Understanding Corporate Action
Corporate action is a series of steps or policies taken by companies in order to manage their operations and finances to achieve short-term and long-term goals. The definition of corporate action includes various activities that involve changes in capital structure, dividends, or shares, such as offering new shares, exercising rights to shares, or disposing of assets. The main function of corporate action is to help optimize company performance, create value for shareholders, and maintain business continuity. In carrying out corporate actions, companies have several goals to achieve. One of the main goals is to increase operational efficiency and the company’s ability to generate profits. Corporate action can be carried out through business restructuring or optimizing the capital structure designed to create synergy and greater operational efficiency.
Another goal for companies in carrying out corporate actions is to expand market share and create sustainable business growth. This can be achieved by carrying out acquisitions, mergers or joint ventures with other companies that are considered strategic and have growth potential. In addition, corporate actions can help companies increase liquidity and access new sources of funding. Overall, corporate action is an important effort by companies in facing dynamic economic and business changes. Through corporate actions, companies strive to remain competitive, maintain healthy business growth, and provide added value for all stakeholders, including shareholders, employees, suppliers, customers, and communities. Therefore, understanding the meaning of corporate action and the company’s objectives in carrying it out is essential for stakeholders in evaluating company performance and strategy.
Types of Corporate Actions
Dividend distribution is one of the most common types of corporate actions carried out by companies. Dividends are divided into two types, namely cash dividends and stock dividends. Cash dividends are payments given by a company to its shareholders in the form of money, while stock dividends are distributions of additional shares to current shareholders based on their percentage of ownership. Dividend distribution aims to provide returns to investors and increase the value of their investments in the long term.
Share repurchase or better known as “buyback” is a company policy to buy back a number of shares that have been issued and are circulating on the market. Buybacks are usually carried out with the aim of reducing the number of shares circulating on the market, increasing earnings per share, and reducing share price volatility. In general, a share buyback indicates that the company believes the current share price is undervalued and executing the buyback will provide more value to shareholders.
Issuing new shares or “rights issue” is a public offering method carried out by companies to raise funding through the capital market. In this case, the company issues the right to existing shareholders to purchase an additional number of shares in accordance with the proportion of their current ownership. Usually, the share price offered in a rights issue is lower than the market price, thereby providing an incentive for shareholders to participate. Issuing new shares can help a company obtain fresh funds for business expansion, reducing debt, or other financial reasons.
Merging companies through mergers and acquisitions is a corporate strategy carried out to combine several companies into one business entity. A merger is the process of combining two similar companies that have relatively the same size and business scale, while an acquisition is the purchase of one company by another company. The objectives of mergers and acquisitions include, among other things, creating business synergies, increasing market share, reducing operational costs, and increasing efficiency.
The Impact of Corporate Actions on the Stock Market
The impact of corporate actions on the stock market is very significant, especially in terms of changes in share prices and company value. Corporate actions, such as divestitures, mergers, acquisitions, and business combinations, can attract investor interest and create mixed reactions in the stock market. For example, when a company announces an acquisition or merger with another company, this could indicate that the company is looking for ways to expand its business or improve operational efficiency. In the short term, this news can cause the company’s share price to increase as a reaction from investors who expect profits from the transaction. However, the long-term impact of corporate actions on share prices and company value is highly dependent on the results of business integration and the synergies it produces. If the integration runs smoothly and successfully creates efficiencies, the share price will continue to increase over time. On the other hand, if the integration process experiences obstacles or fails to achieve the expected targets, share prices may fall and disappoint investors.
Apart from the impact on share prices and company value, corporate actions also affect market liquidity and trading volume. When there is information about upcoming or ongoing corporate actions, trading volume changes because many investors want to buy or sell shares based on these developments. This will make the market more liquid, namely the market’s ability to facilitate stock transactions quickly and efficiently. However, market liquidity and trading volume can also have a negative impact due to corporate actions, especially if business integration does not run smoothly or the company is hit by controversial issues. In situations like this, investors will be more careful in making investments and wait for further information before deciding to buy or sell shares. As a result, market liquidity may decrease temporarily, causing stock price volatility and potentially destabilizing the overall stock market.
Examples of Corporate Action Cases and Their Analysis
Corporate action case studies are often found in large companies in the business world. Corporate action is a strategic step taken by a company to increase shareholder value, influence organizational structure, or even change business direction. Examples of corporate actions include mergers, acquisitions, divestitures, and internal reorganizations. One example of corporate action that is interesting to analyze is the merger between the giant technology company Alphabet Inc., parent company Google, and smartphone manufacturer HTC. In 2017, Alphabet Inc. announced that it intends to acquire HTC’s design and R&D division for $1.1 billion. The aim of this corporate action is to strengthen Google’s hardware division and increase its competitive position in the global smartphone market. This merger is expected to help Google compete better with other smartphone manufacturers such as Apple and Samsung.
Analysis of the impact of this corporate action on stock market performance shows that Alphabet’s share price increased after the announcement of the merger plan. In general, compared to conditions before the announcement, investors appear more optimistic about the company’s future prospects and its ability to face competitors in this sector. Apart from that, HTC’s share price also increased after news of this merger emerged, illustrating a positive reaction from investors towards this strategic alliance. In analyzing corporate actions such as the case example above, it is important to consider the broader implications of the action. In addition to the direct impact on stock market performance, corporate actions can also have consequences for organizational structures and larger market dynamics. In the example of Alphabet and HTC, this merger encourages collaboration between the companies in the development of new products and technologies, thereby potentially influencing the smartphone market in the future.
