Why do ASX companies undertake share consolidations? Here are the 3 key reasons

Some microcap ASX stocks (particularly companies below 1c) will undertake share consolidations. There are several reasons why they undertake this, but 3 in particular stand out.

1. Share consolidations lead to an increased share price

First and foremost, consolidating shares can increase the stock’s market price, making it more appealing to certain investors and possibly leading to increased demand. And this is the key reason that many companies will state when outlining plans for a share consolidation.

This move often leads to an increase in the stock’s market price because the intrinsic value of the company remains the same while the total number of shares decreases. As a result, each share represents a larger portion of the company’s assets and earnings.

This could potentially make the stock more appealing to certain investors. Many institutional investors often avoid lower-priced stocks due to perceived volatility, so a higher share price can attract this class of investors. Indeed, many companies will state that the purpose of a consolidation is to make itself a more attractive investment.

Above everything, it is essential to note that share consolidation does not inherently change the total market capitalisation or financial performance of the company. Therefore, a company still may not be appealing to all investors even after a share consolidation.

2. They can also help meet stock exchange requirements

Second, it can help a company meet stock exchange listing requirements.

Many stock exchanges have minimum share price requirements for listed companies and/or for indices. The NASDAQ for instance has a minimum price of US$4 for a newly listed company and US$3 for all others.

If a company’s stock price falls below such a minimum threshold, it risks being delisted. In such scenarios, a share consolidation can be an effective strategy to increase the share price and maintain compliance with exchange listing requirements.

Of course, it is often the case that the share price will have started from a higher point and have come down to lower levels. So unless anything else changes, this strategy may just be a temporary reprieve.

3. They increase Earnings Per Share

It is also worth considering that the less shares on issue, the higher the Earnings Per Share will be. This will seem a trivial point to some, because stocks needing to undertake consolidations likely will not have earnings – they will likely be an early stage resources explorer or tech stock. Although the day may well come when they will be large, profitable enterprises and this may be more relevant.

What about the opposite move – a stock split?

Sometimes companies do the opposite – share splits. This is typically achieved by dividing each existing share into multiple ones, thereby reducing the individual share price. For instance, in a 2-for-1 split, every share owned by an investor is divided into two, effectively halving the price per share.

The overall value of the investment remains the same, as the increase in share number balances out the reduction in share price. Companies often resort to splits to make their shares more affordable (only on the surface) to retail investors and increase liquidity.

Share splits increase the number of shares available, lowering the individual share price while maintaining the overall market capitalisation. Although this rare in Australia, high-profile companies on Wall Street have undertaken them historically and recently. Apple carried out a 4-for-1 split in August 2020 (the fourth in its history), while Tesla implemented a 5-for-1 split in the same month, both with the aim to make their shares more accessible to individual investors.

So, you can see they work similarly to share consolidations and have similar objectives (to influence the level of investor interest) but in different directions. Of course, you are far more likely to see a consolidation rather than a split down under.

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