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Why Office Depot Plunged by Almost 12% on Friday

By Eric Volkman – Jun 26, 2020 at 5:37PM

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A relatively rare piece of financial engineering was the culprit.

What happened

On a dim day for the stock market on Friday, Office Depot (ODP 1.66%) fell much harder than the main equity indexes and a great many other companies. The clear reason for this is the retailer's announcement that its board of directors has approved a proposed 1-for-10 reverse stock split. This will be enacted just after market close next Tuesday, June 30.

So what

Reverse stock splits are relatively rare occurrences on the market. They usually happen when a company wants or needs a relatively quick way to lift its stock price.

Falling stock price indicated on an electronic graph.

Image source: Getty Images.

In Office Depot's case, "a reverse stock split could allow a broader range of institutions to invest in our Common Stock (including investors that, as a matter of policy, avoid or are prohibited from buying stocks that are priced below a certain threshold)," the company wrote in an April regulatory filing.

It added the move could also attract analysts and brokers who shy away from recommending or trading low-priced stocks because of company policies prohibiting this. Finally, it believes that employees and partners are "less likely" to work for or with a publicly traded business in such a situation.

Now what

Although these are valid points, the core reason Office Depot's shares are so low is because the company is struggling. In recent years, the retail apocalypse has negatively affected its business, which remains dependent on its many brick-and-mortar stores. The economic slowdown caused by the coronavirus pandemic has only exacerbated the situation.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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