Companies should think carefully before offloading their shareholder bases; they can be extremely valuable, not least because of their loyalty
Newly renamed UK mobile phone giant O2 (formerly mmO2) recently announced that 833,000 of its smaller shareholders took up the offer to cash in their holdings at a premium to the market price. For O2, the problem was that 63 percent of its shareholders owned just 3.5 percent of the company’s total market value. The cost of servicing these shareholders is significant: for shareholders with fewer than 1,000 shares, it cost more to post their dividend checks than the value of the dividend. O2 says it will save £3 mn ($5.65 mn) by buying shares back from smaller holders.
O2’s actions exemplify a growing trend of companies trying to reduce the number of private shareholders. Firms have always preferred institutional shareholders as they are less expensive to administer, and they add prestige: having institutional names such as Fidelity or Jupiter says something about the company and confers status.
As well as the direct costs associated with smaller shareholders, hidden costs can be created by their demands on the finance director’s time. Smaller shareholders are known to call companies and ask to speak to board directors. They may understand that quoted firms cannot give them insider information, but this won’t stop them fishing.
In spite of all this, however, it is important that companies resist the temptation to offload smaller shareholders without first thinking of the consequences. Smaller shareholders, even those with just a few hundred shares, can be incredibly valuable. They can be immensely loyal, often regarding the company they invest in as ‘theirs’ and really willing it to succeed. This emotional bond is useful if the company needs to raise money because, although smaller investors start with small investments, they tend to add to their holding in rights issues or placings.
Smaller shareholders also create noise and excitement. Because they don’t commit vast sums they often take risks that institutions steer clear of, frequently leading the market as they move into stocks unloved by institutions.
Private shareholders are also inveterate networkers: they form strong bonds in chat rooms such as MichaelWalters.com and ADVFN.com, and their passion for a stock often interests larger institutional investors. Without their lively debate, some fantastic growing companies would never be on the radar of professional investors. A classic example is technology and software solutions provider KTS.
If the company sells consumer items or services, having a large number of private shareholders can be useful, as they often like to further support the company by buying its products. This benefit came in extremely useful for utilities such as British Gas after privatization.
O2’s situation has highlighted a real issue for every ambitious growing company. As the business develops, so does the firm’s shareholder base, and O2 is right to review the mix of private client and institutional shareholders to ensure capital is effectively nurtured. Nonetheless, O2’s actions should not be seen as undermining the importance of private shareholders. Their contribution to the growing popularity of a stock and the buzz and trading liquidity they create is of a value far in excess of their proportionate holdings.