New Buy-Back, Par Cut Rules Give Executives New Tools in Thailand.

Sep. 7--Given the difficult and challenging economic climate, chief executives are under enormous pressure to lift share prices and create shareholder value.

The recent change to the Thai Public Limited Companies Act on par value reductions and share buy-backs has provided chief and senior executives with new tools and has generated considerable activity among a number of leading Thai corporations.

Companies such as Advanced Info Service, Charoen Pokphand Foods and Electricity Generating Plc have said that they are either contemplating a reduction in par value or implementing share buy-backs. These activities are often justified by claims that the result will increase shareholder value.

In contemplating moves to increase shareholder value, one basic premise must be kept in mind: a company's value is a function of its future cashflows discounted at a rate that accounts for the risk of the cashflows and the time value of money.

Given that neither reductions in par value nor share buy-backs (share splits) change the operating cashflows or the discount rate applied to those cashflows, it is worth knowing how these activities might create, or possibly even destroy, shareholder value.

Companies reducing par value do so through a share split. In the US some companies split their shares regularly while others have never had a split.

However, there is no correlation between share splits and the long-term value creation of companies as measured by their Total Shareholder Return (TSR -- stock price appreciation plus dividends).