Reverse stock splits are widely viewed as a cosmetic fix by
public companies to raise the price of common shares. Reverse stock
splits are generally thought to be utilized for two principal
purposes: (1) to remain listed on an exchange; or (2) to entice
greater breadth of stock ownership, usually targeted at institution
Furthermore, reverse stock splits are viewed by many as a
late-in-the-game effort by under-performing and/or out-of-favor
companies to reverse their fortunes without improving the
underlying business. Yet, empirical data shows that some companies
are able to implement a reverse stock split and, after that
inflection point, ultimately thrive. This intriguing point led us
to look more closely at why some companies succeed post-reverse
stock split while others fail.
From 1962 to August 2008, there have been over 2,000 occasions
in which a U.S.-listed entity implemented a reverse stock split
when its share price was less then $1 per share the day before the
split execution date.1 Academic literature suggests that
the resultant lack of marketability and/or liquidity for a stock
after a delisting can be significant, with a first day market
capitalization contraction of 18-20% and continued subsequent price
FTI Consulting, Inc. ("FTI") has independently
reviewed the facts and circumstances surrounding many of the
entities that have implemented reverse stock splits since 1962, and
has also conducted an extensive review of published research on
reverse stock splits. The purpose of FTI's research was to
isolate success stories and examine the common denominators of
these successes. In sum, although the general trend for companies
that effect a reverse stock split is a reduced market
capitalization, there are numerous situations where market
capitalization of the reverse splitting-entity hold or even
increase. Please see the table below for several recent
Date Of Reverse
Market Cap At Time Of Reverse
Split (in Millions)
Market Cap 1-Year Later (in
CYCLACEL PHARMACEUTICALS INC.
FUTUREMEDIA PUBLIC LIMITED CO.
DG FASTCHANNEL INC.
PRG SCHULTZ INTERNATIONAL INC.
AMERICAN ELECTRIC TECHNOLS INC.
VIA PHARMACEUTICALS INC.
TAPESTRY PHARMACEUTICALS INC.
Gaining a better understanding of the factors associated with
the success stories is critical to assist management teams, boards
of directors and shareholders in making the determination of
whether or not to approve and move forward with a reverse stock
In general, we found that the companies which succeed subsequent
to the implementation of a reverse stock split proactively
formulate a business plan to address any perceived or actual
operational underperformance, combine a properly sized reverse
stock split with effective communication to the investor community
about the merits of the company's underlying business plan, and
provide detailed, post-reverse stock split communications regarding
the progress in executing its business plan. Variations of this
formula can cast a reverse stock split as a critical inflection
point whereby management can attract the attention of investors,
build credibility and direct investors' attention to the
existing and growing value in the underlying business.
WHY IMPLEMENT A REVERSE STOCK SPLIT?
Two of the most common reasons that a company would implement a
reverse stock split are: (1) to maintain listing on an exchange;
and (2) to attract new pools of existing and future investors to
the market for its stock.
MAINTAIN A LISTING ON AN EXCHANGE
NASDAQ and the NYSE have somewhat different requirements for
initial and continued listing, yet both exchanges have listing
standards that require listed companies to maintain a minimum stock
price of $1 per share. Once...