Be Wary of Share Consolidation

Share consolidation is an exercise whereby the shares of existing shareholders are combined. For example, in a 10 to 1 consolidation, 10,000 shares that you own will become 1000 shares.

Even though the number of shares has been reduced, nothing has changed in terms of the percentage of shareholdings. Theoretically, the price of the shares should increase by the same multiple in which the share was consolidated.

For example, if the price of a share was trading at $0.10 and there’s a consolidation of 10 is to 1, it should trade at $1 after the consolidation exercise.

shares-consolidationRecently, there had been a number of share consolidations. Chasen, whose share was trading at $0.005 to $0.01, did a 100 is to 1 consolidation. If the valuation remains unchanged (big if), the price should trade at $0.50 to $1 post consolidation.

Apparently, there were many shareholders who were not aware of this consolidation and happily sold their shares at $0.13-0.20 post consolidation. On the other side, directors and the company were buying up the shares, driving up the price to $0.30.

The sellers would have gotten a rude shock (and big loss) when they later realised they had unknowing shorted the shares as the number of shares they owned had actually reduced. They would be subjected to SGX’s compulsory buyback and a check of SGX’s annoucements confirmed that indeed there were many short sellers for several days after consolidation (even up to today!).

Two other companies which also had share consolidations, STX Pan Ocean and Anwell, did not seem to have much of this “short selling” problems taking place.

If you are a shareholder of any company, this highlights the importance of reading the documents that they send to you. Know what is happening to your company, and do not be caught off guard just because you didn’t know what is happening.

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Comments

  1. Elly says

    Hi Martin,
    Why does a company choose to have share consolidation of their shares? Is it becos the share value has somehow come down alot and the company is not in ‘good shape’? That is to say that these companies are rather ‘shaky’, so it’s better not to buy their shares?
    Thanks!
    Regards
    Elly

    • says

      Hi Elly,

      The company will always provide the “reasoning” for the consolidation in the prospectus they send out to shareholders.

      It is good to read them and see how credible they are.

      One reason is it makes the share more tradeable.

      For example, if the fair value of a share is around 5 cents, buyers and sellers might be bidding to buy and sell the shares at 0.05 and 0.055 respectively.

      This is a huge 10% spread between the buying and selling price. Lets say we do a 10 is to 1 consolidation. The fair value of the new shares are worth 50 cents.

      Now, instead of bidding at 50 cents and 55 cents, buyers and sellers can close the gap and bid all the way to 50 and 50.5 cents. The spread (as a percentage of the price) is so much smaller.

      I don’t think we can generalise and say that any company that does a share consolidation is shaky.

      But it could be a sign that the pre-consolidation price is at fair value or even over valued.

      If the fair value of a company is 20 cents and it is trading at 5 cents, it would be much more worthwhile for the company to conduct a share buyback exercise. Provided they have the cash of course.

      • Elly says

        Hi Martin,
        Thank you so much for your prompt reply; now i can understand better.
        Hope 2009 will provide a good opportunity for all investors to enter or re-enter the stock market!
        Best regards
        Elly

  2. edward says

    Hi Martin

    Could you kindly advise whether Chartered Semicon’s consolidation of 10 shares to 1 is good for investors holding on to their shares or would be better for these investors to sell them before the consolidation?

    Thanks

    Edward

    • says

      Hi Edward,

      Technically, it shouldn’t make any difference. If the price is trading at $0.18 now, it should trade at $1.80 after consolidation.

      However, the higher price might make it less accessible to small time retailers and their perception might also be different. Some investors wrongly decide whether a share is cheap or expensive by its absolute price.

      On another note, you actually get a smaller spread after consolidation. Instead of a spread of 0.005 (0.18/0.185), it is now 0.01 (1.80/1.81) which is akin to $0.001 previously.

  3. Jane says

    Hi Martin,

    Could you kindly advise on Chartered Semicon’s consolidation of 10 shares to 1 if i have less than 10000 shares let say 2000shares
    then what shall i do or what will happen?

    Also, as u mention above
    “the sellers would have gotten a rude shock (and big loss) when they later realised they had unknowing shorted the shares as the number of shares they owned had actually reduced. They would be subjected to SGX’s compulsory buyback and a check of SGX’s annoucements confirmed that indeed there were many short sellers for several days after consolidation (even up to today!).
    then when then the seller can sell their shares?

    Thanks
    Jane

    • says

      Hi Jane,

      If you have 2000 shares, it will become 200 shares. You can sell it on the unit market.

      So, for example, you had sold 2000 shares unknowingly, you would have shorted 1800 shares as you only have 200 shares to deliver.

      SGX will do a forced buyin of the 1800 shares for you to cover the position. In this case, you can probably appeal to SGX to waive the short-selling fine of $1000 or 5% of contract (whichever is higher).

      The 200 shares can be sold anytime; it is a matter of not selling more than you own.

  4. dontnomuck says

    Dear lioninvestor

    I own 3000 SMRT shares since early this year, The company has announced dividend payout of 6 cents payable on 12 August 2009. Would I still be entitled to the dividend if I sell off my shares before l2 August.

    dontnomuck

  5. Camper says

    Hi Martin,

    In the SGX website, I realized the status in Chartered Semiconductor is being denoted as “BI”. According to SGX, the term “BI” explicitly states that the stocks status is “Buy In Only”.
    Could it be due to the recent shares consolidation?
    Kindly enlighten me on this term “Buy In Only”. Thank you.

    • says

      Hi Camper,

      Chartered and Chartered 100 are the old counters and are no longer for trading.

      The new ones are CharteredSC and CharteredSC 100.

  6. Camper says

    Hi Martin,

    Thanks for your reply. Currently I am holding 10000 shares of Chartered. In this case, if I desire to liquidate my position, how should I go about doing it?
    (Ie, Close my position by selling it via Chartered SC.
    Or wait till the “BI” status for Chartered is over? However as stated earlier Chartered might not be available for trading.

    • says

      Hi Camper, do you have 10000 or 1000 shares?

      If you were holding 10000 shares in the past, these would have become 1000 shares after consolidation. You can sell 1000 shares of Chartered SC if you wish to liquidate the position.

      If you were holding 100000 shares, these would have become 10000 shares now. Then you would sell 10000 shares of Chartered SC.

      • Camper says

        Hi Martin,

        Currently I possess only 10000 Chartered shares. This is equivalent to 1000 shares of Chartered SC.
        Thanks for your prompt reply.

  7. Jane says

    Hi Martin,

    Below is what i found in sgx

    CHARTERED SEMICONDUCTOR MFGLTD ENTITL.
    Announced on 2009-05-07

    Particulars : SHARE CONSO OFFER OF 1 FOR 10
    Ex-date : 18 May 2009
    Buy-In Last Cum Date : 20 May 2009
    Record Date : 20 May 2009

    what does buy-in last cum date means?
    What is the different if i want to
    sell or buy my shares before the 20May?

    Thanks

    Jane

    • says

      Hi Jane,

      If you own 10000 shares previously, it will be recorded on the books as 1000 shares on 20 May.

      If you are planning to buy/sell chartered now, you would be trading the consolidated shares as the trades are settled t+3.

      15th May is the last date for trading of the un-consolidated shares.

  8. zeejay says

    Hi Martin,

    You mentioned that the consolidated shares can be sold in the unit market.

    I have 300 shares after consolidation. I tried to sell 300 shares online but the system prompted that I can only sell in lots of 1000 shares.

    How do I go about this?

    Thanks.

    • says

      Hi Zeejay,

      The unit market is not accessible online for most brokerage online systems. You will have to place the trade by phone.

      If you are using POEMS, they will have the unit market online.

      Some counters might also provide for a temporary trading counter xxx 100 which allows for trading in 100 shares.

  9. zeejay says

    Hi Martin,

    I’m using POEMS.
    I’ve looked through and found the CharteredSC 100.

    Thanks, Martin

  10. edward says

    Hi Martin

    Swiber Holdings had a share placement recently at S$0.88 per share. Would this reduce the market price of Swiber Holdings which was trading at S$1.05 per share before the share placement? With the increased number of shares after the share placement, wouldn’t its share value be decreased?

    I suggest you provide on-line share investment courses and recommend stocks to buy/sell daily.

    Anticipatingly

    Edward

    • says

      Hi Edward,

      I haven’t been following swiber but it would depend on how many new shares were issued.

      If you value the shares based on PE and the forecast earnings doesn’t change, then certainly your valuation will be different.

      Short term wise, the price can go any direction.

      Sorry to disappoint, but no plans to do any stock recommendation or structured online course at this moment…

  11. Sylvia says

    Hi Martin,

    Yes, I wish to ask about Swiber as well. I assume that the Swiber will open about $1 on Monday. But investors short term uncertainty about this may drive the price even lower. So is it advisable to cut loss or hold it first?

    Thanks.

    • says

      Hi Sylvia,

      It is usually a futile exercise to try to predict the short term direction of prices…half the time, you are right and the other half of the time, you are wrong.

      Especially when there is so much noise in the market that could have a greater impact than this share placement.

  12. tawen says

    Hi,
    Previously i own 1000 chartered , after consolidation it shrink to 100 charteredsc, and the value also shrink from $2000 to $200. Is it correct? i’m a new bird. Why after consolidation the value also shrink?

    • says

      Hi Tawen

      a share consolidation has no effect on the value of the shares.

      The price of Chartered used to be about 20 cents/share before consolidation, after the consolidation, it’s at $2/share.

  13. Christoph says

    Hi – saw your comments on consolidation but can’t understand the logic of you seeming to suggest it makes little difference to the shareholder ( if I understood you correctly ). I took a wild but modest punt on AIG in March – 3500 shares. Shares were 1.40 when I purchased them and rose to 1.90 some weeks ago – not a bad for a three month wait. But after 1 for 20 consolidation I am left with just 175 shares @ $18.25 per share!! Perhaps arrogantly, I was punting on AIG heading for 3 – 5 dollars ( or more ) over the next 24 – 36 months (??) if it could get back on its feet, giving gains in the 100′s of percent. The company had terrific revenues in the past and I thought it might be able to attain profitability and share price rise again in coming years as the economy recovered. Had it ever gone back to the 20,30 or 30 dollar per share it once was, the gains would have been astronomical. As a result of the consolidation the chance for such exponential gains has evaporated entirely. At 18 / share the price would need to go to hundreds and hundreds per share to make the same returns…. next to impossible. So I would beg to differ that consolidation is of little consequence to shareholders.

    I would appreciate your comment if any. And yes …punting on AIG was always going to be a BIG call in these troubled times. A hard lesson learned from a foolish choice in hindsight I’d say…

    Regards.

    • says

      Hi Christoph,

      It might seem easier for a share to go from $1 to $10 (pre-consolidation) then from $20 to $200 (post-consolidation), but from a valuation perspective, they actually mean the same thing.

      If 10% of a company is valued $1 million, it is still worth $1 million whether the company has a:

      a) total of 5000 shares and you own 500 shares each priced at $2000
      b) total of 100,000 shares and you own 10,000 shares each priced at $100.

      If the company makes so much money that 10% of the company is now valued at $10 million,

      a) each share will now be priced at $20,000
      b) each share will now be priced at $1000

      You cannot compare the historical price chart based solely on absolute price levels if the share has been consolidated or split. You need to adjust for that.

  14. pam buchanan says

    Hi Martin
    I am very confused as a shareholder of Mano (MANA) with this one. Mano currently trading around 0.09p but I cannot work out what the consolidation SP will be for Mano – should happen mid Aug/September. I dont understand “60 day volume…” and why the SP on conversion is based on 14 April. Any help really appreciated as it seems awfully complicated.

    http://www.marketwire.com/press-release/Mano-River-Resources-Inc-TSX-VENTURE-MNO-974667.html

    - All share transaction whereby African Aura shareholders will receive 1.57 Mano shares for each African Aura share, representing a premium of 18.7% to African Aura’s 60 day volume weighted average share price at market close on 14 April 2009, based on Mano’s 14 April 2009 closing AIM price and an exchange rate of C$1.80 to Pounds Sterling 1.

    • says

      Hi Pam,

      Sorry I missed your message.

      Your case is not actually a share consolidation exercise, but more a merger of two companies, so there isn’t any exact way to calculate what the price of the merged entity will be.

      The prices are only used to calculate how many shares each African Aura shareholder will receive.

  15. simon atley says

    Hi Martin,
    Interesting website, a huge thanks for all your efforts.
    Im actually a uk investor and am scouring the web for info on shares that have consolidated and their short term price action afterwards.
    Reason being is we have a company on the LSE-gfrd (galliford try) that is completing a ri and then consolidation. Quite a good company going forward and wouldn’t normally hesitate to pick the right entry point and invest however the word ‘consolidation’ fills me with a little fear.
    Needless to say companies that I’ve come across in the past have headed south after cons’ eg: tanfield (tan) northgate (ntg) mecom (mec) brit insurance (bre).
    Im just curious as to whether this is the common rule world wide or im just unlucky with what companies im looking at.
    Short term meaning 2-3 months.
    All thoughts appreciated and thanks for your time.

    best regards

    simon atley

    • says

      Hi Simon,

      I wouldn’t say it’s the common rule but maybe it has to do with the fact that growing (in terms of earnings) companies usually won’t have to do a share consolidation.

      It is when earnings drop significantly and the price of the share drops to very low levels that a share consolidation is warranted.

      And if earnings continue to deteriorate, naturally the post-consolidation share price will also drop.

      To make your analysis simple, it might be better to look at the fundamentals of the business rather than look for any historical consolidation patterns.

  16. Shelagh says

    What reason’s do companies usually do a share consolidation of 10 to 1? Is there any reason to believe they might be making themselves more attractive to be bought up by a potential competitor? Is this what companies do before they try make a transition to the TSX? I had shares in a company called (PAN: TSV )Panterra. They are in the process of consolidationg the shares from 10 to 1. The shares are currently worth .05.

    Is there any reason I should be concerned?

  17. M.L. Mosdell says

    If the total number of shares that I own equal 10% of the company’s shares and there is a 10 is 1 consolidation, I do understand that I still have my 10%. My concern is, can then the company after consolidation issue more shares and therefore my % held will become smaller?
    Please advise
    Thanks so much, LB

  18. Jim Mair says

    If I simply hang onto my shares in SNE, which has had a 30-1 consolidation today, where do I stand?

    My Commsec portfolio shows SNE as an Invalid listing.

    Do I still own the now-reduced shareholding?

    Jim

  19. Fuad says

    Hi,

    I have a question:
    Share Consolidation:

    If for example I hold 5000 ordinary shares and a company announces a consolidation of preference shares of 1:10 – do I lose money in this process?

    How does this affect me as an ordinary shareholder as well as the price?

    Thanks.

    • says

      Hi Faud,

      You will end up having 500 shares but typically the share price should increase by 10 times after the consolidation.

      The exercise by itself should not result in any financial gain or loss for you.

      • RAVIYER says

        I am sorry – but I fail to understand how consolidation will not lead to an effective loss. In the case of RBS It will lead to a loss in dividends as the consolidated price really will have NO meaning if the earnings per share remains where it would have been. The earnings per share will not go up 10 times because the process of consolidation was at a ratio of 1:10. This is really a swindle. The apparent face value of a share is perhaps not as important as the earnings and yield for investors. The value of the shares is SIGNIFICANT only for gamblers. The investors will have LOST out in the RBS deal and for that matter in any deal that consolidates shares for an artificial increase in value.

        • says

          Dear Raviyer,

          Earnings per share is simply actual earnings divided by number of shares. If number of shares is now 1/10, the EPS will increase correspondingly by 10 times.

  20. Ryan says

    Hi, thanks for the explanation. I was hoping you could confirm or refute something for me. My friend put a lot of money into the Calgary- based Compton Petroleum a few years ago. The share price fell from around $12 a share to around 12 cents. I advised him to sell the shares he had and get out of debt. However, they reconsolidated this week and the share price went back up to 100 times the previous value, $12. The reconsolidation rate wad 1:200. My question is, did I just “advise” my friend out of a lot of money, or would he have ended up about the same had he kept the shares?

  21. Ana says

    Hi,

    Luna Gold corporation just did a consolidation of 5 to 1. I have 1300 shares and expected my shares to be adjusted to 260 when this happened on Feb 24th, 2012. Instead, there was an execution on my account on the 22nd for a sale of my 1300 shares at the pre-consolidation price of $.63. It is still the same today the 24th, and, in my portfolio, instead of saying LGC.V, it has a long number. I don’t understand this at all. Please help.

  22. Daid Gale says

    When this action takes place, the notification to share holders should, in the contents of the letter, fully explain any potential consequences.

  23. Andy says

    Hi Martin,

    Recently, ASA consolidated their shares from 15 to 1… However, the price did not change from 0.07 to 1.05 as it supposedly should be… Is this usual? Or there is a gestation time for the price to change?

    Regards,
    Andy

  24. Rogued says

    I if have 300 shares at 18 pounds now they are worth 19 pounds per share. My shares suddenly dropped from 300 to 262 and my broker tells me they have been consolidated. Is this how it works ? Plz enlighten still learning.

    • says

      Dear Rogued,

      If there was a share consolidation, your number of shares should have decreased. If your broker said so, that should be correct.

  25. Bob says

    Hello Martin

    I hold 100,000.00 CFD’s in RBS [ Royal bank of scotland in LSE ] bought in when the price was GBP 00.50p and now it had dive to 00.21p, at the moment the holding is in a big loss, and they are going to consolidate shares 10:1 by doing so the number of CFD’s i will have is 10,000.00 but will it create any dangerous problem with regards to sufficient margin being kept in account, at the moment to be precise: Cash in account is GBP 36628.59 Unrealised Loss is : -28201.92 Total margin/Margin requirement is :2192.19 and Trading resources is :6234.48.

    I am worried that for eg: On 6th june 2012 when the shares consolidate i might have to increasing the amount of trading resources and i am running short of funds to top up.

    What do you think ? Is consolidation a danger signal for me.

    Regards
    Bob.

  26. Maz079 says

    Thank you Martin this has helped me a lot as i am trying to consolidate a Limited Insurance Company given that we had challenges with our currency the Zim Dollar, where we were forced to re-denominate the share capital but that does not sound good as we are retaining big figures than what we want. i will get in touch with you when i have done the paper work and advise you of the progress or if in need of assistance.

    regards

    Maz079
    Internal Counsel

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