Exploring corporate actions: An in-depth discussion

In the article on the investment conundrum concerning equities, we aimed to shed further light on the world of equity and the stock market. Today, we want to address a key event in the capital market called corporate action. What then is a Corporate Action?

A corporate action refers to any event initiated by a publicly-traded company that brings about a change in its financial structure, ownership, or operations. These actions are typically approved by the company's board of directors and can have various impacts on the company, its shareholders, and the market in general.

Corporate actions are undertaken by the listed companies for various reasons, each reason serves a specific purpose and addresses different aspects of the company's operations, financial structure, or strategic goals of the firm.

Indeed, there are several reasons why companies engage in corporate actions. Below are some of the reasons provided for discussion

Financial Restructuring:

Companies might undergo corporate actions to optimize their financial structure. For example, a stock split or reverse stock split can help adjust the share price to make it more attractive to investors, while a stock buyback can improve earnings per share by reducing the number of outstanding shares.

Capital Allocation

Companies use corporate actions to manage their capital and resources effectively. Dividends and stock buybacks return excess cash to shareholders when the company believes it is not needed for further growth opportunities.

Strategic Growth:

Mergers, acquisitions, and joint ventures can provide avenues for companies to expand their product lines, geographical reach, customer base, and market share.

Focused Operations:

Spin-offs and carve-outs allow companies to separate distinct business units, which can help each unit focus on its specific operations, strategies, and growth prospects.

Shareholder Value:

Corporate actions are often undertaken to enhance shareholder value. Dividends, share buybacks, and other actions that demonstrate strong financial performance can attract investors and potentially lead to an increase in stock price.

Dilution Management:

Companies might issue new shares through rights issues or convertible securities to raise capital. These actions, if carefully managed, can help raise funds without causing excessive dilution of existing shareholders' ownership.

Market Perception:

Corporate actions can influence how the market perceives a company. Positive actions like dividends and stock splits might indicate financial health and confidence in future prospects, leading to positive investor sentiment.

Overall, corporate actions reflect a company's strategic decisions and its response to evolving market conditions, regulatory requirements, and financial goals. They play a crucial role in shaping a company's trajectory, influencing its relationships with shareholders, and impacting its performance in the market.

Types of corporate actions

Now that we know the reasons for corporate actions, it is important we discuss the various types of corporate actions. We have established that corporate actions refer to various events or decisions undertaken by a company which can have an impact on its shareholders and the overall structure of the company. Here are some common types of corporate actions that can have an impact on the firm’s bottom-line.

Dividends:

The most common type of corporate actions in Ghana and most of the African countries is the dividend. Companies can distribute portion of profits approved by the board to shareholders in the form of cash dividends or stock dividends (additional shares of the company's stock at a specific price).

Stock Splits:

The next one is the stock splits and this action is not very common in Ghana. A stock split involves dividing existing shares into multiple shares, usually to increase liquidity and affordability. For example, a 2-for-1 stock split doubles the number of shares while halving the price per share.

Reverse Stock Splits:

We also have reverse stock split and this can be confusing sometimes. In a reverse stock split, a company reduces the number of outstanding shares and increases the price per share. For example, a 1-for-10 reverse stock split combines 10 shares into one and increases the price of the said security by a factor of 10 in the market.

Mergers and Acquisitions (M&A):

In recent years, we have seen at least one M&A on the Ghana Stock Exchange. M&A activities involve the combination of two or more companies through mergers, acquisitions, takeovers, or consolidations. These kinds of transactions can result in the creation of a new company or the absorption of one company by another company.

Spinoffs:

In our market, spinoff is not common but very common in the developed markets. A spinoff occurs when an existing company separates a portion of its business unit into a new business, and operate as an independent company. The parent company distributes shares of the new company to its existing shareholders of the old company.

Rights Issues:

In Ghana, we have seen tender offer from PZ and Republic Bank of Trinidad and Tobago to HFC shareholders years ago. Tender offers involve a company making a public offer to purchase shares directly from its shareholders, usually at a premium to the market price. Shareholders have the choice to sell their shares or retain their ownership in the listed company.

Initial Public Offerings (IPOs):

For IPO, we have seen several of this in Ghana. Most recent one is the MTN IPO. An IPO is the process through which a private company offers its shares to the public for the first time, allowing it to become a publicly traded company.

Share Buybacks:

Stock or Share buyback is an interesting concept where company with excess money will decide to exercise this type of corporate actions. Stock or Share buybacks occur when a company repurchases its own shares from the open market to minimize the outstanding shares in the market. This can provide support to the stock price and return capital to shareholders.

Corporate Restructuring:

Corporate restructuring involves significant changes to a company's structure or operations, such as reorganizations, restructurings, or changes in the company's capital structure.

These are just a few examples of the many types of corporate actions that can occur. Each corporate action can have different implications for shareholders, the company's financials, and the overall market dynamics. It's important for investors to stay informed about corporate actions and understand their potential impact on their investments.

For a deeper understanding of this subject and further assistance kindly contact EcoCapital Investment Management Ltd., on +233(0)50 155 3502.

EcoCapital Investment Management Limited (EIML) is a company incorporated in Ghana and licensed by the Securities and Exchange Commission (SEC) as an Investment Management firm, and by the National Pensions Regulatory Authority (NPRA) as Fund Manager of both second and third tiers of the national pension scheme.

The corporate mandate of the firm is to deliver premium financial solutions and investment management services to both retail and institutional investors in Ghana. Services on offer at EcoCapital include: Wealth Creation and Management, Investment Portfolio Management, Pension Fund Management, Mutual Funds, Retirement Planning, Investment research and Advisory.

The firm has three mutual fund products under management, namely; Prime Fund, Nordea Income Growth Fund and the Weston Oil and Gas fund