolution are not required, but a special auditor will still need to verify the merger.
  9. 9. Merger as Restructuring MeasurePrior to the Merger Act, the question of whether distressed companies could be involved in a merger was muchdebated in Swiss legal doctrine. This debate has been brought to an end by the act, which explicitly allows adistressed company to be absorbed or combined if certain prerequisites are met.A company is distressed if the latest balance sheet shows that half of the capital stock and statutory reserve is nolonger covered. A severe form of distress occurs if the corporations liabilities exceed its assets (over-indebtedness).Normally, an over-indebted company must file for bankruptcy or a moratorium (for further details please see"Corporate Restructuring Explained").While a company in financial difficulties may be rescued by merging into another company, there must be someprotection for the creditors of the other company or companies involved in the merger. Therefore, under the act adistressed company may merge with another, non-distressed corporation only if the non-distressed company hassufficient free equity to cover fully the share capital of the distressed company. Free equity is the amount which thecompany could also pay out as a dividend (ie, equity in excess of the share capital and statutory reserves).The act still allows the merger if creditors of the participating companies subscribe a subordination of their claims tothe extent that there is not sufficient free equity. This will ensure that where the company becomes insolvent, the debtwill be treated as equity. The subordinating creditors will participate only if and to the extent that all other creditorshave been fully satisfied.In order to verify that the prerequisites are satisfied, the surviving company must submit a report by an appropriatelyqualified auditor to that effect.Conflict with Corporate Rules on InsolvencyWhere a company is in distress, corporate law provides that it must call a shareholders meeting at which the board ofdirectors will suggest restructuring measures. If the company is over-indebted, it must file for bankruptcy immediately.Non-observance of these rules would subject the members of the board to personal liability.Although the first rule does not necessarily conflict with the possibilities granted under the Merger Act, the secondrule does, if applied strictly: if the board must file for bankruptcy immediately, there is no room for a merger.Three key points must be made. Firstly, in order to verify the over-indebtedness, the company must establish (exceptin obvious cases) audited interim accounts at a going-concern value and at liquidation values. Only where bothaccounts show over-indebtedness must the company file for bankruptcy. This is a time-consuming process duringwhich the company may also prepare for a merger.Secondly, the company may avoid filing for bankruptcy if creditors are willing to agree on a subordination of theirclaims.Finally, and most importantly, there is a tendency in Swiss law to relax the requirement for an immediate filing. TheFederal Supreme Court has held that the filing may be avoided if a serious possibility of restructuring exists.Additionally, proposals for a new accounting law suggests that the board should be granted a period of 60 days inwhich to file for bankruptcy. While the law is a long way from being enacted, doctrine sometimes refers to theproposals to interpret the discretion of the board.The board of directors is accordingly given a certain leeway even if it fears that the company is over-indebted, butsees a possibility of a merger to avoid bankruptcy.However, if a merger is not already on the horizon when the situation becomes critical, there may not be sufficienttime and the board of directors may have to follow the requirements of corporate law. At this stage, the board maydecide to file for bankruptcy, but at the same time apply for a corporate moratorium (for further details please see"Corporate Restructuring Explained"). A board of directors may find itself in an uncomfortable situation and thereforeprefer this route. If a merger is an option, the company may still go ahead with it under a moratorium.

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