Bye-Bye from Nasdaq
from Winter 2000
by Judith Rehak
It’s not only investors who are dizzied when Nasdaq does its yo-yo imitations. Every time stocks drop through the floor, board members of all kinds of companies get the vapors, fearful that they’ll be delisted. Nasdaq takes this action for a number of reasons. For example, a company must have net assets of at least $4 million. A minimum share price is another requirement. If a stock trades for less than $1 for 30 straight market days, a company faces delisting. Nasdaq lifts that minimum to $5 for companies that don’t meet the net asset requirement but have either a $50 million market capitalization or $50 million in total assets, and $50 million in annual revenues. Companies that commit these sins usually end up on the dreaded over-the-counter bulletin board, where few ever catch a major investor’s eye.
Some have gone there already. In August, eFax.com, the electronic mail-service company, got the boot when its assets fell below the required minimum. Pending a merger, the company is now languishing on the OTC bulletin board, its shares hovering at about 20 cents.
Meanwhile, the list of companies whose stock has fallen below $1 grows longer every week. Among those who’ve been driven from Nasdaq: Arabian American Development Co., a petrochemicals maker that saw its price sink to 50 cents a share after being battered by the rocketing price of oil. Colonial Holdings, a money-losing race track operator in Virginia, proved to be an equally bad bet for its shareholders, bottoming out at 25 cents a share.
Nasdaq gives companies several chances to escape the fatal day. If a company’s shares close over $1 just once in the 30-day period, for example, the exchange starts the doomsday count all over again. If a company does fall off the 30-day ledge, Nasdaq offers a helping hand by giving the company two chances to boost share value above $1—a level the company must maintain for 10 consecutive days to keep its listing.
This generosity on Nasdaq’s part explains why so many once-proud Internet companies are managing to hang on despite sickly stock. Most famously, these include drkoop.com, a health care network that had the former surgeon general as its chairman and whose shares once traded at $45. Among the others keeping Koop company: Beyond.com, an online software retailer, down from a high of $38.50, and Pets.com, which leapt out of the cage with an IPO price of $11 in February and was recently heading for doggie heaven. Once among the Who’s Who of Wall Street darlings, such stocks are now merely “Who’s That?”
“Once you’re on the over-the-counter market, you’re a Wall Street orphan, because no analysts are following you,” says Greg Kyle, president of Pegasus Research International, which monitors stock movements among Internet companies. “Typically these companies never made money to start out with, and that is magnified because once delisted, it’s very difficult to tap capital markets.’’
Remedies for a sinking stock price are few: Investors who once threw cash at Internet start-ups have disappeared like the dodo, though occasionally a rescuer will show up. The Dutch supermarket company Royal Ahold increased its stake in online grocer Peapod and now owns 80%.
Some companies, not trusting in that particular brand of miracle, opt for a reverse stock split, converting several shares into one to push the share price above $1. GSV Inc.—which in its first incarnation was an e-tailer, then in its second life invested in other start-ups—pulled off a one-for-five reverse split after its stock plunged from $14.50 to 34 cents. The move boosted its share price to $1.50 on its first day of trading. “We were caught up in dot-com mania,” explains Larry Morgenstein, GSV’s chief financial officer. “But we paid off most of our accounts payable, and now we’re moving on to make prudent investments.”
Good luck. Generally, reverse splits are seen as another stop on the path to oblivion. “Typically the warning signs are already there,” says Charles Kaplan, president of Equity Analytics, which follows stock splits. “Probably over 90% of the reverse splits I’ve looked at have missed their filing deadlines with the SEC.” Adds Kyle: “Doing a reverse stock split is just buying time. It takes care of the dollar-a-share minimum, but you still have to have the required net assets to stay on Nasdaq.”
