interactive.wsj.com
June 20, 2001
Reverse Splits Rarely Revive
Stock of Troubled Companies
By AARON ELSTEIN
WSJ.COM
Less is more. With increasing frequency and urgency, companies are
reciting this mantra as they seek reverse stock splits to lift ultra-depressed
share prices.
Webvan Group, for instance, is asking
shareholders to approve a 1-for-25 reverse
stock split at the online-grocery company's
annual meeting on June 29. By reducing
shares outstanding to 19 million from 480 million, the Foster City, Calif.,
company hopes to prop up the value of its stock, which went public at $15
in 1999 but hasn't traded over $1 since Nov. 27, 2000.
The company also hopes to preserve its listing on the Nasdaq Stock
Market, retain employees and attract investors who shun "lower priced
securities," Webvan says in a recent regulatory filing.
But Webvan shareholders might want to know the story of Maxicare
Health Plans. Shares of the troubled health-care management company in
Los Angeles had fallen to 44 cents when it used a 1-for-5 reverse split on
March 28. The stock got an immediate boost, jumping to $2.44 on
Nasdaq. Then on May 25, the company's California operation filed for
bankruptcy reorganization, and its shares stopped trading that day at
$1.25.
"A troubled company is a troubled company, no matter how you split its
stock," says Greg Kyle, president of Pegasus Research, a New York
stock-research firm.
In swelling numbers, one-time highfliers listed on the Nasdaq and New
York Stock Exchange are seeking reverse stock splits in last-ditch efforts
to keep their names on investors' radar screens. But if history is any guide,
this maneuver -- common among "penny stocks" but rare until recently
among listed stocks -- usually fails to save struggling companies.
Excite At Home, an Internet portal whose shares reached $99 in 1999,
Tuesday said it will ask shareholders to approve a reverse split of up to
1-for-4. Others companies to recently seek reverse splits include E-Stamp
(up to 1-for-13); Egghead.com (up to 1-for-10); Beyond.com (up to
1-for-15); Leapnet (1-for-5); Quotesmith.com (up to 1-for-6); and Salon
Media Group and Tickets.com, which haven't specified the terms of their
proposed splits.
Through June 15, 25 companies had sought shareholder approval for
reverse splits, according to the Investor Responsibility Research Center in
Washington, compared with 17 in all of 2000. But the center uses a
database of only about 4,000 companies, and a search of proxy filings
over the past six months shows that at least 86 companies listed on
Nasdaq, Big Board, or American Stock Exchange have filed this year for
reverse splits.
Nevertheless, delistings are rampant.
According to the National Association of
Securities Dealers, 145 companies were
delisted from Nasdaq through April 30
because their stock prices fell too low,
compared with 46 through the same period
last year.
Reverse splits carry little weight with investors unless they come with a
credible recovery plan, analysts say.
"Reverse splits might lengthen a company's runway, but if it isn't
accompanied soon after by plans for how the company is going to
restructure its operations and get new financing, it doesn't mean much,"
says John Lewis IV, president of Gardner Lewis Asset Management,
Chadds Ford, Pa.
Officials at Webvan insist they have a viable turnaround plan. Spokesman
Bud Grebey says the company has a new chief executive, Robert Swan,
formerly its chief operating officer and a one-time executive at General
Electric. The company has about $115 million in cash and equivalents and
is working with Goldman Sachs Group to raise $25 million.
Assuming it can raise the needed cash, Mr. Grebey says, the company's
business plan "presents a clear path to profitability in the second half of
next year." Webvan posted a first-quarter loss of $86.1 million, or 18
cents a share, compared with a loss of 17 cents in the year-earlier period.
But first-quarter revenue was $77.2 million, compared with $37.5 million a
year earlier.
Indeed, some investors are willing to gamble on Webvan. "A few of these
Internet companies in dire trouble are going to rise from the ashes," says
Mr. Lewis, who recently increased his stake in Webvan to about 3.4
million shares. "I don't know if Webvan will be one of them, but it's
possible."
But the odds are certainly against Webvan and other companies counting
on reverse splits. One study showed that among 76 companies that did
reverse stock splits between 1976 and 1991, 20 went out of business
within three years. The others underperformed the market by an average of
33% over a three-year period.
Prem Jain, a professor at Georgetown University who co-authored the
study with Victor Defeo, a professor at the University of Pennsylvania, said
they chose not to update it "in part because we do not believe that the
conclusions would change."
"Make no mistake, a reverse split is an act of desperation," says Barry
Siegel, chairman and chief executive of Driversshield.com. "It sends a
terrible signal that management has tried everything it knows to lift the
stock price and nothing has worked."
The Plainview, N.Y., auto-fleet management company considered a
reverse split earlier this year, but shareholders balked. Its stock
nevertheless recovered, and the company recently was told it could keep
its Nasdaq listing.
Nasdaq listed companies with stocks trading for less than $1 for 30
consecutive trading days are in danger of delisting. Companies in this strait
generally have 90 days to get their stock back above $1 and keep their
listings, which is widely seen as critical in attracting institutional investors.
A handful of companies have beaten the odds against reverse splits. One is
7-Eleven, the Dallas convenience-store chain that completed a 1-for-5
reverse split in May 2000. That brought its stock up to $20.94 the day of
the split from $4.19.
Analysts say 7-Eleven turned around its fortunes by reducing debt and
improving earnings. The earnings improvement was magnified by the split.
Because of the split, its earnings per share jumped in 2000 to 98 cents a
share from 18 cents the prior year, even though profits rose by only 30%.
The split also had an important psychological effect in raising 7-Eleven
shares above $10.
"The stock was seen as a single-digit midget and a lot of institutions just
wouldn't touch it," says Jonathan Ziegler, an analyst at Deutsche Banc
Alex. Brown.
But Webvan and other latent penny stocks, generally defined as those
trading for less $5, face an uphill fight to regain investor attention. The
Securities and Exchange Commission has "suitability" rules designed to
discourage inexperienced investors from buying penny stocks.
At Merrill Lynch, the largest retail brokerage, brokers are prohibited from
recommending shares that aren't rated by the firm's research analysts, a
spokesman said. And the spokesman said the analysts generally don't rate
penny stocks.
Analysts at Goldman Sachs, which underwrote Webvan's IPO in 1999,
aren't rating the company's shares while the firm's investment bankers try to
raise funding for Webvan.
Even on Internet message boards, discussions dedicated to Webvan have
ceased. "We allow the discussion of any stock trading on a domestic stock
exchange that has traded over $5 for the past 30 consecutive days," says
an official at The Motley Fool. In other words, Webvan has lost its board.
Write to Aaron Elstein at aaron.elstein@wsj.com
KJC |
