Stock splits move shares in Internet time
Until recently, a stock split announcement would result in a moderate pop in the stock price, but now such otherwise mundane announcements have become market movers.
Of course, Red Hat also coated the bitter news with a healthy dollop of sugar as the company announced it will split its shares 2 for 1.
Until recently, when a company announced a stock split there was a moderate pop in the stock price.
Today, however, such otherwise mundane announcements have become market movers for several reasons. The first dynamic is that tech companies are hot. As a result, the slightest bit of good news, such as a split, can send shares climbing.
In addition, the Internet disseminates news of a split instantly to countless online stock traders who buy stocks hoping to reap a quick gain in a short period.
"Stocks typically move on news of the split itself," said John McPeake, an analyst with Prudential Securities. "It used to be that a big move was two or three points, but now it's not uncommon to see stocks move eight to nine points as information gets priced into stocks faster with the advent of the Internet."
As another example, shares of database maker Oracle jumped more than 6 percent today after the company announced that it will split its shares.
However, not all tech stocks rise after news of a split. Check Point Software, for example, announced today that it will split its shares, and the stock fell 5 to close at 193.
Companies typically split their stocks to increase liquidity and make it easier to buy a lot of 1,000 shares. For example, an investor might not be able to buy 1,000 shares of stock trading at 130, but may be inclined to buy 1,000 shares at 65.
McPeake noted that splitting a stock can send a message that a company believes its performance is strong and its stock will continue to rise.
BEA Systems, for example, has risen 71 percent since it announced Nov. 16 a 2-for-1 split. The stock, which began trading today on a split-adjusted basis, was hovering around 62--nearly double its close of 36.25 on the day before the split announcement.
Companies that issue stock splits tend to perform well, McPeake said. BEA, which helps companies build e-commerce infrastructures, earlier this month saw its shares jump after it announced partnerships with Bull and iXL Enterprises and said it will restructure its business into four groups.
In some cases, a company's stock continues to surge long after the split announcement. But that's more likely a continuation of investor enthusiasm driving the shares sharply higher prior to the split.
For example, four splits that were announced last month and become effective this week all gained in price since the announcement, but to different degrees:
• On Nov. 16, Atmel announced a split. Since then, shares have gained about 9 percent.
• Network Appliance also announced a split on Nov. 16. Shares have gained about 40 percent.
• Shares in Mercury Computer Systems have climbed about 14 percent since it announced a split on Nov. 18.
• Ariba announced on Nov. 16 that it would split its shares. Between then and last Friday, shares have gained 18 percent.
Ariba, the Internet procurement software maker, actually saw its share price fall from around 108 on a split-adjusted basis on the day of its announcement to as low as 102 a few weeks later. The stock, however, has bounced back and is now trading at about 130.