Consolidation of shares, also
known as reverse stock split, is a corporate action where a company reduces the
number of its outstanding shares while increasing the share price
proportionally. This process does not change the overall market capitalization
of the company but aims to adjust the capital structure to meet certain strategic
or regulatory objectives.
Reasons
for Consolidation:
1. Improving
Perceived Value: Consolidation of shares is often used to
increase the share price to a level that is more attractive to investors or to
meet minimum price requirements for stock exchange listings.
2. Capital
Restructuring: It simplifies the capital structure by
reducing the number of outstanding shares, which can make financial statements
clearer and easier to understand for investors and analysts.
3. Meeting
Regulatory Requirements: Some stock exchanges or regulatory bodies may
have minimum price or shareholding requirements that companies must meet to
remain listed or compliant.
Process:
During a consolidation, existing
shareholders receive a reduced number of shares in exchange for their current
holdings, typically in a ratio such as 1-for-2 or 1-for-10. For example, in a
1-for-5 consolidation, a shareholder who holds 100 shares before the
consolidation would receive 20 shares after consolidation. The share price
increases proportionally to maintain the same market capitalization.
Impact:
-
Shareholder Ownership: While the number of shares held decreases, the
proportional ownership in the company remains the same.
-
Market Perception: A higher share price may enhance the company's
image and attract a different category of investors.
-
Financial Ratios: Key financial metrics like earnings per share
(EPS) and price-to-earnings (P/E) ratio may change post-consolidation due to
the adjusted number of shares.
