MERGER two or more companies combine, by mutual agreementBUYOUT the controlling interest in a company is boughtSTOCK SPLIT more shares issued, same total valueREVERSE SPLIT fewer shares issued, same total valueSPIN-OFF a division becomes its own public companySESSION 13 Corporate Action
Not every change in your portfolio comes from a buy or sell order you placed yourself. Companies make their own moves, mergers, splits, buyouts, spin-offs, and those moves ripple straight into your holdings.
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Background
Five Ways a Company Can Change Your Portfolio
A corporate action is any decision a company makes that changes its stock, separate from anyone buying or selling shares on the open market. Five of the most common:
MergerTwo or more companies combine into one, with all parties agreeing to the terms. In March 2006, the not-for-profit New York Stock Exchange merged with Archipelago Holdings to form a new, publicly traded company, NYSE Group. Archipelago shareholders received shares in NYSE Group equal in value to their original Archipelago stock.
Source: NYSE Group merger-completion press release, filed with the SEC, March 7, 2006
Stock SplitWhen a stock's price climbs above what a company considers its ideal range, or when a company wants to widen its investor base, it can split its stock: issuing more shares in exact proportion to the existing ones, without changing anyone's total investment value. A "two-for-one" split turns each existing share into two, each worth half the price. Investors end up holding more shares at a lower price each, with the same total stake.
Reverse SplitThe opposite move: a company decreases its share count to raise the price per share. Issuing half as many shares at double the price is one example. This can make a stock look more appealing to certain investors, without changing the company's underlying equity.
Spin-OffA parent company sets up one of its existing divisions or subsidiaries as its own separate public company, often to refocus its core business or let the new company attract its own investor interest. Existing shareholders of the parent typically receive shares in the new company as part of the spin-off.
BuyoutThe majority, or controlling interest, of a company's shares is bought. A management buyout is a specific case: the company's own executives buy out the shareholders, taking the company private so they can run it without being accountable to public shareholders. Investors are paid market value for shares that then stop trading.
Key Terms
Vocabulary
Tap a card to flip it and reveal the definition. Each card's top edge is color-coded to its action type.
Corporate Action
When a public company initiates an action that brings a change to its stock.
Merger
Two or more companies combine into one company, with all parties mutually agreeing to the terms.
Buyout
The majority of a company's shares of stock, its controlling interest, is bought.
Management Buyout
The management of a corporation buys the controlling shares in the company, taking it private.
Stock Split
A company divides each outstanding share into more shares, lowering the price per share. Company equity is unaffected.
Reverse Split
A company decreases its outstanding share count, raising the price per share. Company equity is unaffected.
Spin-Off
An existing publicly owned company distributes new shares, or sells part of its assets, to create a separate new public company.
What You'll Be Able To Do
Objectives
Define each term related to corporate action.
Develop your own explanation of each term to present to the class.
Explain the impact of different corporate actions on investors.
Evaluate scenarios to determine their impact on an investor's portfolio.
Warm-Up
What Just Happened to My Portfolio?
Three teams check their portfolios and find something changed, without placing a single buy or sell order. Figure out what happened before revealing the answer. (None of these scenarios factor in commissions or fees.)
Team SMG_10_A1
Was holding 100 shares of Disney stock with a net cost/share of about $30. One day they check and find 200 shares with a net cost/share of $15. No buy or sell transactions were entered. Explain.
Stock SplitA two-for-one stock split. 100 shares × $30 = $3,000 total value before; 200 shares × $15 = $3,000 total value after. The share count doubled and the price per share halved, so the total stake didn't change.
Team SMG_10_A2
Was holding 200 shares of Gap, Inc. with a net cost/share of about $25. One morning the Gap shares were gone, replaced by an additional $5,000 in Total Equity. They did not sell their shares. Explain.
BuyoutA buyout. 200 shares × $25 = $5,000, exactly the amount that appeared in Total Equity. Someone, an acquirer or the company's own management, bought the controlling interest and cashed shareholders out at market value; the shares then stopped trading and the cash value landed in the account instead.
Team SMG_10_A3
Was holding 100 shares of Fisher Scientific International, Inc. (Symbol: FSH). A few days later, TMO appeared in their Account Holdings instead of FSH. They neither sold FSH nor bought TMO. Explain.
MergerThis matches a real event: Thermo Electron Corporation (NYSE: TMO) and Fisher Scientific International Inc. (NYSE: FSH) completed a tax-free, stock-for-stock merger on November 9, 2006, forming Thermo Fisher Scientific Inc., which trades under the symbol TMO. FSH shareholders' stock was automatically converted into TMO shares as part of the merger, no separate buy or sell order needed.
Source: Thermo Fisher Scientific merger-completion press release, filed with the SEC, November 9, 2006
Activity Sheet 1
Corporate Actions
P&G
The Procter & Gamble Company (Symbol: PG) is considered by some to be the #1 maker of household products. In 2001, it bought Clairol. In 2003, it bought Wella AG. In 2005, it bought Gillette. Which type of corporate action occurred? Explain.
BuyoutAll three were buyouts: Procter & Gamble bought Clairol, Wella AG, and Gillette outright, each becoming part of P&G rather than remaining independent public companies. The Gillette deal alone was P&G's largest acquisition ever, a roughly $57 billion, all-stock transaction announced January 28, 2005 and completed October 1, 2005.
Source: "P&G to buy Gillette in $57B stock deal," CNN Money, January 28, 2005
P&G, continued
Has P&G's purchase of Clairol, Wella AG, and Gillette made it a more attractive investment to you? Would you invest in P&G? Why or why not?
DiscussionOpen question, reasonable answers can go either way. In favor: three acquisitions across hair care, cosmetics and perfume, and shaving broadens P&G's product lines and reduces its reliance on any single category. Against: repeated large acquisitions add integration risk and debt, and a buyer might prefer a company with organic growth instead of growth-by-acquisition.
Comcast
On February 1, 2007, Comcast Corporation (Symbol: CMCSA) announced a 3-for-2 stock split. If you held common stock in Comcast at the time, how would your portfolio have been affected?
Stock SplitA 3-for-2 split gives each existing share an additional 0.5 share (half a share), not "one and a half," as the activity sheet's wording states. For every 2 shares held before the split, an investor holds 3 afterward, the same ratio as an additional half-share per share owned. Comcast's SEC filing confirms this directly: "an additional 0.5 share for every share held," paid February 21, 2007 to shareholders of record February 14, 2007. Stock splits don't change the value of any shareholder's stake; only the share count and price per share change.
Source: "Comcast Announces Three-for-Two Stock Split," Comcast press release, February 1, 2007
Comcast, continued
How would a stock split influence your decision on a potential investment? More willing? Less likely? Why?
DiscussionOpen question. A split itself doesn't change a company's fundamentals, but some investors read it as a signal of management's confidence in continued growth, and a lower per-share price can make a stock easier to buy in round lots. Others treat a split as cosmetic and focus only on the underlying business.
Spin-Offs
In August 2005, IAC/InterActiveCorp (Symbol: IACI) established Expedia (Symbol: EXPE) as its own company. Starting in 2001, Altria (Symbol: MO), formerly Philip Morris Companies, moved to establish Kraft Foods (Symbol: KFT) as its own company. Sara Lee (Symbol: SLE) began doing the same with Coach (Symbol: COH) in 2000. What type of corporate action is this, and why might each company have made this choice?
Spin-OffIAC's Expedia spin-off checks out as stated: completed August 9, 2005, to focus each business on its own strategy.
The Altria/Kraft and Sara Lee/Coach examples need a date correction. In each case, the year given in the activity sheet was only the first step, a partial IPO, not the full spin-off: Kraft Foods was 16%-IPO'd by Altria (then Philip Morris) in June 2001, but Altria didn't distribute its remaining ~89% stake directly to its own shareholders, the actual spin-off, until March 30, 2007. Similarly, Sara Lee sold 19.5% of Coach to the public in October 2000, then fully spun off its remaining stake to Sara Lee shareholders in April 2001. Both are still spin-offs; the activity sheet's stated years mark the IPO step rather than the completed spin-off.
The likely reasoning behind each move: IAC spun off Expedia to let each business focus on its own strategy. Altria's full spin-off of Kraft is widely understood as a way to shield Kraft's shareholders and stock from the legal and reputational risk tied to Altria's tobacco business, and its own 2007 press release cites giving each company's management more room to focus on its own business. Sara Lee spun off Coach to let Coach focus on its own brand and, the stated rationale goes, unlock more shareholder value than it could inside the larger, more diversified Sara Lee.
Does a parent company's decision to spin off a division or subsidiary affect your decision to invest in it? Why or why not?
DiscussionOpen question. A spin-off can be a positive signal, a focused, independent company is sometimes easier to value and grow than a division buried inside a larger conglomerate. It can also be a reason for caution: a newly independent company loses the parent's balance sheet and resources, and its stand-alone track record is short.
Application: Research a company that had a corporate action in the last five years. Prepare a short presentation explaining that action and its effect on the corporation and its shareholders.
Enrichment: Prepare a tutorial covering each of the five terms above and how it affects an investment portfolio.