Archive | March 8, 2011

Script Splits and Issues

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Sometimes firms offer shareholders three shares in proportion to the shares they own. For example, they may be offered one free share for every share owned. This is the script issue.

Alternatively, the shares are split. For example, every share, par or nominal value one dollar, is replaced by two shares, par or nominal value $.50.

In each case, the market value of the share will fall to half of the previous figure. The idea is that markets recognize a broad range of trading prices for shares. With growing profits and dividends over the years, the share price increases. Sometimes the market feels the new price is inconvenient and deter small shareholders from buying. The theory is that shareholder’s are happier with 100 shares at $50 than 10 shares at $500. If this doesn’t seem logical it is because it is, in fact, quite illogical-it’s pure investor psychology.

For example, UK market like shares in a range, say of £1-£10. Above this level, companies frequently do scripts or splits to bring the price down to a better trading price, one which is thought to lead to a more widespread holding and more liquidity. Thus, in the autumn 1998, the Logica Share price was £20. They did a four for one script issue to bring the price down to 4 pound sterling.

In US, the same idea prevails, but at much higher share price levels. On the continent of Europe, too, shares trade typically at far higher prices than in the UK. When the Paribas was privatized, for example, 3.8 million applied for the shares and received just four each-but the price was about $450. Switzerland is a place where traditionally, shares of the banks, pharmaceutical companies and Nestlé’s have traded at a price equivalent to several thousand dollars. However, the law, which required a minimum legal value of 100 per share, has been altered to lower this to 10 per share. In May 1992, Nestlé’s took advantage of to replace each share, legal value to 100, by 10, with a legal value of 10 each. The effect was to lower the price each from 9600 to 960.

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