General Question

gorillapaws's avatar

Why would a company not want to split their stock when the price starts getting kind of high?

Asked by gorillapaws (30691points) March 5th, 2008 from iPhone

I understand the reasons & advantages for why a company might want to split their stock when the share price gets kind of high, but what’s the disadvantage for them? Or to put it another way, why do companies ever let their stock prices get to several hundred dollars/share?

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3 Answers

srmorgan's avatar

Some companies envision a high stock price as prestigious and do not split their stocks. The effect of a stock split is nil on the overall capitalization of the company.

Look at Berkshire-Hathaway, that’s Warren Buffett’s investment vehicle. Markel has never split since they went public and their share price is up around $400. I haven’t checked it lately. There are other examples.

srm

gorillapaws's avatar

So it’s really just an ego thing? I mean as a stock’s price gets higher it can become more difficult for small investors to invest the amount they want with the company. Like with the $400 example, If i wanted to invest 1100 with them, I would be forced to only invest $800, that’s a loss of $300 that would otherwise be invested with them. Sure it’s just pocket change to companies, but I would think that pocket change could potentially add up to a lot with thousands of investors over many years, that seems (at least in theory) like a lot of lost capital for something as petty as prestige.

srmorgan's avatar

I really can’t give you a plausible answer for this. I am in Corporate Finance but not in a public company (at least not for the last 18 years) and I don’t move in those circles.

I really think it is a psychological thing. A PR person for a company might come up with specious reasons but I guess it is up to CEO and the operating officers about how they want to present themselves.

When Google was putting together their Dutch Auction when they were going public in 2005 or 2006 the magnitude of the share price was a big deal to them, or at least I think I read that. For some reason that I do not recall they were looking for a share price around $100 but ended up at $85 when the IPO finally went through. There must have been a psychological issue centered around that $100 threshhold, but the stock has soared, what’s their highest price, $600?

But you do see companies whose share prices hit $80 or $90 and think they need to get back to $25 or $30.

SRM

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