Dear Bill; There have been far more than 90 reverse stock splits in the past 13 years. You are welcome to access Alta Vista's database. (But that is not really important) Prima facie I accept your position that 90 percent of all companies that have reverse stock splits go on to lose even greater value. But one must keep in mind that these routinely were very sick companies that had already entered a long-term cycle of business reversals. By contrast, IOM split at a foolishly low price in possible response to market manipulation by the CEO. Certainly enough of the nation's finest class action law firms have made such an allegation.
IOM is a sick company right now, notwithstanding the rose colored view from the Michael Copleys of the IOM board. Michael, it ain't about differences in management. It's about Mr. Edward's very serious transgressions. You don' t sack the CEO of a company over differences in style when he has driven your sales up over one thousand percent in three years because "He wanted to make us into a three billion dollar company, and we were more concerned with being a ten billion dollar company" That kind of remark suggests that the corporate culture of dishonesty is far more entrenched than some would wish to believe. The full story on Mr. Edward's departure is not yet on the horizon.
Nevertheless, IOM is not a terribly sick company as were most companies who had gone through the pain of a reverse split. IOM has a superior product, and potentially a fine product line. It retains a modicum of customer loyalty and brand recognition-however short term that may be. After all, it's not the same thing as having used Gillette for generations. And at one point in time, the frequent stock splits made an awful lot of sense-not just because of IOM's phenomenal growth, but because its low price and spectacular growth attracted investors of relatively cheap stocks into buying IOM products. It was a brilliant marketing strategy. However, IOM's strengths have become its weaknesses-a history of spectacular returns on its stock price with outright goofy expectations by its investors--expectations that were fueled by the obvious manipulation of the stock's price on two occasions in April/May '96 and Fall '97. Consequently IOM has a not only an ex-CEO problem, but a shareholder problem that may even dwarf their hopefully short-term product transition problem.
Today, IOM is a company in transition. Its core challenge is moving from having a near monopoly in a unique newly created field to fending off all kinds of potential competition in the always-volatile commodity like storage field. Cam IOM win that battle? Without a doubt. Big time. But a mature storage company, which is what IOM is now seeking to become routinely experiences intense price competition. Accordingly, the beta and long term price swings of the company's stock will be volatile to say the least. (Obviously, IOM does not possess MSFT's intellectual property, which insures continued growth over the years--thus commanding a much higher multiple.) Thus, the price prediction of every member of the IOM board could be accurate. IOM could slip to two dollars a share, and IOM could easily skyrocket to twenty plus dollars a share. But the inherent problems of dropping below ten and five dollars a share are devastating. The lack of institutional support and the inability to buy on margin ain't beanbag. By contrast, the problems of a stock selling at 60 (as opposed to a split adjusted 30) are non existent. A one hundred share lot of a stock purchased at 60 is only six thousand dollars. Two hundred shares purchased at two dollars is-well the price of a couple of Jazz drives. Ten billion-dollar companies do not need to attract that sort of investor, and they damn well cannot attract the serious long term investor that they will need. And you don't have to ask me, you can ask Mr. Buffett. There is a reason why he was so reluctant to split the shares of Berkshire Hathaway.
Kim Edwards clearly made enormous contributions to Iomega. His continued usefulness as a fall guy should not be ignored. While, not necessarily undergoing a honeymoon period, the new CEO will have a period where at least his credibility will go unchallenged. Thus the sooner the better the time to engineer a reverse stock split |
