Reverse-split strategy rarely boosts stock price for long

By Jon Swartz
USA Today

SAN FRANCISCO — It is high-tech's version of a Hail Mary play. Handheld-computer maker Palm wants to pump up its stock price and pave the way to split into two companies with a 1-for-20 reverse stock split. Palm, whose shares have languished below $1 since August, wants to offset the decline often associated with a spinoff.

Tech firms from behemoth Nortel Networks to startups Copper Mountain Networks and MicroStrategy have turned to the strategy in recent months. This year's average split ratio of 1-for-10 exceeds the 1-for-7 average in 2001 — a sign tech firms are trying to boost stock prices and avoid delisting, said the University of Chicago's Center for Research in Security Prices.

But the strategy rarely works. Of 37 tech firms on Nasdaq that reverse-split this year, only five are trading above their reverse-split price, and eight are below $1.

A reverse split is "meaningless unless the company also performs well," said Linda Killian, fund manager at Renaissance Capital.

A reverse split reduces the number of outstanding shares and instantly lifts stock price. A stock trading at $1 that is split 1-for-5 should rise to $5, and avoid falling below the minimum stock price — usually $1 a share — to be delisted on Nasdaq.