'Share Consolidation' is explained in detail and with examples in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Share Consolidation refers to a reverse split. In this corporate operation, a number of shares of stock become merged together into only one single share. These share consolidations can take place either in the forms of reverse stock splits or as stock share funded buyouts.
With reverse stock splits, the corporation simply decreases the quantity of shares of its own stock available in order to increase the price per share. When a stock buyout takes place, the acquiring corporation creates more shares of its corporate stock with which to buy out the chosen target company. The target firm’s shareholders then receive this newly created stock from the acquiring company in lieu of receiving cash payments for the target company shares they own.
There are a number of advantages to Share Consolidation buyouts done through stock funded purchases. The acquiring firm is able to buy the target corporation without having to deploy its own cash reserves or without getting a loan. This does not mean the transaction is free or completely without cost.
In creating the new shares, this diminishes the stock price of the buyer’s shares. This can happen as investors decide that the target firm is worth less than the total number of shares which the acquirer is willing to pay. The present shareholders then own a lesser percentage of the firm and its future earnings. This is the case whether or not the value of their shares decreases or instead remains constant. It explains why many companies will instead utilize combination efforts of both cash and stock buyouts in order to successfully pay for an acquisition.
When a target firm becomes a part of the acquiring company, then its own corporate shares do not trade individually on the stock exchange any longer. One hundred percent of the target corporation’s shares will be traded in exchange for the shares of the buying corporation as the transaction concludes. At this point, shares of the target firm will be delisted from all market indices they may trade in, as well as from the exchanges on which they were listed themselves. This also changes the aggregate value for the index the target company used to comprise. Managers of indices often choose to substitute in another corporation in place of the target corporation to maintain the same number of companies within the index in question.
The number of outstanding shares following the buyout will vary based on the relative values of the stock issues of both the selling and buying firms. When the shares of the seller prove to be higher priced than those of the acquirer, a greater number of shares will exist following the merger. As corporations merge their own shares in a reverse stock split, fewer remaining shares will exist following the operation or alternatively the combination.
When corporations choose to consolidate their shares utilizing reverse stock splits, this typically gives a warning that the corporation has run into trouble. The firm will quite possibly no longer be able to build up its share value via increasing its sales. This would be why they are trying to boost the share price to make it seem more valuable and expensive for the investors.
Once stock prices decline below the minimum allowed price set by the hosting stock exchange, they will be involuntarily delisted off of the exchange. This is why firms which are nearing bankruptcy may attempt to consolidate the price of their share to keep them over the threshold of this minimum price. For example, the NYSE New York Stock Exchange removes any corporation when the average price for its corporate stock drops under a dollar for any rolling 30 day long period.
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