Corporate Actions Unveiled: Strategies for Smart Investing

Join Guillaume Roux-Chabert of Interactive Brokers Singapore as he interviews Stefano Grasso, Portfolio Manager of the Enhanced Value Fund, about the dynamic world of corporate actions and their significant impact on stock prices and investor decisions. From understanding stock splits and dividends to navigating mergers and acquisitions, Stefano provides practical advice for investors on how to anticipate, respond to, and capitalize on these events.

Summary – IBKR Podcasts Ep. 187

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Guillaume Roux-Chabert 

All right, so let’s get started. Thank you all for joining us today for this podcast. I’m your host here, Guillaume Roux-Chabert with Interactive Brokers Singapore. So today our topic is about a very key component of the life cycle of equities, which are the corporate actions. I’m joined today by Stefano Grasso, Portfolio Manager of the Enhanced Value Fund, which is by the way, also available in our marketplace for eligible investors. 

Stefano, thank you very much for joining us today, and let’s dive in our topic directly with my first question. This topic is indeed quite timely because NVIDIA just announced a major corporate action with their split.  

So could you tell us a little bit more about it, and can you describe what corporate actions are and what they mean for a fund manager like you? 

Stefano Grasso 

Yeah, sure. Hi, Guillaume, and thanks for having me. As you said, maybe let’s, before jumping into the darling of the market, NVIDIA, let’s step back a second and define corporate actions as events initiated by publicly traded companies that have the potential to impact the price of their securities, such as equities or debts. 

And, with corporate actions, we have a very wide and big laundry list of actions. To simplify a bit for our audience we can divide them in four categories. One is dividends and distribution which are things like a dividend declaration, stock dividends, spatial dividend and things that are basically return of capital to shareholder, direct return of capital to shareholder.  

There is then a second bucket, which is share capital alteration, which are stock buyback public offering, private placement, stock option, follow also on this on this category, stock warrant exercise, and so forth. 

Within this category, we have also the stock split, which I’ll come back in a second about NVIDIA. Then we have a bucket we can call corporation reconfiguration, which are the spin off, divestiture, merger, acquisition, liquidation, change of corporate structure, consolidation, joint venture.And these things are really material usually for the company.  

And finally, there is another bucket, let’s say, everything that is not included in the buckets before, but are still meaningful actions like listing change, the listing, change of fiscal year. There are some peculiar, but still very interesting corporate actions that are interesting to notice and to take note about. 

Regarding NVIDIA, it was expected that the price action after the stock split, usually companies do stock split when the price increase a lot and increase to a point where the retail investors struggle to buy one share because the price of that share has become like a price of a big home item or a big purchase. 

So they split it to give more liquidity to the stock. It’s interesting because Warren Buffet and Berkshire Hathaway never split the stock. And since the 70s when Berkshire Hathaway was traded the compounding effect brought the stock price today to be in the hundreds of thousands of dollars per one share. 

Other companies, the majority of the companies decided to split. Nvidia did the split. And usually when, the stock that are, we can say fashion that are like the darling of the markets, they do the stock split.  

They generate a price appreciation on the basis that there are more retail investors able to purchase few shares. And there is often a cult with these companies, therefore reducing the price of the share allows a much broader audience to buy into the share. So more demand for the shares price goes up  

NVIDIA has been going up, despite the stock split, but the stock split was something that possibly helped even more the stock. 

Even though from a financial perspective, it’s like you have the same pizza, let me say, and you cut it instead in four pieces in eight pieces, the pizza is still the same. You’re going to feed the same number of people. It’s just that they’re going to get two smaller pieces rather than a bigger piece, right? 

Guillaume Roux-Chabert 

Yeah, absolutely. That’s a good analogy indeed. It’s not only NVIDIA. We have also Microsoft that is coming, that’s for the stock split, like there was on the 10th of June. 

But obviously you have other type of corporate actions and you mentioned about them, but from your point of view, what is your approach to handling corporate actions and how do you ensure like timely and accurate processing on your side? 

What happens after you receive these corporate actions? Because it can be quite sudden sometimes.  

Stefano Grasso 

Correct. Majority of the corporate actions happen, and especially the most relevant and important happen all of a sudden, so you don’t get a notice, like the stock split was announced a while ago, but that’s more the exception. 

If you have the initiation of a share buyback program or the payment of the extraordinary dividend, this happens without notice.  

So basically you wake up in the morning that the decision has been communicated to the market or is communicated during an earning release. 

And there is little you can do to do the work before. I have to say certain corporate events are out-speakable, and if a company is trading a very cheap valuation, eventually those two companies that were in the container lesser, both were bought out by two different private equities. 

So if you do, let’s say your homework, you can expect certain corporate actions to happen. If a company has a lot of cash on their balance sheet, you can expect them to do something with the cash, right? Maybe give a dividend, maybe start a share buyback or maybe do some acquisition.  

So the key for us and the way with the colleagues within an enhanced value fund, we look at this situation is for both the companies that we have in our portfolio and the ones that are on the watch list, we want to know them so well that whatever additional information comes in, it’s an additional data point that we can quickly process and take a view if you want to do something with that position. 

If we have in the portfolio. Add, sell, do nothing. If we don’t have in the portfolio, buy typically or short sell, if it is something really disruptive. So the answer is there is no secret sauce, but if you have done your homework on the company, you’re just quicker to process the information and you can just take advantage. 

Actually, one example that comes to mind is one of our portfolio companies, IDT, which is small cap U.S. listed company that had a lawsuit and we were expecting the result of the lawsuit to happen. The lawsuit was for $1.1 billion and the market cap of the company at the time was $600 million. 

So potentially the lawsuit could have been very disruptive for the company.  

When the announcement came out saying that basically the lawsuit was dropped and the judge was saying there is no merit in this lawsuit, the stock traded up, I think like less than 10%, but actually that was a 200% potential impact in the stock price. 

So, we were very clear about what that meant. We were able to add immediately to the position. And in the following days, the stock trended up and increased. And that’s an example where you’ve done the homework and you can be quicker than the market, especially in a small cap company, especially in a crystal-clear situation like the one I just described. 

Guillaume Roux-Chabert 

Excellent. Yeah. And it’s good that you give this tip of “do the homework and check on the cash on the balance sheet” because it tells that the story might be happening. So that’s a good takeaway for the audience. 

Maybe we can drill down a little bit with your extensive experience with the stocks and we’ll take maybe like one of the scenarios of the corporate action, which is the merger and acquisition.  

So could you describe a bit more your experience with complex corporate actions with examples such as merger and acquisition and how do you navigate these events? 

Stefano Grasso 

Yeah, it’s one of the probably most complex corporate actions, because typically what happens when a company is buying another company or two companies are merging, is there are a number of stakeholders involved. The boards of the two companies need to agree on a certain level of details. 

Usually there are regulators, possibly several jurisdictions that need to come in and say, if they agree or if they block the deal. A relatively recent one, but definitely high profile was the acquisition by Microsoft of Activision Blizzard, the gaming company. 

And that deal took more than a year to finalize. And it initially seemed that the UK regulator was not happy and that there were a lot of uncertainties. And Activision Blizzard has been trading below the actual price that was known that Microsoft committed to buy it for the majority of these fifteen months or so that took the deal to close. 

Usually what happens in the simple case is that the stock price goes close to the purchase price and it stays there unless there are big disruptions.  

So, these deals are very difficult and there are a lot of also professionals with insider information, because you have a number of banks, lawyers and consultants working on the deal, and they might know something that you don’t know. 

And sometimes you see some price actions that you wonder if someone knows more than others. So it’s very difficult. And for a retail investor or a small fund, you can’t be sure that you know all the information to the latest extent, right? 

So this is the first point on M&A kind of activity.  

The second is that usually in case of an acquisition, the company that buys the other company has a negative price reaction because they’re spending cash to buy another company. And typically the target company gets a bump in price because of course to go private, you need to incentivize the shareholder to sell and so forth. 

But there are several exceptions to this rule because sometimes, for example, when Warren Buffett buys something, the market says this is good news. If it is a good price for him, it is a good price for Berkshire. And therefore, even the company that actually lays out the cash is going to go up in value, right? 

You can’t really do the usual trade the short the buyer and go long the acquire, and basically the target company basically makes money.  

The information that the market reacts to sometimes is in a different way. And on the merger, a friend of mine says there are never mergers, right? 

There is always someone being acquired and someone acquiring it. And you see it usually when people that stay in the top position of which company fill the top spots in the merger organization. 

And it’s very complex because for the culture of two companies can be very disruptive. And we recently have the merger of UBS and Credit Suisse in Switzerland and basically Credit Suisse was handed almost for free to UBS, and UBS subsequently had the price appreciation quite substantial. 

There are lawsuits still ongoing for the 81 bonds that have been wiped on the credit free side. And there are these lawsuits that are going to come to the merged entity at a later time. So there are a lot of percolations and permutations of subsequent actions that can happen that make that very difficult to assess at the beginning. 

And sometimes it just takes weeks to assess the specific corporate action.  

Guillaume Roux-Chabert 

We covered already the main corporate actions, like the dividend, that’s stock splits, the merger and acquisition. 

What about like the share buyback, which is also quite key and important? So each time in these situations, it seems like the key is communication, right? 

So how do you see companies communicating on their corporate actions and do you see any differences between stocks and exchanges depending on their requirement and what kind of level of transparency do you see, from them, if you have some examples? 

Stefano Grasso 

100%. So I think it’s an epiphany. It’s an a-ha moment when a corporate action happens, because if it is a meaningful corporate action, it’s basically the management of the company, the board of the company, playing their cards and the shareholders are getting dealt the cards without having a say, unless there are lawsuits and things like that.  

So it’s very important for the investor to receive enough information to be able to assess the situation. And to your point about the exchanges, we invest in emerging markets, China, even Singapore is much less advanced and transparent than the US in terms of disclosure. 

Canada is another example where the level of disclosure is not to the same level of the U.S. And that’s part of the reason why the U.S. is the most liquid market in the world and the biggest capitalization by far in the world.  

So definitely there is an element of exchanges and rules, but I think the management is always capable to clear uncertainty with a press release or an ad hoc conference and I think oftentimes this doesn’t happen.  

Even in the US, when excess cash is returned via dividends rather than buybacks, that creates a tax event for the receiver of the dividend whereby in the buy back scenario, you wouldn’t have a tax event for the investor. 

But because maybe there is a bigger shareholder that needs some cash and doesn’t want to sell, they have just above a 50% of the company, they don’t want to lose control, they need the cash and they trigger this dividend payment and then the other investor is saying, hey, you’re pushing to me a tax event. Why are we doing this?  

And it’s not always properly communicated.  

We really inquire hard on companies to be transparent. There are some changes of jurisdiction incorporation of the company. Tesla recently moved from California to Texas , so remove the headquarters from California to Texas. The incorporation was in Delaware and they went to the other jurisdiction for not having Elon Musk’s pay challenged. 

And these things can be done in a very transparent way explaining the reason, which by the way, in Tesla’s case has been very transparent. Then we can discuss if the pay is too much or not, but it has been done for that reason.  

In other situations, there are clearly some hidden reasons not explained, and I think that’s what harms capitalism, because the small investor that maybe doesn’t have the full understanding of what’s going on gets not delivered the full picture. 

Guillaume Roux-Chabert 

Yeah, but that’s why we have IB and a flow of information for the informed traders and that kind of podcast definitely helps. 

You mentioned about Berkshire, one of your favorite stocks, yeah, I know that they never had a split since they were issued, except they created a Class B, right? But is that because it’s reflecting the strategy of the company and you can read a bit into this corporate action as like a strategy statement from the management? 

Stefano Grasso 

The majority of the things that Berkshire does are done in a very transparent and best practice way. The Class B was made for two reasons. If I remember correctly, it was explained in great detail. 

One was that there is a thing like fractional shares and basically some brokers used to take the big Berkshire Class A and split it in multiple shares and gave it to the investor that didn’t have the full capital to buy one share. 

But doing that, they were charging an enormous amount of bid ask fees and stuff. And Warren Buffett didn’t like to have the small shareholder being penalized in that way. So that’s one reason why he did the Class B. 

And the second reason was as he’s giving more control, as he’s donating more shares to charity every year for the last for twenty years, he’s donating 1/20^th of his net worth in Berkshire to charities. 

As he does that, he of course reduced the control that he has over Berkshire. And in order not to reduce the control, he basically converted the Class A shares into B shares. The Class B shares don’t have the same voting power as the Class A shares. So basically he’s diluting the voting power of the known Class A shares, therefore keeping the same amount of money that he’s left with after these payments to the charities. More meaningful in terms of voting power. 

So again, he’s right to do within the boundaries of the law whatever he wants. Investors are free to sell or buy based on the information, but very transparently communicated. Very transparently executed. No surprises in that sense.  

Guillaume Roux-Chabert 

Interesting. Okay. Thank you so much.  

Stefano, maybe one last question to have a bit more sharing experience on these corporate actions.  

So can you give us like a couple of examples of a recent corporate actions that were meaningful for the Enhanced Value Fund?  

Stefano Grasso 

Yeah so let me tell you two examples that I think are interesting for the audience. One is the change of the listing change. So we were invested in a shipping company that was listed in Oslo. And they were seeking an obtained listing in the U. S. And the rationale for that, for them, was to give more visibility to their stock and to have them included in the pool of shipping companies that were listed in the U.S., where some ETF were tied into.  

You have the same underlying business. Nothing changed, but the management wants to create more visibility for their stock. Interactive Brokers also allows the Oslo Stock Exchange. We are both stockholders on Oslo and in the U.S. stock, but many of the more mass market brokerages don’t easily allow to buy shares in the Oslo Stock Exchange. 

So that’s a case of a corporate action that was, in this case, explained and it’s interesting because the liquidity of the stock in the U. S. immediately picked up very quickly compared to the Oslo market. And that allows for a fund like us to be able to get in and out more comfortably because it’s more liquidity. 

So that was one. 

And another one that I find interesting is the change in fiscal year. With a fund manager friend of mine, we said we want to look at all the companies that have the fiscal year not ending on the 31^st of December and prove the point that we believe to be true, that they overperformed the broader index or their sector. 

And the reason for that is that usually, and we saw it for our accounts, if you don’t have the closing of the fiscal year on the 31^st of December, as the majority of the companies have, you pay less the auditors and the accountants, because that’s when the peak of the work is coming for everyone, right? 

So a company that has a fiscal year ending in March or even within the quarter, right? I think IDT, that I mentioned before, they have it in in May, some odd month, okay? When a company changes the fiscal year, it can be because they want to save on accountant fees and things like that. So a very noble objective. 

We support that. We like it. It’s a bit more difficult to look and compare quarter to quarter with other companies. You need to do some adjustments. It’s okay to pay the price for that if it’s meaningful for the company.  

But there is also a risk because sometimes the company does that because a year is particularly good and they want to spread the year on different periods. So watch out when you say change in fiscal year and make sure that this is properly communicated because can spell troubles as well.  

Guillaume Roux-Chabert 

Yeah, absolutely. All right, Stefano, we are reaching the end of this podcast. I want to thank you so much, dear Stefano Grasso from the Enhanced Value Fund. 

Thank you very much also for the audience for listening to this podcast for the informed investors. I wish you all a very happy trading ahead. Thank you.  

Stefano Grasso 

Have a great day. Bye. 

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