Royal Bank of Scotland Considers a Share Consolidation


LONDON -- Later this month, at the annual general meeting on May 30, shareholders in Royal Bank of Scotland (NYS: RBS) will be asked to vote on a proposed share consolidation. Simply put, for every 10 shares that investors hold, they will receive one replacement share, with their existing shares being canceled.

While share consolidations aren't all that common, they aren't unheard of, either. Like share splits, they usually -- although not always -- occur when a company's board comes to the view that a share's price range is affecting its trading.

So what's going on? And should you worry?

Do the splits
Share splits are probably more common than share consolidations. I'll help you understand the process.

Consider a company such as AstraZeneca, for instance. Its shares are priced at around the 27 pound mark, meaning that investors can only buy them in multiples of 27 pounds.

Put another way, ignoring trading costs, an investor wanting to buy 500 pounds' worth would be able to purchase 18 shares but have 14 pounds or so left over -- enough for just more than half a share, but not a whole share.

Divide the nominal value by 10 -- a "one-for-10" share split, in other words -- and the shares become worth 2.70 pounds. That way the investor can buy 185 shares, with just 50 pence left over.

Has the value of the company itself altered? No. But investors are able to attune their share purchase more closely to the funds that they would like to invest. But clearly, the bigger the sum invested, the less relevant the argument becomes. An investor investing 5,000 pounds or 50,000 pounds would be progressively less concerned about odd sums left uninvested.

Appropriate price
Share consolidations are the same thing, but in reverse. And under RBS's proposed "10-for-one" consolidation, every 10 shares at today's price of 22 pence would become one share at 2.20 pounds.

Why would the board bother to do this? Take it away, RBS:

The Group currently has a very large number of ordinary shares in issue. This means that a small movement in the share price can result in large percentage movements and considerable volatility in the Group's shares. The Board believes that consolidation will result in a share price and nominal value more appropriate for a company of the Group's size in the UK market and may assist in reducing volatility, thereby enabling a more consistent valuation of the Group.

In other words, it's a question of perception, not valuation. Logically, the value of the underlying business remains unchanged, and investors' individual stakes in it will remain unchanged. But instead of having shares worth 22 pence each, they'll have one-tenth as many shares, each worth 2.20 pounds -- or whatever the current price is. This, according to RBS's board, is "a more appropriate" value. Although, frankly, given the egregious destruction of shareholder value that has taken place in recent years, my own view is that today's "penny share" trading range is more appropriate.

Will there be losers?
Yes. In practice, almost every investor will lose out to some extent. But should you be worried? Not really.

Holders of fewer than 10 shares, for instance, will see their entire investment donated to charity, unless they request it in cash. To pick an example at random, that means that investors with, say, nine shares will either be making a 2 pound donation to charity or getting a check for 2 pounds. Likewise, investors with shareholdings that aren't exactly divisible by 10 will be subject to the same process, with their fractional holding either going to charity or being paid as cash.

I can't imagine that many will be all that concerned over a couple of quid. That said, share consolidations can be misunderstood; take a look at the comments appended to this article in the weekend press, for instance.

Waste of time?
Even so, shareholders will be losing out in another sense, I believe.

Whatever happens to their individual holdings, the simple fact is that it's difficult to attach much credence to the price volatility argument. This consolidation, I reckon, is much more to do with perceptions and appropriateness than it is about volatility. And as such, all investors are paying for the cost of the exercise -- publicizing it, canceling existing shares, and issuing new ones.

Granted, in the scheme of things, the sums involved won't be huge. But you'd imagine, frankly, that the board of RBS had other priorities.

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At the time thisarticle was published Malcolm owns shares in AstraZeneca. He doesn't have an interest in any other shares mentioned. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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