What are Corporate Actions?

A corporate action is something a company does that changes things for people who own shares in the company. These are the people called shareholders. Corporate actions can make the price of a company’s shares go up or down. They can also change how many shares a shareholder owns or what kind of shares they own.

The main types of corporate actions

There are a few big corporate actions that happen pretty often:

• Stock splits make it so there are more shares and each share is worth less
• Reverse stock splits do the opposite
• Stock buybacks are when the company buys back its own shares from shareholders
• Spin-offs create a whole new company out of part of the old company
• Mergers and acquisitions are when companies join together or buy each other

Let’s look at each of these corporate actions to understand them better.

Stock Splits and Reverse Stock Splits

How a regular stock split works

In a regular stock split, the company increases the number of shares and decreases the price of each share. But the total value of a shareholder’s ownership stays the same.

Let’s say a company has 100 shares and each share is worth $50. The company is worth $5000 total. If the company does a 2-for-1 stock split, each shareholder will get 2 shares for every 1 share they own. So now there are 200 shares. But each share is only worth $25 now. The company is still worth $5000 total. A shareholder who owned 10 shares worth $500 before now owns 20 shares… still worth $500.

Companies often do stock splits when their share price has gotten very high. The lower price after the split can attract more investors. The more shares there are, the more liquid the stock is – it’s easier to buy and sell.

The deal with reverse stock splits

A reverse stock split is the opposite of a regular stock split. The company decreases the number of shares and increases the price of each share. Just like with a regular split, the total value stays the same.

Reverse splits often happen when a company’s stock price has fallen very low. The higher share price looks better and can help the stock meet minimum price rules to stay on a stock exchange. Reverse splits are often seen as a bad sign, though, like the company is struggling.

Stock Buybacks

In a stock buyback, a company buys back some of its own shares from shareholders. This makes fewer shares on the market. Buybacks are good for shareholders who keep their stock – since there are fewer shares, each share is a bigger piece of the company. Buybacks can increase a company’s earnings per share and often increase the share price.

Companies might do buybacks when they think their stock is a good value. They’re basically investing in themselves. Buybacks are often good for shareholders in the short term. But critics worry they can take money away from things like research and development that can help the company grow in the future.

Spin-Offs

In a spin-off, a company takes part of its business and turns it into a whole new company. Shareholders of the original company get shares of the new company.

A famous spin-off was when eBay spun off PayPal into a separate company in 2015. Investors often like spin-offs because it can unlock the value in a part of a company that may have been overlooked when it was part of the bigger company.

Mergers and Acquisitions

Corporate mergers and acquisitions are when companies combine together in different ways.

In a merger, two companies join together as equals to make a new, bigger company. The shareholders of both original companies become shareholders of the new company. One example was the 1998 merger of Chrysler and Daimler-Benz to form Daimler Chrysler.

In an acquisition, one company buys another company. The shareholders of the acquired company are bought out and no longer own part of the new combined company. They’re paid for their shares, though. An acquisition is basically one company taking over another. One famous example is Facebook acquiring Instagram in 2012.

Mergers and acquisitions can be good for a company that wants to grow quickly or get access to new technology or markets. They’re not always great for employees, though, since combining companies often means layoffs and job cuts. For shareholders, it depends on the deal. Sometimes their shares become more valuable in the new combined company. Other times, they may prefer to just be bought out.