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There has been some talk among recently Presidential Candidates about how they would like to break up the Oligopolies of telecom providers in the United States if they are elected in 2020.

Let's say I own stock in Telecom Company A, which controls approximately 35% of the market, and has a stock value of $100/share. In 2020, a new President is elected, and they follow through on their plan to break up these telecom providers into smaller pieces. Telecom Company A is now in 3 pieces of roughly equal size, with each piece now competing.

What (in theory) happens to my $100 share in the original, non-broken-up company? Will some part of the split company retain the name "Telecom Company A" as well as my complete share, now worth significantly less? Will my one stock split into three, with each one (theoretically) valued in such a way that all of them add up to $100 at the start of the split? Will this all depend on what actions Telecom Company A takes moving forward?

I found this article on how Bell handled splitting into the Baby Bells in 1982 that may or may not still be relevant. It looks like shareholders were given a proportional share in each of the baby bell companies for their stock. I'm not entirely certain what that means (IE if I owned 1 share out of 300 million shares in Bell, how many do I own in AT&T if it has 100 million shares? Or did AT&T need to have 300 million shares to ensure proportionate distribution?) I'm also not certain if that's still how this would be handled; Bell voluntarily broke themselves up after they became certain that they would lose an anti-trust lawsuit. Today's telecom companies might choose to fight such a lawsuit out, and their break-up would be handled by the Government as opposed to the individual companies, which could mean a different course of action.

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    Every spin-off would start out with the same number of shares as the parent had before it was split. After the initial split, things could happen like stock splits (probably reverse splits) that affect the total number of shares, but then your question about rounding of fractional shares would be controlled by the rules of the stock split, not the spinoff/break apart action. – Ben Voigt Dec 19 '19 at 21:54
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Consider what happens when a company is broken up.

  1. Start with company A.
  2. Create subsidiary companies X, Y, Z, ... .
  3. Transfer assets and personnel to X, Y, Z, ... .

In step 1, you hold your $100 share in company A.

At step 2, if A owns the subsidiaries’ shares outright, then your $100 share has pretty much the same value. If A did some deals and only held, say 50% in each subsidiary, then assuming everything was done equitably, others would have pumped enough assets into the subsidiaries that the 50% left to A would be worth whatever A spent on setting the subsidiaries up. That is, your $100 share would then still be worth $100, assuming all else remains the same.

At step 3, assuming equitable transfers, whatever A is paid by the subsidiaries (even if it was just shares in the subsidiaries) would be worth the same as the assets transferred. So your $100 share is still worth $100, ceteris paribus.

So, assuming equitable dealings all the way through, your $100 share should still be worth the same after the exercise as it did before.

Nevertheless, there is always the possibility that some or all of the deals might not be equitable, so in real life, your $100 share may be worth more or worth less or worthless after the exercise.

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  • It seems to me that it would most likely be worth less. For example-- let's consider a regional office. Telecom Company A had one regional office for three counties that could service every customer in that area, and that housed 100,000 people to handle everything. Telecom Company A is suddenly split into subsidiary companies X, Y, Z... Those companies are expected to compete in that area, otherwise we've still got the exact same oligopoly. Whoever doesn't retain the building now has office, hardware, and staffing expenses to become competitive in the area. – NegativeFriction Dec 20 '19 at 12:32
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    @NegativeFriction It depends on the situation - in many cases a broken up company is worth more than the sum of its parts because the individual companies can be more nimble and adapt to their situation better. But certainly there could be some economies of scale that are lost as well. – D Stanley Dec 20 '19 at 13:31
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Typically, your shares get split accordingly, and for every share of the mother company you owned, you would own a share of each part. Assuming that the sum of the parts is equal to the total, you wouldn't lose (or gain) anything.

Afterwards, each part company would decide on their own what the want to do - share splits, share reduction, buy-backs, whatever. But such actions have zero impact on the value you as a share holder have, as you still own the same part of the company - only the nominations and counts of the shares would change.
There is of course an indirect effect; if the market considers a company is making good/poor decisions, share prices would rise/fall appropriately - not any different as with decisions of the original mother company.

Aside from that, you always have the chance to sell your shares before this happens, and secure your value, if you think the changes will have negative impact on the overall value.

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  • Theoretically, my stock could lose value overnight if shareholders had insufficient faith in one of the subsidiaries, right? IE, I had my $100 share, and a known failure is placed at the head of subsidiary X. Shareholders want to abandon ship ASAP, it's well known, and by the time I'm legally able to sell the stock, it's worth less than its proportionate share of the original company A – NegativeFriction Dec 20 '19 at 12:35
  • In principle, yes; but shareholders don't get that idea from thin air in the night. It is already out there, and therefore already 'priced in' in today's value. And it is no different from a company that is not solitting up. – Aganju Dec 20 '19 at 14:00
  • I guess I just foresee a world where the government tells a company that they have to split up because they're effectively a monopoly in many regions. The company does so, but intentionally makes all but one of the subsidiaries trash, with the goal that they will fail, and the chosen subsidiary can return to their previous status in a certain amount of time. – NegativeFriction Dec 20 '19 at 14:04
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I think two different values are mixed up here.

First let us assume that a company owns some assets and that its share value is equal to the value of these assets. Then if the company is broken up into several distinct entities, each of these entities would get some of the assets but the total value of the assets didn't change. So if you held say 1% of the share value of the original company, after the split you should one 1% of each of the new companies and the total value would be exactly the same as before.

But in real life the share value of a company is not equal to the value of the assets they own. The price reflects some market believe of the future earning potential of the company. Now if the company is broken up, the sum of the future earning potential of the new companies is not the same as the original companies, it has no reason to be. So the value of your shares after the split will be different than the original value.

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