Be Wary of Share Consolidation

Share consolidation is an exercise whereby the shares of existing shareholders are combined. For example, in a 10 to 1 consolidation, 10,000 shares that you own will become 1000 shares.

Even though the number of shares has been reduced, nothing has changed in terms of the percentage of shareholdings. Theoretically, the price of the shares should increase by the same multiple in which the share was consolidated.

For example, if the price of a share was trading at $0.10 and there’s a consolidation of 10 is to 1, it should trade at $1 after the consolidation exercise.

Recently, there had been a number of share consolidations. Chasen, whose share was trading at $0.005 to $0.01, did a 100 is to 1 consolidation. If the valuation remains unchanged (big if), the price should trade at $0.50 to $1 post consolidation.

Apparently, there were many shareholders who were not aware of this consolidation and happily sold their shares at $0.13-0.20 post consolidation. On the other side, directors and the company were buying up the shares, driving up the price to $0.30.

The sellers would have gotten a rude shock (and big loss) when they later realised they had unknowing shorted the shares as the number of shares they owned had actually reduced. They would be subjected to SGX’s compulsory buyback and a check of SGX’s annoucements confirmed that indeed there were many short sellers for several days after consolidation (even up to today!).

Two other companies which also had share consolidations, STX Pan Ocean and Anwell, did not seem to have much of this “short selling” problems taking place. 

If you are a shareholder of any company, this highlights the importance of reading the documents that they send to you. Know what is happening to your company, and do not be caught off guard just because you didn’t know what is happening.