When you do get shares in another company automatically?

by Manshu on April 27, 2012

in Investments

Thiyagu posted an interesting comment the other day where he said that he held some shares of L&T Holdings, and when L&T divested its stake in L&T Finance he expected to automatically get shares in L&T Finance but was disappointed when he didn’t get any.

So, the question is under what conditions should you expect to get the shares of another company automatically?

I think this is most easily understood when you think of yourself as the owner of the company because as a shareholder that’s what you really are.

If you owned L&T which in turn owned L&T Finance – the value of L&T Finance is implicitly accounted for in the value of your L&T holding.  And if you decide to sell L&T Finance to someone you would expect cash for it and not shares of L&T Finance.

In terms of a company doing this — L&T divested a part of its stake in L&T Finance and got cash for those shares which went in their balance sheet. No one got new shares in L&T Finance by virtue of owning L&T itself.

It is most common for shareholders of one company to get shares of another company during takeovers and mergers. It is common for the company that’s buying to pay through cash and shares, and that’s when as a seller you get new shares.

When Facebook bought Instagram, the shareholders of Instagram were paid in cash and stock so if you owned shares in Instagram you would automatically get shares of Facebook because of this deal.

Similarly during merger of two companies, the shareholders of the companies get shares in the new company at a predetermined ratio which is usually based on how big the original entity was compared with the new entity.

As I said earlier, this is most easily understood when you think of yourself as the owner or seller of the company and think in terms of what you would have wanted in this transaction had you owned the whole company instead of a few shares.

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{ 3 comments… read them below or add one }

Thiyagu April 28, 2012 at 11:37 am

Hi Manshu

Thanks for your detailed explanation but still not convinced.

Whenever analysts recommend any shares of the company, they are analysing the share value on multiple angles , different ratios and various perspectives. One of them is unlocking the company value. That mean, if a company listing any of its subsidiary in stock exchange , shareholders of parent company would be benefited.

For example, it is said M & M Automobile parts company business itself Rs.1200 crores which is a subsidiary of M & M. If M & M decides to list Automobile parts company as a separate company , then obviously parent M & M Shareholder should be benefited.

Another example, Reliance Industries Ltd is said to have 26 subsidiary companies . If it decides to list 2 or 3 of these companies, then again parent company Reliance Industries Ltd should be benefited.

Another example, HDFC and ICICI bank is expected to list their Insurance Company and Mutual Fund Company in the near future. Listing mean deposing this Insurance Company and Mutual Fund company as a separate company in the stock exchanges and thereby identifying their intrinsic value.

Now My questions are

1. What is the meaning unlocking of company value by listing their core subsidiary companies in the stock exchanges ?
2. By doing such act, how shareholders of parent company would be benefited ?
3. Suppose , if the parent company divest only 25 % stake in the subsidiary through IPO, then whether shareholder of parent company would get any preference in getting that subsidiary company shares at subsidised price or would get subsidiary company shares automatically ?
4. Suppose, if the parent company divest entire 100 % stake in the subsidiary through IPO ( most parent companies won’t do like that , but still for example sake ), then again whether shareholder of parent company would get any preference in getting that subsidiary company shares at subsidised price or would get subsidiary company shares automatically ?
5. Suppose, if parent company sell that particular subsidiary company for all cash component, then I agree parent company shareholder won’t get anything in their hands. Networth of the parent company would increase through any premium received on the valuation of susidiary.
6. Suppose, if parent company sell that particular subsidiary company for 25 % cash and 75 % stock deal to another company, whether shareholder of parent company would get share of the buying company ?

AS you have taken my suggested topic as a separate positing, request you to clarify on the above mentioned points to have more clarity to the readers.

Thanks in Advance.

Reply

Manshu April 28, 2012 at 6:48 pm

Thanks for your questions, I’ll try to answer them as best as I can.

1. Unlocking value in this context usually refers to the fact that the market is not appreciating how valuable the subsidiary is and not putting an appropriate price to it while calculating the value of the parent company. So, if the subsidiary is listed then that will mean its shares also trade and there is a price and value for those available at all times. Anyone can look at that and say that it is worth say 4,000 crores and the parent holds 80% so automatically the parent should have at least a value of Rs. 3,200 crores plus whatever other value the market puts on their own stock. This way a company hopes that its price will rise and value will be unlocked.

2. They expect shares in the parent company to rise because it will now reflect the correct value of the subsidiary. So, perhaps ICICI’s share will rise commensurate with their holding in the insurance company and the price it fetches in the market, which wasn’t so transparent before the subsidiary was listed.

3, 4 & 6. Not automatically, they might say that parent shareholders get a preference or get a discount or something to that effect, but it won’t happen automatically.

5. Fine.

Reply

wealthucreate April 29, 2012 at 10:15 pm

I did spend some time reading few articles on your blog. Quite informative and Precise.
I would visit this blog again here after.

My uncle has few shares that are in physical format. The company “X” was taken over and lots of action happen but the new shares for various reasons did not reach him. Is there a possibility of converting the shares “X” held by my uncle?

If the answer is yes, do you have any idea on how it needs to be done?

Reply

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