Investing Potentials

Stock Splits: A corporate action in which a company divides its existing shares into
multiple shares. Although the number of shares outstanding increases by a specific
multiple, the total dollar value of the shares remains the same compared to pre-split
amounts, because the split did not add any real value. The most common split
ratios are 2-for-1 or 3-for-1, which means that the stockholder will have two or three
shares for every share held earlier.

Special Dividends: A non-recurring distribution of company assets, usually in the

form of cash, to shareholders. A special dividend is larger compared to normal
dividends paid out by the company. Also referred to as an "extra dividend".

Generally, special dividends are declared after exceptionally strong company

earnings results as a way to distribute the profits directly to shareholders. Special
dividends can also occur when a company wishes to make changes to its financial
structure or to spin off a subsidiary company to its shareholders. For example,
GenTek Inc. issued a special cash dividend of $31 per share on Mar 16, 2005, in
order to restructure toward a more debt-based financing mix.

Stock Buy Backs: The repurchase of outstanding shares (repurchase) by a company

in order to reduce the number of shares on the market. Companies will buy back
shares either to increase the value of shares still available (reducing supply), or to
eliminate any threats by shareholders who may be looking for a controlling stake.

A buyback allows companies to invest in themselves. By reducing the number of

shares outstanding on the market, buybacks increase the proportion of shares a
company owns. Buybacks can be carried out in two ways:

1. Shareholders may be presented with a tender offer whereby they have the option
to submit (or tender) a portion or all of their shares within a certain time frame and
at a premium to the current market price. This premium compensates investors for
tendering their shares rather than holding on to them.

2. Companies buy back shares on the open market over an extended period of time.

Mergers and Acquisitions: Mergers and acquisitions (M&A) and corporate

restructuring are a big part of the corporate finance world. Every day, Wall Street
investment bankers arrange M&A transactions, which bring separate companies
together to form larger ones. When they're not creating big companies from smaller
ones, corporate finance deals do the reverse and break up companies through
spinoffs, carve-outs or tracking stocks.

Not surprisingly, these actions often make the news. Deals can be worth hundreds
of millions, or even billions, of dollars. They can dictate the fortunes of the
companies involved for years to come. For a CEO, leading an M&A can represent the
highlight of a whole career. And it is no wonder we hear about so many of these
transactions; they happen all the time. Next time you flip open the newspaper's
business section, odds are good that at least one headline will announce some kind
of M&A transaction.

The Main Idea

One plus one makes three: this equation is the special alchemy of a merger or an
acquisition. The key principle behind buying a company is to create shareholder
value over and above that of the sum of the two companies. Two companies
together are more valuable than two separate companies - at least, that's the
reasoning behind M&A.

This rationale is particularly alluring to companies when times are tough. Strong
companies will act to buy other companies to create a more competitive, costefficient company. The companies will come together hoping to gain a greater
market share or to achieve greater efficiency. Because of these potential benefits,
target companies will often agree to be purchased when they know they cannot
survive alone.

Distinction between Mergers and Acquisitions

Although they are often uttered in the same breath and used as though they were
synonymous, the terms merger and acquisition mean slightly different things.

When one company takes over another and clearly established itself as the new
owner, the purchase is called an acquisition. From a legal point of view, the target
company ceases to exist, the buyer "swallows" the business and the buyer's stock
continues to be traded.

In the pure sense of the term, a merger happens when two firms, often of about the
same size, agree to go forward as a single new company rather than remain
separately owned and operated. This kind of action is more precisely referred to as
a "merger of equals." Both companies' stocks are surrendered and new company
stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to
exist when the two firms merged, and a new company, DaimlerChrysler, was
created.

In practice, however, actual mergers of equals don't happen very often. Usually, one
company will buy another and, as part of the deal's terms, simply allow the acquired
firm to proclaim that the action is a merger of equals, even if it's technically an
acquisition. Being bought out often carries negative connotations, therefore, by
describing the deal as a merger, deal makers and top managers try to make the
takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining
together is in the best interest of both of their companies. But when the deal is
unfriendly - that is, when the target company does not want to be purchased - it is
always regarded as an acquisition.

Whether a purchase is considered a merger or an acquisition really depends on

whether the purchase is friendly or hostile and how it is announced. In other words,
the real difference lies in how the purchase is communicated to and received by the
target company's board of directors, employees and shareholders.

IPOs: An initial public offering, or IPO, is the first sale of stock by a company to the
public. A company can raise money by issuing either debt or equity. If the company
has never issued equity to the public, it's known as an IPO.

Companies fall into two broad categories: private and public.

A privately held company has fewer shareholders and its owners don't have to
disclose much information about the company. Anybody can go out and incorporate
a company: just put in some money, file the right legal documents and follow the
reporting rules of your jurisdiction. Most small businesses are privately held. But
large companies can be private too. Did you know that IKEA, Domino's Pizza and
Hallmark Cards are all privately held?

It usually isn't possible to buy shares in a private company. You can approach the
owners about investing, but they're not obligated to sell you anything. Public
companies, on the other hand, have sold at least a portion of themselves to the
public and trade on a stock exchange. This is why doing an IPO is also referred to as
"going public."

Public companies have thousands of shareholders and are subject to strict rules and
regulations. They must have a board of directors and they must report financial
information every quarter. In the United States, public companies report to the
Securities and Exchange Commission (SEC). In other countries, public companies
are overseen by governing bodies similar to the SEC. From an investor's standpoint,
the most exciting thing about a public company is that the stock is traded in the
open market, like any other commodity. If you have the cash, you can invest. The
CEO could hate your guts, but there's nothing he or she could do to stop you from
buying stock.