General Electric reverse split. How to make money on it?
American industry will exchange its securities on a 1-for-8 basis.
The company has set a split date for July 30.
GE shares declined at all stages of the approval procedure.
What is the essence of the operation?
Will be exchanged Every eight old-style papers for one new one. The company is increasing the market price of its shares through a reverse split. Thus, instead of the 8.77 billion shares traded on the market, there will remain a little less than 1.1 billion, but each will cost eight times more than it cost before the split.
According to the official release, the procedure will take place on Friday, July 30, after the close of trading. From Monday, August 2, new securities of higher value will appear on investors’ accounts. There will be no fractional shares. Balances of less than eight shares will go at market rates with cash out to investors.
Why are they doing that
GE emphasizes in its release that it has sold several subsidiaries in recent years and plans to do so in the future. Noticeably affected the price tag of the parent company’s shares: in five years, the price of the paper fell from $ 30 to $ 13.
The explanation is quite logical: often, M&A deals require the exchange of blocks of shares, and it is more convenient when both parties have the usual par for the market. Historically, this should have been at least $ 30 a piece.
There are other potential reasons for the reverse split, which GE does not mention not to provoke a sell-off. But they are worth remembering.
- GE is the only company worth over $ 100 billion in which the quotation does not even reach $ 20. prevents significant funds from seriously considering paper for their portfolios. Often they have restrictions on the minimum value of shares in their declarations.
- The company’s management has no other ideas to raise GE’s capitalization. A reverse split is often the last resort to avoid further price declines or even delisting. Exchanges have restrictions on the minimum value of the issuer’s securities.
- High activity of “meme” investors. The speculators who operate through forums like Reddit are often targeted by cheap papers. Before the overclocking of quotes, Gamestop’s price was a little over $ 10, AMC was less than $ 5. They cost $ 220 and $ 58, respectively, but institutional investors are still not interested in them due to the abnormally high volatility. GE doesn’t want to be the hero of the forums.
For the first time, news of a possible consolidation of GE shares appeared in early spring. Management proposed on March 10 during the merger of divisions within the holding. A shareholder vote for May 4. On May 25, in the course of communication with investors, confirmed the plan. The split date on June 18.
During all these days, GE shares were sagging, but subsequently, the drawdown was quickly redeemed. The positive in broad indices: since the beginning of March, the S&P 500 has risen by almost 9%. The company consistently implements its strategy and shares it with investors could have played a role.
How you can make money on it
A reverse split is a mirror image of a stock split. If a decrease in quotation leads to an increase in turnover, then an increase in it causes the opposite effect. Investors leave with a small check; larger ones come.
Can lead to a local sale of securities before the exchange. The peak of sales may fall on the last days before July 30. But given the company’s strong fundamentals, the quotes will tend to recover. On this, you can build strategies similar to how they work with a dividend gap.
Alternative scenario: the securities will continue to decline after the split since, for strategic investors, the reverse split signals the company’s management’s uncertainty.
