what’s a break up for?

Chief editor



As financial information is eaten like pastries, hot and breakfasted, Anthony Bondain gets up at dawn to serve you a morning meeting every morning.
For more than two decades, a financial journalist and stockbroker, inimitable editor and phlegmatic leader, editor-in-chief of ZoneBourse.

Companies whose share price is rising sometimes have the option of dividing the share price by multiplying the number of shares outstanding by the same factor. In France, this generally involves distributing the face value of the share. In the United States, the operation is called a “split.” Amazon has just made a “split” of 20. Google will do the same in July, based on an identical multiple. But by the way, what is the split used for and what is its impact?

You should know at the outset that the division has absolutely no effect on the value of the company. If you can imagine the process, it’s like taking the same cake and dividing it into several parts. The existing shareholders will keep for them exactly the same share of the cake in relation to the shares they own. For example, with a division of 4, my share of $ 1,000 will be automatically replaced in my portfolio by four shares of $ 250 each.

The division has five main advantages:

  • It makes it possible to significantly improve the liquidity of the share and thus facilitate transactions for individual shareholders or small institutional shareholders, both at entry and exit, in full or in part. On the other hand, if the liquidity impact is limited overall with huge capitalizations such as Amazon or Google, this is significant for small capitalizations whose stock price has risen to 5 or 6 numbers.
  • For large institutional investors, this can also dramatically reduce transaction costs – as a massive increase in liquidity narrows the spread between supply and demand. This is a negligible figure when investing small amounts, but such a spread of a few cents or tens of cents can be very expensive for institutions in transactions of hundreds of millions or billions.
  • In general, as evidenced by various academic studies, companies that “split” their shares benefit from a revitalized valuation in the coming months, perhaps because the stigma of “expensive stocks”, however unjustified, no longer exists, again raising public interest. .
  • This simplifies the management of stock options remuneration, especially for technology companies that make extensive use of them, including all types of subordinated positions.
  • Finally, stocks that are “split” tend to perform better than others, as the following chart from BofA shows. This is, of course, because stocks that are rising high enough to qualify for a split are already stocks of companies that are doing well and performing better than the market.
The distribution of shares is historically ascending - The average performance of the S&P 500 index compared to companies that announced a distribution for 3/6/12 months

The distribution of shares is historically ascending – The average performance of the S&P 500 index compared to companies that announced a distribution for 3/6/12 months

Several negatives need to be included:

  • In the event of operational or financial inconvenience at the company level, this may have a detrimental effect on its public image. Take, for example, a company with a $ 1,000 stock that splits into 10, reducing it to $ 100. Then comes the complicated news or bad news that will cause the stock to drop to $ 40 or $ 50: even if the market capitalization remains the same, public perception will not be the same.
  • In certain specific cases, this operation may contribute to reducing the quality of shareholding by attracting a new public that is more volatile and less familiar with the company. That’s why Warren Buffett has been rejecting the Berkshire Hathaway stock split for decades. The higher ticket served him as a “solution” and ensured that somewhere he attracted only shareholders devoted to his cause, well acquainted with the Berkshire philosophy, and capital for a long or very long time. Berkshire shares are valued at $ 471,500 at the time of writing. There is a more affordable stock B, which states $ 313.66, but it undoubtedly has less benefit – and weight – than the “real” share.
  • Finally, and this is an unofficial shortcoming because it is limited to small capitalizations, the operation can involve significant administrative costs.

Zonebourse.com 2022

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