Key Considerations for a Reverse Stock-Split

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The recent uptick in biotech valuations has reduced the number of companies trading below a dollar, but there remain a large number of would-be drug developers whose stock price is still measured in cents. As such, once must assume that C-suites across the country remain awash with chatter of an imminent reverse stock-split. What, then, are the factors a company should consider when pursuing a reverse stock split? Do they affect the momentum of a stock’s trading? And why even do them at all? Let’s start with the latter.

Over the last year, a large number of small companies have risked being delisted for non-compliance with Nasdaq’s and NYSE American’s continued listing requirements, with the chief culprit being a failure to maintain at least a one dollar closing bid price for 30 consecutive (business) days. In other countries, minimum share prices are not a thing. On the London Stock Exchange, for example, there are numerous companies whose share prices are quoted in double-digit pence, and people are happy to hold them. After all, where do you think the phrase “penny stocks” came from? Not so in the U.S. though, which is why I find myself writing this blog.

Now, Nasdaq allows 180 calendar days to regain compliance to its rule by maintaining a one dollar closing bid price for a minimum of 10 consecutive days during a 180-day period. But if a company cannot meet this requirement, a reverse stock split is usually the path forward. A reverse stock split increases a company’s share price while reducing the number of outstanding shares. Meaning that, all other things being equal, a company’s market capitalization remains the same, and investors own the same percentage of the company before and after.

So, it’s about fixing a technicality.

We recently looked at data from over 100 reverse-splits since 2022 to answer the two other questions I posed earlier. For companies with a market cap of below $100M, a 1-for-10 or 1-for-20 reverse stock split is about average. Generally, post-split these companies’ stock performance has largely been positive (though it’s a small sample size and doesn’t account for the general rise in sector valuations).

Individual performance is highly stock-specific – as you might expect. By and large, individual stock momentum is the driving force of performance following a reverse stock split. Meaning that if a company’s stock price was heading south in the first place, it tended to continue. And if a company’s stock price was rising (but still remained below a dollar during the qualifying period) it continued rising. On average, a stock’s next-day performance following a split was roughly flat, though there were examples of both positive and negative outsized moves.

In summary then, a reverse stock split is a non-event. It’s a solution to an arbitrary problem, although a necessary one since trading OTC is suboptimal compared to being on the Nasdaq or NYSE American. Not surprisingly, companies do not regard reverse-splits as milestones, nor promote them as anything other than an administrative necessity. Case closed.

If you’d like to discuss the merits of a reverse stock split, or have another investor relations-related question, please contact our team today.

Authored by: Laurence Watts, Managing Director, Gilmartin Group

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