Citigroup Proposed Reverse Stock Split: Didn't They Learn Any Lessons from AIG?
A couple of months ago, I wrote about my dismay concerning the proposed reverse stock split of AIG to a ratio of twenty to one. What was on the table was a drastic diminishing of stockholder shares to one twentieth of what they owned in order to prop up the price of the stock by a multiple of twenty.
What happened, as I predicted, was a run to sell the stock. Almost instantly the price, which had briefly been augmented twentyfold to $23 from $1.16, fell to $18 and within a week was down to around $9. I was lambasted by some "in the know" who said that the stock was trading too high even in the mid-one dollar range and would have fallen eventually to a berth more suitable to its actual worth.
But it all seemed a bit coincidental and many pundits on CNBC and in the Wall Street Journal echoed the point I was making that short sellers came on board and drove the stock way, way down to a level that at the old reverse stock split rate would have been 45 cents. Would such a dive happened naturally, without news of something disastrous happening in the company? I think not.
And interestingly, AIG's second quarter results have lately been quite good and have contributed to a drastic rise in AIG's price, closing at $27 on Friday -- which translates to about $1.35 under the old system. Their new management team, led by retired Metropolitan Life chief Bob Benmosche, on top of better business decisions made in recent months, makes the future look quite a bit brighter. Would that those of us who once had twenty times more stock might have slowly moved upward at greater multiples of advancement.
Now, Citigroup has sent stockholders a proxy that, among other things, proposes a reverse stock split in seven possible different ratios: 1:2, 1:5, 1:10, 1:15, 1:20, 1:25 and 1:30 to be later determined by the Board of Directors. The difference between the AIG decision and this one is that Citigroup is telling us that it might or might not do the deed and is merely asking for our consent.
It specifically indicates the downside to such a split and "assures" us that the Board of Directors will take into account the market at the time, while cajoling us to vote for this catch-all reverse split possibility because it will somehow increase the attractiveness of the stock, in particular to institutional investors who don't like to buy stock priced at a low rate.
The problem is that Citigroup has recently been doing fine and, after stumbling a bit in the last couple of weeks, has regained its footing and, after closing Friday at $3.85, looks well on its way to getting above the five dollar base required for institutional investing. Not to mention the initial horror story of AIG in the recent background. Does anyone think that the minute Citigroup does a reverse split that there isn't going to be a pounding down of the stock? Not to mention financial reports on CNN's Anderson Cooper, NBC, CBS, ABC, Fox News, MSNBC and tweets on Twitter expressing the almost universal consideration that it is a faux move designed to trick everyone into thinking the stock is more viable. A naked attempt that will be joked about over morning coffee and Facebook accounts in the vein of "Who are they kidding? They're clearly in trouble" sort of thing.
While it's encouraging that the financial experts have told us that the reverse stock split is on the Citigroup backburner, such a vote request at this time doesn't inspire confidence and is totally unnecessary. For God's sake, let the company continue to mend and slowly work its way back to financial health without methods that are historically unhelpful to the stock value and ultimately to the shareholders who bought the stock in good faith.
If you have not done so, I would urge Citigroup shareholders to read the proxy statement carefully and vote the reverse stock split down.
Michael Russnow's website is www.ramproductionsinternational.com
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Why would CITI propose a reverse stock split? Reverse splits are typically VERY counter-productive to the GROWTH of a company. Ideally Citi needs to find other ways to raise money and start buying back shares.
GOOD NEWS!!! There is finally great new movie out about market manipulation, the SEC, and short selling called: "Stock Shock." For those of us that want to understand some of the inner workings of the market, it is a must-see. Very easy to understand and entertaining. Amazon has it or stockshockmovie.com has a trailer.
Michael....thank you .
thoughts from a financial guy with 30 yrs.
* you're correct about reverses....about all reverses are a death knell. AIG is close to dead (yes, they have some good divisions) and like many companies close to death, they jump to the reverse split strategy, knowing that the odds of success are somewhere between 1-3 out of 100.
* people need to have a better understanding of short sellers. your classification of them as "vultures" shows your naivete. as an example, if there were more short sellers in the mid to late 90's, we would not have had the dot com bubble. shorts keep companies honest and ultimately long shareholders benefit from this. shorts force companies to be more transparent as greater transparency provides information, which displaces fear.
* i always chuckle when the masses scream for the "uptick" rule....i would suggest a " downtick " rule as well, which might prevent the marginal suckers from coming in to buy overpriced stocks just before corrections. market do overshoot/overheat both ways, not good for anybody except the pros.
If a company is well managed, profitable, etcetera, and the market is acting somewhat "efficient", shorts are going to stay away from that company. for that matter, if the market is "efficient", there is less likely to be an overshoot/inflated price such as those seen in the dotcom bubble.
problem we have the past several years is that the "efficient market theory" hasn't played out well
neither giti or aig is worth more than zero dollars so any valuation, reverse split or not is entirely gratuitous.
the aig earnings news was obviously leaked and everyone jumped on it, both long and short.
if citi does a reverse split i will short it, also.
the one thing you are right about is that a stock that does a reverse split is almost always a good short candidate just as aig has become one again.
the borrow on citi will be most difficult to find!!
Oh, just keep the thing nationalized and run it as a public service. We need a public banking sector in this country, and this one should be part of it.
In any case, the stock market is no place for the little guys, only the elite. People should have learned that back in 1929, and they definitely should by now.
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To Drymartini1, you're mostly right, but stocks move because people are scared. Bad news drives the market. A reverse split is bad news on top of other bad news for that company.
Re AIG, it would've been enormously coincidental for the stock to fall so rapidly the moment the stock did a reverse split of twenty to one. Within the day it dropped $5, and in a few days it dropped $14 from its split price of $23. It hadn't been dropping at that percentage all along, so you're suggesting it was just happenstance? Just EPS and P/E?
Common opinion at the time was that short players had nowhere to go when the stock was priced low, but when it hit $23 they pounced, borrowed the stock and immediately sold it, driving the shares way down. Similarly, as the news has been lately good about AIG and its report was coming out last Friday, those who'd borrowed the stock for short trading feared if they didn't buy it back at the lower levels -- around $13 -- they would lose their profit realized if the stock moved above the price at which they'd borrowed.
Reverse stock splitting is a bad move, and Citigroup shouldn't even be talking about it at a time when the company is reviving and moving steadily upward. Even the talk might cause people to panic. And panic is a definite part of the stock game -- much more dramatic than EPS and P/E as you claim.
short term stocks move for variety of reasons including fear and greed. agree on those points with you.
but then you make ridiculous statements like "likelihood is greater that Citigroup will reach $20 than $400" (your comments below) !! Give up blogging for a few months and rather go attend maybe a stock valuation or any basic intro to finance class :).
try using those kind of statements in any forum where there are a few financial analysts or anyone who has a basic idea regarding capital markets and see if you dont get laughed out of there !!
Sorry for being harsh, but you cant expect to have any credibility when you make those kind of statements.
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So, you think -- no offense taken -- that the likelihood is not greater that Citigroup might reach $20 per share from its current low price range than to get to $400/share from an inflated reverse split rate of about $20? That perhaps the chances are the same?
Because the point I was making in decrying the diminishing of shares by a 1 to 20 ratio, i.e. from 1,000 shares to 50 shares, was that it's a more doable scenario for the stock to move up to $20 from its mid-dollar range of a few months ago than for it to move from $20 (post reverse stock split) to $400. With only fifty post-reverse split shares it would have to reach the $400 level to make the same profit.
I'm not a financial expert and never claimed to be one, but there is such thing as common sense (unless you misread my earlier comment and just thought I was stating something obvious and silly, i.e. it would be easier to expect Citigroup to reach $20 than $400 from perhaps the same price).
If you didn't misread my comment and just chose to poke fun, hope you had a beer as well.
The last post I read said that the reverse split by AIG created a shortage of stock that the shorts had to cover thus driving it up to absurd levels. Who knows but if true this is an excellent hammer for C to have hanging up there ready to fall..but when prey tell? The main reason Citi can't move is day trading. A hundred thousand share buy, a 5 cent rise.. $5,000 bucks. Wham, bam thank you mam until the end of time..or the reverse split whichever comes first. I look for it to happen when there are a lot of short options and only a little time left. :-)
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The news I read was that the short buyers knew a positive economic report on AIG was coming in a few days and they had to buy the stock (which they'd previously borrowed and sold at the $18-23 rate when the reverse split took place) while it was still in the $13-15 range, enabling them to pay back the stock and still make a profit.
So, AIG was poised to go up -- though obviously not at the drastic levels it did when the short buyers scurried -- but an upward movement was expected.
Just as a continued vertical movement is happening with Citigroup. So why spoil a good trend with a gimmick to pretend the stock is selling at a higher rate -- a higher rate that would surely bring out the "short" vultures all over again?
All, while diminishing the shares of the stockholders and their chances for greater profits in the long run when the Citigroup stock rises gradually as it's doing now. 1,000 shares is a lot better than 50, and the likelihood is greater that Citigroup will reach $20 than $400, which it would have to do to equal the value of shares reduced after a 1:20 split.
stock moves based on EPS and P/E. NOT on market price.
stock split and reverse split is immaterial for the value of the company. dont they teach that in any basic finance class ?
You are deluded. Shorts don't care if the stock price is $2 or $20; if they think it can fall 50%, a move from $2 to $1 is the same as a move from $20 to $10.
Furthermore, the likelihood that the stock will appreciate from $1 to $20 is just as good as the likelihood that it would move from $20 to $400 with 1/20the shares - its the same valuation for the company! Actually given some archaic rules forbidding some large mutual funds buying stock of companies with stock prices under $5 a share, it might move faster with a reverse stock split.
Now, there has been some work suggesting that there is some weird psychology in the market where people like you who don't understand valuations of businesses as opposed to stock prices will doggedly hold onto stocks of companies with $1 share prices thinking that they can't fall further. But guess what - you can still lose 100% of the value of the stock, just as you could if it was $20 with 1/20th the number of shares!
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TheLastWallStreeter, I still maintain that going from $1-$20 is a better bet, especially with mega-sizers like Citigroup (and AIG), based upon past history, than to rise from $20-$400. Look at Citigroup and Bank of America's increase in the past few months. Quadrupled and quintupled in price.
You honestly think Citi would've gone from $20 to $80 or B/A from $20 to $100? I think not. It's easier and more attractive to buy lower priced stock and more shares for greater profit, than taking chances on an overpriced stock on a questionable company for which you can only afford fifty shares. Not to mention short traders pouncing on a shaky stock. You say they'd do the same with a $1 stock. Then why didn't they when AIG was at mid-dollar and climbed from 33 cents to $2? They waited 'til it was $23 with room to fall. This is common sense and has nothing to do with poring over valuations of a company.
You mock those who buy cheaper stocks "thinking they can't fall further." Yes, you can lose 100% if it flattens, but 100% of what? A small investment at 1,000 shares, whereas the upside -- considering stock history -- is an attractive gamble. The gamble isn't nearly as sweet 20 times the price and only fifty shares, and I still maintain it's less likely to go upward in the same proportion as the lower priced stock.
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