Mastering Types of Corporate Actions for SIE Exam Success

Corporate actions are events implemented by a corporation that directly affect its shareholders. Understanding them is essential for investment company and variable contracts products representatives as well as crucial for passing the FINRA SIE Exam. These actions can influence stock prices and shareholder value significantly. Here’s a breakdown of major corporate actions—stock splits, mergers, acquisitions, buybacks, and tender offers—along with real-world examples and practical applications.

Detailed Explanations

Stock Splits

A stock split increases the number of shares outstanding while proportionally reducing the price per share, maintaining the company’s market capitalization.

Example

Consider Company XYZ has 1,000,000 shares outstanding priced at $100 each. In a 2-for-1 stock split:

• Shares outstanding become 2,000,000.
• Share price reduces to $50.

    graph TD;
	    A[Initial Share Price: $100] -->|2-for-1 split| B[New Share Price: $50];
	    C[Initial Shares: 1,000,000] -->|2-for-1 split| D[New Shares: 2,000,000];

Mergers and Acquisitions (M&A)

Mergers combine two companies into one, while Acquisitions involve one company purchasing another. M&A can lead to synergy creation, cost efficiencies, or expanded market reach.

Example

• Merger: Company A and Company B merge to form Company AB.
• Acquisition: Company A buys Company B outright.

    graph TD;
	    A[Company A + Company B] --> B[Company AB];

Buybacks

A buyback occurs when a company repurchases its own shares from the marketplace. This often indicates confidence in the company’s future.

Example

If Company ABC buys back 100,000 shares, the remaining shareholders own a bigger piece of the company, possibly increasing stock price per share due to reduced supply.

Tender Offers

A tender offer is a bid to purchase some or all of shareholders’ shares in a corporation at a specified price, often at a premium.

Example

Company XYZ offers to buy shares from current shareholders at a 20% premium to current market prices to gain control over the company.

Visual Aids

For a clearer understanding, here’s an overview diagram of typical corporate action processes:

    graph LR;
	    A[Announcement of Corporate Action] --> B{Type of Action};
	    B --> C[Stock Split]
	    B --> D[M&A]
	    B --> E[Buyback]
	    B --> F[Tender Offer]
	    C --> G[Share Adjustment]
	    D --> H[Integration Process]
	    E --> I[Share Reduction]
	    F --> J[Purchase Transaction]

Summary Points

• Corporate actions significantly affect market prices and shareholder value.
• Stock splits increase share quantity but decrease price per share.
• M&A operations can lead to expanded business operations and efficiencies.
• Buybacks reduce shares in the marketplace, potentially raising prices.
• Tender offers involve a company attempting to purchase his shares at a premium.

Glossary

• Stock Split: An increase in the number of shares outstanding with a proportional decrease in share price.
• Merger: The combination of two companies into one.
• Acquisition: The purchase of one company by another.
• Buyback: When a company purchases its own shares from the marketplace.
• Tender Offer: A public, open offer to buy shares at a specified price.

Additional Resources

• Books:
  • “Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions” by Rosenbaum & Pearl
  • “Security Analysis” by Graham & Dodd
• Online Resources:
  • Investopedia.com
  • FINRA.org
• Websites:
  • Markets.BusinessInsider.com
  • NYSE.com

Quizzes

Test your understanding of corporate actions with these SIE-style quizzes.