ppt for corporate actions

Corporate Action• It is an “event” initiated by a public company that affects the securities (equity or debt) issued by the company, company’s financial structure and ultimately the stakeholders

Types of Corporate Actions

Corporate actions are classified as:• Voluntary• Mandatory and • Mandatory with choice

Types of Corporate Actions Contd..• Mandatory Corporate Action: It is an event initiated by the corporation and by the board of directors, that affects all shareholders.

Participation of shareholders is mandatory for these corporate actions.

An example of a mandatory corporate action is cash dividend. All holders are entitled to receive the dividend payments, and a shareholder does not need to do anything to get the dividend.

Other examples of mandatory corporate actions include stock splits, mergers, pre-refunding, return of capital, bonus issue, asset ID change, pari-passu and spinoffs.

Strictly speaking the word mandatory is not appropriate because the share holder doesn't do anything. In all the cases cited above the shareholder is just a passive beneficiary of these actions. There is nothing the Share holder has to do or does in a Mandatory Corporate Action.

Types of Corporate Actions Contd..• Voluntary Corporate Action: These are actions requiring a decision from the investor on whether or not to participate.

Companies will not process these actions automatically because, the decision on whether to participate will vary for every investor.

Shareholders may chose to take no action which will leave their securities unaffected by the Corporate Action.

Voluntary corporate action includes Tender Offer, Rights issue, Making buyback offers to the share holders while delisting the company from the stock exchange etc.

Types of Corporate Actions Contd..

• Mandatory with Choice: This corporate action is a mandatory corporate action where share holders are given a chance to choose among several options

An example is cash or stock dividend option with one of the options as default

A list of Corporate Actions Events / Corporate Actions Types

• For EQUITIES:

Mandatory Events

Mergers A merger occurs when two or more companies combine into one

while all parties involved mutually agree to the terms of the merge. The merge usually occurs when one company surrenders its stock to the other.

Both companies' stocks are surrendered and new company stock is issued in its place.For example, in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company, GlaxoSmithKline, was created. In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. Being bought out often carries negative connotations; therefore, by describing the deal euphemistically as a merger, deal makers and top managers try to make the takeover more palatable. An example of this would be the takeover of Chrysler by Daimler-Benz in 1999 which was widely referred to as a merger at the time.

Acquisition

Acquisition means a bigger company acquiring a smaller one for further expansion. The acquiring company often offers a premium on the market price of the target company's shares in order to attract shareholders to sell.

For example, News Corp.'s bid to acquire Dow Jones was equal to a 65% premium over the stock's market price.

Bonus Issue• Also known as Stock Dividend• Shareholders are awarded additional securities (shares, rights or warrants), in proportion to their holding, free of payment

• A company calls a Bonus Issue to increase the liquidity of the company's shares in the market. Increasing the number of shares in circulation reduces the share price.

• Theoretical example, company ABC calls a 1 for 4 Bonus issue:

For every four shares you own in ABC you will receive one additional free share i.e. you will own 5 shares of ABC after the issue

Cash Dividend

• Distribution of cash to shareholders, in proportion to their equity holding

• Effects of a Dividend on the share priceExample, if an investor owns 100 shares and the cash dividend is Rs. 0.50 per share, the owner will receive Rs. 50 in total.

• Shareholders in companies which pay little or no cash dividends can reap the benefit of the company's profits when they sell their shareholding, or when a company is wound down and all assetsliquidated and distributed amongst shareholders

• The face value of the shares will not be affected

De-merger A business strategy in which a single business is broken into

components, either to operate on their own, to be sold or to be dissolved.

A de-merger allows a large company, such as a conglomerate, to split off its various brands to invite or prevent an acquisition, to raise capital by selling off components that are no longer part of the business's core product line, or to create separate legal entities to handle different operations.

For example, in 2001, British Telecom conducted a de-merger of its mobile phone operations, BT Wireless, in an attempt to boost the performance of its stock. British Telecom took this action because it was struggling under high debt levels from the wireless venture. Another example would be a utility that separates its business into two components: one to manage the utility's infrastructure assets and another to manage the delivery of energy to consumers.

Spin-off• The event through which a new company is created and separated

from its parent company. After the event there are 2 separate companies, each with their own outstanding share capital.

• Shareholders of the parent company will be given some amount of shares in the spun off company according to a ratio (for example, each shareholder in parent company A will receive 5 shares in the spun off company B). Each shareholder holds shares in company A as well as in B at the moment of the spinoff.

• Spin-offs may also be motivated by a desire to benefit the stockholders by improving the stock price. It is difficult to determine the strength of several unrelated businesses that are part of the same company. As a result, the market inevitably undervalues these companies. Therefor, a spinoff will help a Company to clearly value the strength of two separate companies properly

Stock split

• A corporate action in which a company’s existing shares are divided into multiple shares.

• For Ex. A company with 100 shares of stock price Rs 50 per share (100*50 = 5000). The company splits it shares 2 for 1. There are now 200 shocks for Rs 25 each (200*25 = 5000) .

• The reason why companies split their stock is to make them more affordable to investors because stock price reduces after it is split.

• Likewise, reverse stock split increases the stock price while reducing number of outstanding shares.

Mandatory Events with Options

• Cash Dividend• Merger and Acquisition and • Spin Off

Voluntary Events

Buy-back program / Repurchase Offer Buyback is an action in which company offers to buys back its stock from the current share holders at an attractive price. The reason is to reduce the shares outstanding in the market or to reduce the stake of shareholders in company.

A company may decide to reduce its capital when it has excess liquidity and an insufficient return on equity. By repurchasing its own shares, the company automatically reduces its cash balance. The subsequent destruction of shares (the actual capital reduction) then reduces its equity capital, so that the return on equity increases

Example, In the spring of 2000, Royal Philips Electronics announced a capital reduction. The group’s share capital was reduced by 3%, and EUR 1.7bn was paid out to shareholders in the process.Philips paid EUR 1.26 per share and each block of 100 shares was replaced by 97 shares.

Rights Issue It refers to offering additional shares to the current shareholders of the stock.

This is done by companies to raise capital for further expansion.

It provides its existing shareholders the right to buy the stock at discounted rates

Assume company XYZ has announced rights issue in the ratio of 5:2 (for every 5 shares additional 2 shares are offered). If you hold 100 shares of XYZ then you will be entitled to get 40 (100 * 2/5) new shares of XYZ.

Corporate Actions For BONDS:

Conversion of convertible bonds A bond that can be converted into a predetermined amount of the company's equity at a given time, usually at the discretion of the bondholder

Issuing convertible bonds is one way for a company to minimize negative investor interpretation of its corporate actions.

For example, if an already public company chooses to issue stock, the market usually interprets this as a sign that the company's share price is somewhat overvalued. To avoid this negative impression, the company may choose to issue convertible bonds, which bondholders will likely convert to equity anyway should the company continue to do well.

Other Corporate actions with regard to Bonds

• Coupon Payment - interest paymentThe issuer of the bond pays interst according to the terms and conditions of the bond, ie interest rate.

• Early RedemptionThe issuer of the bond repays the nominal prior to the maturity date of the bond, normally with accrued interest.

• Partial RedemptionThe issuer of the bond repays part of the nominal prior to maturity, normally with accrued interest.

• Final RedemptionThe issuer of the bond repays the nominal of the bond, normally with accrued interest.

How a Company announces Corporate Actions?

Registered shareholders are told of the event by the company's Registrar.

Such information is disseminated via online portals

How a Company announces Corporate Actions? Contd..

Need of Corporate Actions

The primary reasons for companies to use corporate actions are:

• Return profits to shareholders: Cash dividends are a classic example where a public company declares a dividend to be paid on each outstanding share.

Bonus is another case where the shareholder is rewarded

Need of Corporate Actions Contd..

• Influence the share price: If the price of a stock is too high or too low, the

liquidity of the stock suffers Stocks priced too high will not be affordable to all investors Stocks priced too low may be de-listed Corporate actions such as stock splits or reverse stock splits increase or decrease the number of outstanding shares to decrease or increase the stock price respectively.

Buybacks are another example of influencing the stock price, where a corporation buys back shares from the market in an attempt to reduce the number of outstanding shares thereby increasing the price.

Need of Corporate Actions Contd..

• Corporate Restructuring: Corporations re-structure in order to increase their profitability

Mergers are an example of a corporate action where two companies that are competitive or complementary come together to increase profitability

Spinoffs are an example of a corporate action where a company breaks itself up in order to focus on its core competencies

Corporate Actions Risks

For many years Corporate Actions have been known to be very risky. The smallest mistake can easily result in huge losses

Types of Corporate Actions Risks

• Financial risk A mistake can easily lead to a substantial financial loss or -gain. (just like making losses, it is also possible to end up with a gain as a result of a mistake).

• Audit risk The industry is being closely regulated and auditors will make sure that every procedure is being adhered to. Making a profit as a result of devation (intentionally or not) of procedures is not allowed.

• Trading risk Failing to make the right decision based on the information of the event may lead to sub-optimal trading.