Citigroup Shares Face Struggle Post-Reverse Split

Monday, 09 May 2011 03:00 PM

 

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Citigroup shares face the typical uphill battle of a stock that just reverse-split its shares, a move that can be fruitful years down the road but that can be tough going at the start.

The third-largest U.S. bank by assets saw its shares fall 2.4 percent to $44.11 on Monday. The reverse split has the stock in double-digits for the first time since November 2008, but the gambit has a mixed track record.

"I doubt the stock is going to go back to the level it was pre-reverse split, but Citi has its work cut out for them," said Jason Weisberg, managing director at Seaport Securities Corp in New York.

Often, companies will engineer a reverse split to keep from being delisted because their stock price has fallen through $1 a share. Many of those companies still don't survive.

For larger companies, the odds are better, though they often take a short-term hit.

Data from Birinyi Associates Inc shows Russell 1000 stocks that have enacted a reverse split since 1990 have seen an average decline in their stock price of 1.6 percent 30 days after the split.

A number of big-cap names have been successful, including Priceline.com, which did this in 2003 when shares were less than $5 a share. It now trades at about $530 a share.

Larger companies often engineer a reverse split to boost their share price to attract institutions, some of which are prohibited from owning low-priced stocks. This often makes shares less volatile as well.

"You can call it the peer pressure factor -- all of their competitors are in the double digits while their stock was in the single digits," said Mohannad Aama, managing director at Beam Capital Management LLC in New York.

"Over time they do increase institutional ownership -- that may have been the main driving factor."

Some continue to struggle post-split. Brocade Communications did a 1-for-100 reverse split that bumped its stock to about $8 a share from 80 cents in June 2007; shares are currently at $6.29. Ciena is down about 28 percent since its September 2006 split.

Priceline.com was an exception, though the stock took a few years to take off. Shares of insurer American International Group Inc fell in 2009 after a 1-for-20 reverse split, although the stock has rebounded since.

Citigroup, which saw its shares hit a nadir of 97 cents in March 2009 in the wake of the financial crisis, may be another -- but it depends on company performance.

"It could be the exception that proves our rule," April Klein, a professor at New York University's Stern School of Business, said.

Klein co-wrote a 2008 study with Emory University's Goizueta Business School finance professor James Rosenfeld showing that those that conduct reverse splits often suffer poor market and operating performance for years post-split.

"Most of the companies on our list were not 'too big to fail.' Also, there was no delisting threat here," Klein said.

With shares at a higher price, the company may be held to a higher standard.

"Why would anybody own Citigroup when they can own JPMorgan for the same share price?" said Mark Sebastian, chief operating officer of Option Pit Mentoring, an options education firm in Chicago.

"JPMorgan is a much better company. Now there is actual price risk for the stock when it wasn't at $4.50."

The shares are trading in the mid-$40s for the first time since October 2007 when the bank started to recognize billions of dollars of losses on bad loans.

Citigroup shares fell on the day in March when the bank announced its reverse split, and industry observers had forecast they would fall again on Monday.

© 2014 Thomson/Reuters. All rights reserved.

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