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Corporate Actions: Mergers & Acquisition

Last week we talked about Bonus Issues & Stock Splits, this time we’re looking at something different. Sometimes it is essential to understand corporate actions, as they do indeed shape how traders or investors react towards the stock. Let’s jump right in!

Dividends/ Stock Dividends

Dividends refer to a portion of a company’s earnings distributed to shareholders. Dividends can be in any form of assets such as cash dividends, stock dividends and etc. Dividends can be paid quarterly, semi-annually or annually. Some companies have their own set of dividend policies.

For instance, ABC Bhd has a dividend policy of maximum 30.0% pay-out from its net profit. Some of the company details include;

Number of existing shares: 100.0 mln
Current share price: RM1.00
Market Capitalisation: RM100.0 mln
Net Profit = RM10.0 mln

Based on the above scenario, Mr. X holds 100 shares in ABC Bhd prior to dividend pay-out adjustment.

Mr. X’s investment value = RM1.00 x 100 shares
= RM100

ABC Bhd declared a 30% pay-out from its net profit. Dividend pay-out works out to be RM3.0 mln (RM10.0 mln x 30%) Mr. X will receive dividend per share of = RM3.0 mln / 100.0 mln shares = RM0.03 After dividend payment, the share price shall be adjusted to;

= RM1.00 – RM0.03 = RM0.97

Mr. X’s investment value = current share price + dividend per share
= RM0.97 + RM0.03
= RM1.00

Meanwhile, the company’s market capitalisation will be adjusted to;

Market Capitalisation = RM0.97 x 100 mln shares
= RM97.0 mln


Mergers & Acquisitions (M&A) / Spinoffs

Mergers & acquisitions refer to consolidation between two or more companies. Mergers refer to a consolidation between two or more companies into a single new company while acquisition is known as a takeover of one company from another company where there is no new entity being formed. The main reason for M&A activities is to create shareholder value.

Traditionally, M&A forms a synergy between two or more parties allows all parties to enhance cost efficiencies (staffs reduction, improve economies of scale and acquisition of new technology) of the business.

Some of the prominent M&A activities in recent years include

Year Acquirer Acquired
2014 Facebook Inc. WhatsApp
2015 H.J. Heinz Company Kraft Foods Group, Inc.
2015 Berkshire Hathaway Inc. Precision Castparts Corp.
2016 SoftBank Group Corp. ARM Holdings Plc
2016 Microsoft Corporation LinkedIn


In order to complete M&A activities, both parties (buyer and seller) would have to mutually agree on the valuations taking place for the price of acquisition. Some of the common valuation metrics used are; Price-to-Earnings Ratio, Enterprise-Value-to-Sales Ratio and Price-to-Book Value. Meanwhile, any M&A deal can be executed either by cash transaction, stock-for-stock transaction or a combination of both.


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