Corporate actions – what you need to know

Corporate actions can be defined as any process initiated by a company for which it either has to inform investors or seek some form of approval. They can be either mandatory, where an investor has no say, or voluntary, where the shareholder has a voice in the matter.

Examples of corporate actions include events as simple as a change in ticker name on the stock exchange, through to something as severe as bankruptcy. Other corporate actions include: acquisitions, changes to dividend payments, mergers, stock splits and spinoffs. And this list isn’t exhaustive.

Corporate actions matter because they affect the shares you, as an investor in a company, hold. It is in your interest to stay up-to-date with the goings on in the corporate world, particularly if you own bits of it. In the wake of the coronavirus pandemic, where many businesses have faced significant challenges, we are likely to see an increase in the number of corporate actions that could impact your investments in those companies.

Here’s what investors need to know.

Acquisitions and rights issues

Events such as the coronavirus crisis meant many businesses had to weather the storm, with some faring better than others. This creates opportunities and hazards for firms.

Companies that have been unaffected find themselves awash with cash, making strategic acquisitions a possibility.

Take for example, Diageo, one of the largest drinks makers in the world, listed in the FTSE 100. In 2020, it announced the acquisition of Aviation American Gin, a brand co-owned by actor Ryan Reynolds, for a princely sum of $610 million. 

The Diageo share price has not performed particularly well, even before coronavirus, but the firm makes money and has plenty of cash with which to make strategic moves. The firm’s chief executive said the purchase of Aviation American Gin followed the trend of consumers spending less on alcohol, but increasingly choosing premium brands over bargain booze.

Another deal was the acquisition of digital music service Napster for $70 million by London Stock Exchange-listed MelodyVR. This acquisition is notable because MelodyVR, which is a small AIM-listed firm, is holding a rights issue for £12 million in order to fund the deal.

A rights issue is when a firm offers new shares to the market at a special price and is typically done to raise money, as MelodyVR is doing. It is not the only firm to have done this, although rights issues have not been that common during a crisis because they can be viewed negatively by investors if they suspect companies are doing it just to raise cash for the purpose of survival.

Share splits and dividends

Merger and acquisition activity is not the only corporate action that is ramping up. Companies are reflecting on how they have performed in the past few months and tinkering with their structures and processes.

Electric vehicle (EV) maker Tesla, for example, has rewarded its shareholders’ patience with a stock split. Elon Musk’s ubiquitous EV firm’s share price had been in the doldrums for several years, but it soared in 2020. The company decided to split its shares five ways.

What this means for shareholders is they won’t lose any value, but whereas previously one share was worth $x, a shareholder will now have five shares, all still worth $x, but divided into five pieces. This means longstanding shareholders can cash in on some of their holdings without liquidating their whole portfolio, while also lowering the barrier to entry for prospective investors.

One less rewarding company activity that has taken place during the coronavirus crisis, was dividend cuts.

Dividend cuts (a mandatory event) are a significant issue for investors as many holders of dividend-paying stocks do so to draw an income from the investment. Awareness of when a firm might cut, or even cancel entirely a dividend, is essential to anyone reliant on them for income.

Perhaps the most high-profile company to do so during the height of the pandemic was oil firm Shell. In April the firm cut its dividend for the first time since World War Two and set the tone for what was to follow, with hundreds of companies following suit.

With an uncertain economic outlook, companies have to assess whether they will cut dividends. Some continue to pay them out of their cash reserves in the hope investors will hold on, but if an economic recovery doesn’t go to plan, it may then be time for a cut.

The upshot of observing all this corporate activity is that companies adapt to the changes in the business environment.

As economies around the world continue to recover from the crisis, or indeed fall back into trouble, firms will have to adapt and react as they see fit. The more aware you are of what those companies are doing, especially ones you may be invested in, the better investment decisions you’ll be able to make.

September 2020