COMMENT
Companies Get Rid Of Small Investors

Companies know that they cannot function effectively without the support of their shareholders. But shareholders can be quite expensive for any business to service. These costs include unavoidable administrative and legal expenses, which could easily be slashed if companies have fewer investors.

Telecom operator mmO2 (LSE: OOM) has decided that it has far too many small investors. According to the cellphone operator, some 1 million of its investors own less than 600 shares each. In fact, at 123p a share, the average value of their holdings is just £370. In total they control around 3.5% of the company's shares. Most are investors by default, because they were awarded their shares after the company was split off from BT (LSE: BT.A) in 2001.

To get a feel for just how much this may be costing mmO2, Marconi (LSE: MONI) recently said it spent £450,000 servicing a shareholder base of a mere 185,000 investors.

Unlike Marconi and Baltimore (LSE: BLM), which wiped out their small investors through share consolidations recently, mmO2 is offering its shareholders a choice. In a move that will also see the company change its name to O2, investors can choose between shares in the new O2 or get a cash alternative. As an extra sweetener, investors who plump for the cash in March will get an extra 5p per share on top. However, shareholders will have to take action to retain their shares. If they do nothing, they will be assumed to have elected for the cash alternative.

Personally, I think these schemes make a lot of sense. They save the companies a fair chunk of money and offer small shareholders a cost-effective way of getting rid of their shares. In the case of Marconi and Baltimore especially, the amounts concerned were so small, these holdings were just distractions and not investments.

MmO2 has been a great turnaround story recently. Its shares hit a low of 37p in June 2002 but have since been one of the FTSE 100's best performers. Profits are expected to rise 45% to £546m in 2005, while sales are expected to rise 16% to £6.6b. At 17 times prospective earnings, the shares look a tad expensive though so it might be worth accepting the company's cash offer and bowing out gracefully.

David owns shares in BT and Marconi, but not mmO2.