United Business Media plc Splits
Two For One
By Chris Doering

London-based United Business Media, which publishes Pro Sound News, Guitar Player and other magazines you probably read, has split its NASDAQ-traded American Depositary Receipts two for one. What's an ADR and why do companies "split" shares? Marketing Guy Chris Doering explains.

United Business Media owns United Entertainment Media, which publishes Pro Sound News, EQ, Systems Contractor News and other pro a/v titles along with the group formerly known as GPI: Guitar Player, Keyboard, etc. United Business Media and Primedia, which owns Intertec, publishers of Sound & Video Contractor and Mix, are the two Media components of the AV Industry Trend Line.

UBM is listed on the London Stock Exchange, but is also traded on the NASDAQ (the National Association of Securities Dealers Automated Quotations) via America Depositary Receipts (ADRs). ADRs are issued by Morgan Guaranty Trust: they make it easy for Americans to own and trade shares of foreign companies, since they behave like a stock: ADRs are quoted and traded in dollars, buy or sell orders are settled according to US market practices, etc. Underlying an American Depositary Receipt is an America Depositary Share (ADS), representing a certain number of shares in the issuing company that are held in that company's home country (the UK in the case of UBM). So instead of splitting its stock, UBM "adjusted its ADR ratio" from 2:1 to 1:1. This has the effect of doubling the number of shares while halving the value of each share.

Why do companies change the nominal value of their stock without changing the actual value of equity holdings? Statistics show that stocks outperform the market for about three years after a split, by a healthy 12.15% on average. So splitting a stock is good for equity owners and for the company's ability to finance acquisitions with stock, even though it has absolutely nothing to do with the performance of the business itself.

Financial wizards have two explanations for why you can boost a company's market value simply by chopping its equity into smaller bits. The first is called "signaling." Investors apparently take a stock split as a signal from management that the company's results will continue to push the price of its shares (or ADRs) higher, and they have kindly consented to split the stock so that you and I can more easily afford a modest stake in their success.

The second explanation is called "trading range." Apparently, investors like to buy stocks that are about the same price as the average in a given industry sector. For instance, before UBM split, a single ADR representing two underlying ADS's was trading at around $20. Primedia's around $8 or so. Now that a UBM ADR represents only one ADS, it costs about $10. Both stocks are now in the same trading range.

UBM can also get a bounce in London from the split, er, ratio adjustment, according to researchers. Keep your eye on the AV Trend Line and its components via the Industry Segment Monitor to see how UBM's move impacts the value of its shares.