Exploring Corporate Actions: An in-depth discussion Pt. 2

In the preceding section of this subject, we explored the varieties of corporate actions and the motivations behind their implementation. Let us now look at the benefits of corporate actions.

Corporate actions have the potential to deliver various advantages to businesses, shareholders, and other interested parties. These benefits can vary based on the specific type of corporate action and the company's goals.

Outlined below are a selection of the typical advantages associated with various corporate actions that we have covered so far:

I. Dividends:

a. Shareholder Income: Dividends provide a direct source of income to shareholders, especially those who rely on regular dividend payments for their financial needs.

b. Attracting Investors: Consistent dividend payments can attract income-oriented investors, potentially increasing demand for the company's stock.

II. Stock Splits:

a. Liquidity and Accessibility: Lower stock prices resulting from stock splits can make the company's shares more affordable and accessible to a broader range of investors.

b. Increased Trading Activity: Lower share prices often lead to increased trading volume, potentially enhancing market liquidity.

III. Stock Buybacks:

a. Enhanced Earnings Per Share (EPS): Buybacks can lead to a reduction in the number of outstanding shares, which can increase EPS and signal improved financial performance.

b. Capital Allocation: Buybacks allow companies to use excess cash to invest in themselves, which might be seen as a vote of confidence in the company's prospects.

IV. Mergers and Acquisitions:

a. Synergies: Mergers and acquisitions can create synergies, combining complementary resources and expertise to generate higher efficiency and value.

b. Market Dominance: Acquisitions can help companies expand their market share and become more competitive in their industry.

V. Rights Issues:

a. Capital Injection: Rights issues allow companies to raise funds from existing shareholders, helping to finance new projects or reduce debt.

b. Equity Management: Rights issues can maintain the balance between debt and equity financing, potentially reducing financial risk.

VI. Spin-offs and Carve-outs:

a. Focused Strategy: Separate business units can focus on their core competencies and growth opportunities, potentially unlocking hidden value.

b. Investment Opportunities: Spin-offs create new investment opportunities, as shareholders of the original company receive shares in the spun-off entity.

VII. Convertible Securities:

a. Low-Cost Financing: Convertible securities can offer lower interest rates compared to traditional debt, reducing the cost of raising capital.

b. Equity Upside: Convertible securities provide the opportunity for investors to benefit from potential stock price appreciation while still receiving fixed interest payments.

VIII. Name Changes:

a. Rebranding and Perception: A name change can signal a new direction for the company, improve its brand image, and better align with its current strategy.

IX. Bankruptcy and Liquidation:

a. Debt Relief: Bankruptcy proceedings can help companies restructure debt and alleviate financial burdens, potentially allowing them to continue operations.

b. Asset Distribution: Liquidation provides a structured process for distributing remaining assets to creditors and shareholders.

The benefits of corporate actions can be influenced by various factors, including market conditions, investor sentiment, regulatory environment, and the company's overall financial health. While these benefits can be substantial, corporate actions also come with potential risks and considerations that companies need to carefully assess before proceeding.

Investors need to understand the consequence of these various types of corporate actions and the impact they may have on their portfolios.

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.