Reprice Share History After Consolidation Or Share Issue?

Should I adjust historic share prices when a company issues new shares or consolidate existing ones?

If you don't know that a company has done a share issue or consolidation in the last few years then should you be buying their shares?

What Was The Share Price Of A Company.

Depending upon where you look you can sometimes find that the different sources of the historic share prices of companies will have different values!

This is because some sources adjust the historic price of a share when a consolidation or issue takes place. At first glance this makes sense, but personally I believe that it is not the best thing to do.

Date Event Num
1 Jan Normal Trading 1000 50p £500
1 Feb Issue Of 1000 New Shares 2000 25p £500
1 Mar 2 For 1 Consolidation 1000 50p £500

In the above example a company starts of In January with 1,000 shares and a market cap of £500, it then does a share issue in February doubling the number of shares in issue and halving the value of each share leaving the total capitalisation the same.

This is then followed by a 2 for 1 consolidation in March meaning that the number of shares in issue is the same as in January and as the share price doubles to reflect the reduced number of shares in circulation this too is the same as in January.

Whichever way you process these changes the chart is going to be misleading if you don't understand what has happened.

Image that you had 1 share which you bought in January for 50p.

If you bought one new share in the issue at 25p then by the end of March you would have invested 75p in the company and owned 0.1% of it.

If you didn't buy one new share in the issue then by the end of March you would have invested 50p in the company and owned 0.05% of it.

If you always adjust historic prices then the share price graph would be flat, suggesting that you have made or lost nothing. Whereas you have in fact lost 50% by not taking up the new share offer or increased you investment by 50% by buying the new share.

If you don't adjust for anything then you still get a misleading graph showing the start and end price of 50p but you get a big drop and rise.

Not all share issues give existing share holders an opportunity to take part, sometimes small private shareholders are left with "We did a deal in a hurry and you now own less of the company, a lot less, in fact your holding is now close to worthless."

Clearly you need a policy that is consistent, adjusting prices sometimes and not others would be immensely confusing so I never adjust prices.

Why Do Share Consolidations Take Place?

When looking at a share consolidation I ask the simple question, why? Is the consolidation the result of a change in the business, perfectly reasonable, or a change in the share price, questionable.

It appears to me that most share consolidations are undertaken by companies that are either failing or have had a massive disaster in their recent past and their share price has crashed and will never recover to previous levels.

For example

Royal Bank
Of Scotland
1 for 10 Banking crash revealed huge losses.
Countrywide 1 for 50 Over expansion, massive losses and huge share issue.
Aston martin 1 for 4 Poor sales and excessive debt led to massive share issue.

Most of these businesses seem to a dislike a share price below a 100p and instead of recognising just how badly the business has done and accepting the fact boards like to "rewrite history".

There is very, very rarely a legal requirement for a consolidation, I believe that Fastjet needed to do one once because their share price had slid so low that there was some regulation that made it impossible/impractical to raise any more funds.

But normally it is a vanity exercise because the board is embarrassed by the share price and they realise that the business has lost a lot of share holders' money and want to disguise this fact.

However a consolidation is not always bad, Investment Funds, Real Exchange Investment Trusts and similar can quite legitimately want a consolidation if they have sold assets and returned funds to share holders.

In pretty unusual circumstances any business might decide to massively downsize, sell off divisions and continue to operate successfully as a smaller business, again in this case a share consolidation would be entirely reasonable.

Why Do Share Issues Take Place?

Share Issues are slightly different from consolidations in that they are not nearly always directly associated with a management making a mess of things.

For example Marks & Spencer did a massive issue of £600 million in 2019, which was about 20% of the company's market cap, to pay for a Joint Venture with Ocado to get M&S into the home delivery market for food.

You could argue that this was also the result of a management failure to grow this capability organically and fund it out of profits and that it was a diversion from M&S's continual issues with clothing and household goods profitability.

Many share issues are clearly associated with management failure, simply the company has run out of money.

The COVID outbreak in 2020 saw many, many companies doing share issues because they simply hadn't the reserves to survive the complete or almost complete shut down of their businesses.