Citigroup just sent me its annual statement and ballot to vote on suggestions from its Board of Directors, which, among other things, extends its flirtation with a reverse split that began two years ago.
For those unaware, a reverse split is the opposite of a split, which is when stock prices get too high and the price might be split in half with each stockholder getting a doubling of shares. When this happens it’s a sign the company is doing well, but because the share price might be too high for a lot of action, halving the price makes it more affordable and shareholders get a chance at continued upward movement with more stock.
With a reverse split, a company is in trouble and stockholders lose their shares proportionately to effect a rise in the cost of the stock. So, if you had 1,000 shares of AIG when it split 1:20 in 2009, you wound up with fifty shares, but the price went from $1.15 to $23.
Here’s the rub. Everyone knows the new price is artificial and they’re not fooling anyone. It’s a sign of desperation, which in AIG’s case was calculated to prevent the stock from tumbling below a dollar and getting delisted from the New York Stock Exchange. Citi itself was in that ballpark two years ago for a short period. However, the stock moved up remarkably since then and hasn’t sold below three dollars in quite awhile. It’s been over four dollars mostly and occasionally has gone over five. So, since it’s in no danger of delisting, why even talk about giving the company a bad mark?
The Directors’ statement insists they merely want to “extend their right” to do a reverse split in seven possible combinations: 1:2, 1:5, 1:10, 1:15,1:20, 1:25 and 1:30, but may well not as they haven’t since they received shareholder authorization to do so in 2009. They explain the upside is that by decreasing the number of shares it would reduce fees on the NYSE. They also warn that in the unlikely development the reverse split vote fails they will still have the right to do so for two months under the approval attained in last year’s shareholder vote.
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