What are share rollbacks, and are they good or bad for shareholders? Resource Investing News answers those questions here.
Share rollbacks occur when a company chooses to issue fewer ordinary shares at a higher value. Rollbacks may also be referred to as reverse stock splits or share consolidation.
To give an example of how share rollbacks work, consider a company with shares priced at $20 each with 1 million shares issued. It could choose to consolidate those shares at a rate of two to one, increasing its share value to $40, but leaving only half a million shares outstanding. In other words, in a rollback the number of shares owned by investors decreases in proportion to the rollback, but the total value remains the same.
Why a rollback?
Share rollbacks give companies the advantage of securing a higher stock value without incurring any costs — except for the administrative fees that may be involved. Sometimes, companies choose to do a rollback in order to make their stock more appealing to institutional investors, as these investors often won’t look at low-value stocks as a serious investment opportunity. Once a company’s share price rises as a result of a rollback, the stock may be more likely to attract institutional investment.
Perhaps the most common reason for a rollback, however, is to meet exchange listing requirements. For instance, a company might want to start listing on a different exchange with higher requirements, or need to maintain the requirements of its current exchange. In some cases, the ratio for a rollback can be one to 100 in order to maintain an exchange listing.
When a company decides to introduce a rollback, investors are sometimes wary — and for good reason. If a company’s share price is declining so precipitously that its only option to stay listed on an exchange is to consolidate, that may not be a sign of flourishing operations. Indeed, according to Kitco, rollbacks often happen when companies have little cash.
It’s also a bad sign if a company has done more than one rollback over the years. Unless the market is doing very poorly, that could indicate mismanagement. Some investors recommend selling all shares when a company intends to implement a rollback — and perhaps repurchasing them when prices are lower — rather than losing money as the consolidation occurs.
Furthermore, share rollbacks tend to depress prices — even though shareholders have exactly the same value of stock in the company, only with a smaller amount of shares. That is in part because of the market forces or events regarding the rollback that may have contributed to the company’s decision to consolidate in the first place.
Are there good reasons to consolidate?
As Kitco notes, share rollbacks are not always cause for concern, and may in fact have only a neutral impact. That’s often the case when a company needs to start listing on a different exchange, whether that means moving from a junior exchange to a more established one, or simply listing in a new location. Companies may make such a switch if they are confident in their ability to raise capital on another market, but need to consolidate their shares to get there. Part of the appeal of a bigger market is greater visibility, and depending on the company, that difference might certainly help its fortunes.
In any case, investors must carefully examine the reason for a share rollback for any stock they own. It is important to determine whether the purpose is benign — for example, to help the company get on a larger exchange — or whether the rollback may spell trouble for the company.