Skip to main content

Is reverse split good or bad?


Reverse stock split reduces number of outstanding shares in a predetermined ratio. It is also known as stock consolidation, share rollback or stock merger because two or more shares are merged into one more valuable share. Reverse split is considered to be a corporate action, meaning action that is affecting share price and needs to be approved by the company's board of directors and possibly by voting shareholders. Company can even get additional letter D to its ticker signifying that it is going through reverse split.

Number of total outstanding shares, which includes shares currently held by all shareholders, including institutional investors and restricted shares, is usually divided with 5 or 10 getting ratio one for five or one for ten but it can be as little as one to two or big as one to hundred. For example if you have 100 shares worth $1 each so you have $100 worth of shares. if a company is going for one for then reverse split, you will receive ten shares, each worth $10. As you van see no real value is added with this action, you still have the same $100 worth of shares, you just hold fewer but more valuable shares; market capitalization is the same.

The question is why the company chooses to do the reverse split and what are the repercussions of such action. The most common scenario is that company is trying not to get delisted from a stock exchange that have minimum bid price requirements. Nasdaq for example will delists companies that trade below $1 for certain period of time. If that happens only place to trade the stock is over the counter market (OTC) in penny stock section. There is prestige that comes with being listed on a major exchange and it certainly attracts many institutional investors and mutual funds so it is easy to understand why company doesn't want to lose that status. With reducing number of shares comes the reduction of number of shareholders which can be useful if company needs to reduce that number for certain regulation or if a company wants to go private.  If you have a public company you naturally want to draw positive attention and attract as many shareholders as you could. Having stock that that is on a higher price side will draw more attention from analysts an subsequently investors. Typically, share price must be above $5 for options to be traded on the stock.

Reverse stock split can be considered as a sign of a struggling company that is trying to avoid delisting but it can be used in a positive way to help company transition to trading on exchange.Smaller number of shares are certainly more appealing to investors in contrast to stock split which dilutes their ownership. If investors perceive it negatively, nothing more than a smoke screen share price can drop to initial value. In case that reverse split is accompanied by positive changes in corporate structure and strategy there is a chance that company is on a good path.
Labels:

Comments

Post a Comment

Popular posts from this blog

OTC stocks more difficult to trade and deposit

  Mina Mar Group helps micro-cap companies structure their growth. Micro-capitalized companies are those with less than $50,000,000 in equity, sometimes under $1,000,000. Restructuring involves raising money (both debt and stock), and planning how they will eventually harvest that wealth. If you’re a founder or investor, the secret to harvesting your equity is to possess assets with a developed market for their sale; up until recently, that market was the public market. Now, Over-The-Counter Securities (“OTC Securities”) don’t serve that purpose since, unless you’re a tech unicorn doing an IPO, there are essentially no ways to sell the shares you’ve invested in. OTC securities – how they were deposited five years ago. Brokerages all around the country have tightened compliance over the past five years to the point where no one may deposit share certificates into their brokerage accounts, even if they can prove that they paid for them. Consider the following demand from a secondary ...
Post a Comment
Read more

Going through Acquisition with Mina Mar Group

An acquisition is the purchase of one business or company by another company. It happens when acquiring company buys most or all target company's shares in order to take control and or other assets of the company. They have to buy more than 50% of ownership. In acquisition usually bigger company buys smaller company and absorb it or run it as subsidiary. Roll-ups or consolidation happen when two or more companies combine in a new business entity. Acquisitions are divided into "private" and "public" depending on whether acquired or target company is or is not listed on the public market. Additional dimension or categorization consists of whether an acquisition is friendly or hostile (hostile takeover). More mergers and acquisitions happens with small to medium size companies. One type of acquisition is reverse merger or reverse takeover enables private company to be publicly listed in a relatively short time frame. Reverse merger occurs when a privately ...
10 comments
Read more

Our perspective on reverse merger

When we are talking about market perspective usually the financial community is mostly focused on private companies that want to go public and are prepared to pay for the privilege of going through an IPO or reverse merger. That is why most financial consultants are looking for the public shell company just to close the deal. Often private companies that use reverse merger to go public are ill-informed on ability to raise funds, unprepared for the intensive effort and extensive costs to create liquidity. This can even lead company to become a shell itself due to lack of action in implementation of needed solutions. This way there is no long term benefit on both sides. Mina Mar Group sees things quite differently. Instead of making quick profit shared between shell owner and us. We deal with private companies that already offer profits  and that truly deserve to be publicly traded and can attract investors at the retail and institutional level and build...
11 comments
Read more