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Using A Reverse Stock Split To Salvage Or Strategize
Surviving Reverse Stock Splits By Eriq Gardner Upside - May 2001, Pgs. 122-126
The worst-case scenario. A reverse stock split often tolls a company’s end, yet companies hoping to forestall disaster have relatively few weapons with which to fight back. A few can repurchase their own stock; many turn to reverse stock splits. Often the trigger for a reverse split is a one-page fax from Nasdaq officials, telling the company it has 90 days to prop up the swooning share price, or else it will be delisted. Delisting of a company’s shares occurs when (and because) its share price falls below the dreaded one-dollar level. That fate means, among other things, that a market will no longer exist for the stock. In this period of disappearing dot.coms, some 257 companies, or more than 5% of the Nasdaq listings, have suffered that ignominious end. Like the Pets.com mascot, the majority of the delistees have faded into memories.
Repurchase if you can. If the company has enough cash—and most that face delisting do not—it can create an artificial demand for its stock by repurchasing shares, in effect becoming its own marketmaker. Analysts generally regard share repurchases favorably when healthy companies undertake them. By reducing the number of shares outstanding, the per-share earnings increase and so generally does the share price. Many investors look favorably on share repurchases as an untaxed dividend, though others feel that cash could be more wisely used by investing in the company. TheStreet.com used a buyback strategy to keep its shares listed, repurchasing $10 million in December 2000.
A portent of disaster. Lacking cash, the company’s remaining choice is usually a reverse split. Unlike a forward split, where one share becomes two or three, the reverse split combines 10, 20, or even 50 shares into one. Forward splits generally signal good news about a company to the market. Boards undertake them to return share price to a more favorable trading range. Reverse splits are almost always seen as a portent of disaster, taken by investors as a signal to abandon the stock while it is still afloat. Neither split affects a stock’s market capitalization; the benefits of either—assuming any follow—are purely psychological. In the final analysis, reverse splits just painfully forestall the inevitable. As share price continues to decline, the company eventually will be delisted for failure to meet the public float requirement. For example, PlanetRx.com, which did a 8-for-1 reverse split on December 14, 2000, was delisted two weeks later. Eglobe, which swapped 47-for-10 on November 13, 2000, disappeared from the Nasdaq nine days later.
Useful splitting. The reverse split is not always just a futile attempt to tread water. One little known use of the strategy is to prepare a company’s stock for an IPO when insiders hold a majority of shares. Here, a reverse split is perceived as a trade-off for the dilution of privately held shares. The reverse split is also infrequently used to divide a company and to facilitate its return to private ownership. This, however, is a tricky tactic, since the SEC frowns upon any maneuver that is made primarily to reduce the number of shareholders in a public company.
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