Consolidation

Wednesday, 24th June 2015 09:41 - by Moosh

It might make one wonder what use consolidation of shares is to a company. Consolidation of shares is actually a very good way for a company to streamline its audience of shareholders.

A recent example in Valirx (TIDM:VAL), which consolidated its shares on a 125:1 basis, soon after saw its share price rise quite dramatically (in response to recent news flow). Prior to consolidation the news from VAL failed to make much impact in terms of price movement since the pre-consolidation price was in the 0.25p region – this area of price tends to attract investors who care very little for the fundamentals of a company and just buy large for usually up to 10% profit before leaving the party – but what does this actually do to the price on the long term? In effect it doesn’t do anything much since the large volume draws big crowds but then by the time the price has effectively moved, those large buyers have left and in a subpenny company there is much difficulty for any sustained movement unless most investors have ganged up and promised they won’t sell into a rising price – which isn’t something you should rely on really.

Consolidation is actually more relevant to the technical side of price movement. In the case above, VAL would’ve attracted the subpenny lovers – but following consolidation, perhaps many of these moved on to find another subpenny love - to leave a more stable bunch of shareholders behind who may be building up a freehold of shares in the company for the long term – it should go without saying that building up a freehold in a company with a reduced number of shares in circulation should reduce the price fluctuations further between cycles. Another advantage of consolidation is that once a share begins to trend then the intraday trends defined by following simple moving averages on an hourly basis will require quite a long time for these moving averages in price to cross over and therefore require anyone buying before a trend has kicked in, to buy and hold because it will only be following the relevant crossovers have taken place which is when the trend takes shape – while this set-up is the same for any number of shares, the widened bid-ask spread that comes with consolidation should allow any trends to play out smoothly and to be read more easily. Following consolidation, the spread tends to widen, which isn’t actually a problem for investors. Traders hate the widened spread obviously because they can’t take advantage of a quick surge in volume so they generally do their best to deter other traders and usually make up any old cock-and-bull story to suit their needs to those who are daft enough to listen – but look, did the widened spread in VAL cause a problem to price movement? It actually didn’t – like I said, VAL still had a loyal audience who were evidently impressed by the company following the news flow so were not driven to other shares by the widened spread. Consolidation has absolutely no effect on increasing or decreasing the number of price cycles. All consolidation should do is tweak the audience of a company towards one which is prevalent in investors and invaders (those who build up freeholds of shares).

So I think it might be worth companies (generally if their share price is below 10p) to consider consolidating their shares especially if they feel that their shareholder audience isn’t suitably valuing them appropriately. Subsections of their audience may well be valuing them as they should, but there may be a large subsection of traders keeping the price suppressed through the very short term trading of a 0.25p rise before escaping. Everyone is entitled to trade/invest as they wish but companies do have the opportunity to take slightly more control to target a more sophisticated audience who have eyes on the longer term prize – it’s up to the company to make that stand if they so wish.