Reverse Stock Splits: A Practical Solution for Rebuilding Capital Structure

Strategic Insights -

Reverse stock splits have historically been viewed as a desperate attempt by tiny companies to avoid delisting, but a growing number of established companies, including AT&T Corp., Lucent Technologies Inc., and Palm Inc., are now contemplating or completing reverse splits as a necessary step in their restructuring efforts. By merging shares, these companies aim to meet listing requirements and appease institutional investors, who often have covenants preventing them from buying stocks below certain prices. As CFOs, it's crucial to understand the practical reasons behind this trend and its implications for rebuilding capital structure.

Key Takeaways:

  • Reverse stock splits are no longer seen as a desperate measure, but rather a practical solution for companies to meet listing requirements and appease institutional investors.
  • The primary reason for reverse splits is restructuring efforts, including spin-offs, which necessitate a new capital structure to accommodate the separation of businesses.
  • Institutional investors' covenants often prohibit them from buying stocks below certain prices, typically $3 or $5, making reverse splits necessary for these investors to remain engaged.
  • Companies like AT&T Corp. and Palm Inc. conducted reverse splits to ensure that the resulting shares of the spun-off companies would meet listing requirements.
  • Capital restructuring via reverse splits is essential for companies to avoid embarrassment and maintain a market presence, as evidenced by the $7.3 billion worth of deals led by Merrill Lynch & Co. as of November.

Statistics:

  • 16 IPO deals worth $7.3 billion led by Merrill Lynch & Co. as of November (Source: IPO.com)
  • Reverse splits are being considered or completed by companies such as AT&T Corp., Lucent Technologies Inc., and Palm Inc. (Source: CFO Magazine)
  • Institutional investors often have covenants preventing them from buying stocks below $3 or $5 (Source: Vincent Sbarra, HBC Capital)
  • Companies like Palm Inc. conducted a 1-for-20 reverse split in October to ensure listing requirements for the spun-off companies (Source: CFO Judy Bruner)

Sources:

  • CFO Magazine
  • IPO.com
  • Vincent Sbarra, senior partner with HBC Capital
  • Ulrico Font, senior analyst for Ned Davis Research
  • Judy Bruner, CFO of Palm Inc.
  • Chuck Noski, former CFO of AT&T Corp.
  • Merrill Lynch & Co.