There's an easy way for Sirius XM Radio (Nasdaq: SIRI ) to see its penny-stock price jump fourfold overnight -- but investors shouldn't care, because it would be a zero-sum game.
I'm talking, of course, about reverse stock splits. These aren't the more conventional stock splits you typically see. Under the more common scenario, a stock with a high share price will declare a split to get its price back down into a shareholder-attractive range. For instance, a company with its stock at $90 may go for a 3-for-1 stock split, where investors receive two additional shares for every one they own. The stock price drops to $30 to reflect the move.
Reverse splits work the other way around. Sun Microsystems (Nasdaq: JAVA ) got tired of trading in the single digits, so it executed a 1-for-4 reverse split last year. The stock price quadrupled overnight, while shareholders wound up with a quarter of the number of shares they once owned. It all adds up to the same thing in the end, but sometimes companies need a psychological boost.
I've got a splitting headache
Prolific reverse splits are rare. Usually it's desperate penny stocks shifting into reverse. Struggling online apparel retailer Bluefly (Nasdaq: BFLY ) went this route in April. With its stock at $0.46 a share, the company declared a 1-for-10 reverse split. The move was good enough to inflate the stock to nearly $5 after the move. However, a reverse split is no remedy for what slammed a stock in the first place. Bluefly has quickly fallen down to the $3 mark.
The list of companies swallowing down hard and resorting to reverse splits is loaded with companies that fade away. It's not a pretty lineup. Occasionally, though, you have a big winner like Priceline.com (Nasdaq: PCLN ) . The top-performing travel portal hit a bit of turbulence in the aftermath of the dot-com bubble. It opted for a 1-for-6 reverse stock split five years ago. It may have seemed desperate at the time, but shares of Priceline have gone on to appreciate nearly fivefold since then.
Brightpoint (Nasdaq: CELL ) is another success story. It went for a 1-for-7 reverse split six years ago. The company has done so well since that humbling move that it has had the luxury of issuing five of the more conventional forward stock splits since the 2002 backtrack.
Sun Microsystems isn't so lucky. The stock has shed half of its value since last November's reverse split. It joins JDS Uniphase (Nasdaq: JDSU ) -- a falling star even after completing a 1-for-8 reverse split two years ago -- as big stocks that have failed to make the most of Wall Street's second chance.
It's different this time
Sirius doesn't really have the luxury of creeping back into double digits organically. It's a $5 billion company after absorbing XM. It would need to be valued as a $35 billion company to find its way back into the double digits, and possibly higher if Sirius continues to dilute its shares.
Let's be honest. I'm a satellite-radio bull, and I can tell you: That’s just not going to happen anytime soon. That would be more than 10 times what the combined companies ring up in revenue this year, with profitability still a blur.
I believe that Sirius XM is bottoming out right now, but with its stock price hanging out in Mickey D’s Value Menu territory, all it will do is attract speculators. Even if it would mean turning every single share into a quarter of a share, a 1-for-4 stock split is almost necessary right now. In fact, a more aggressive 1-for-8 reverse split may be even better.
It's a zero-sum game for investors, but Sirius XM also needs to appeal to on-air talent, partners, and advertisers, groups that are typically market neophytes. Howard Stern was wooed by a cash and stock compensation package. General Motors (NYSE: GM ) was both a partner and investor in XM. It isn't easy to recruit talent and partners -- or win over new sponsorships -- when your stock is trading for a buck and change. People begin to doubt your viability.
A reverse split for Sirius wouldn't just be a psychological move for existing investors. It would also be a math trick to further its agenda elsewhere.
It will probably happen. It's just a matter of when and how severe the reverse will be. My advice to Sirius is to rip the Band-Aid off quickly. There are plenty of reasons to get excited about the future of Sirius XM. Let's just hope it doesn't blow the present.
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