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Do Reverse Splits Ever Work?

http://www.fool.com/investing/general/2009/07/02/do-reverse-splits-ever-work.aspx

Dan Caplinger
July 2, 2009

When stocks perform well, an announcement of a coming stock split can make investors even more optimistic about the future. In the uncertain market environment we're facing now, however, many companies either have already made or are considering reverse stock splits to boost their share prices from extremely low levels.

Still, investors have to wonder: Will reverse splits do any good, or are they basically the kiss of death for a company?

A sordid history
AIG (NYSE: AIG  ) is the latest company to implement a reverse split, but it won't be the last. With many major companies trading in the single digits, reverse splits may be necessary to boost stock prices back up to a level at which they don't look like penny stocks.

By themselves, splits shouldn't make any real difference. Whether regular or reverse, a split simply changes the number of shares outstanding. Offer two shares for every one existing share, and the price for each should get cut in half. Issue one new share for every 10 currently outstanding, and each share's price should multiply by 10. The net value should remain the same.

Nevertheless, reverse splits have not worked out well for many companies that have used them in the past. Sun Microsystems (Nasdaq: JAVA  ) , for instance, did a 1-for-4 reverse stock split back in November 2007. A year later, the stock had dropped more than 85% before it turned around. Even after Oracle's (Nasdaq: ORCL  ) takeover bid for the stock, shareholders stand to receive less than half of what shares traded for at the time of the reverse split.

Similarly, in September 2006, Ciena (Nasdaq: CIEN  ) made a 1-for-7 reverse split. Although shares are currently back in the double digits, they're still down more than 65% from when the split took place.

Bright spots
As it turns out, not all reverse splits have been failures. Take a look at these stocks, which successfully recovered from reverse splits:

Stock

Date of Reverse Split

Return Since Reverse Split

Palm (Nasdaq: PALM  )

Oct. 15, 2002 (1-for-20)

633%

priceline.com (Nasdaq: PCLN  )

June 16, 2003 (1-for-6)

347%

Laboratory Corporation of America (NYSE: LH  )

May 4, 2000 (1-for-10)

330%