There's an easy way for Sirius XM Radio
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
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
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
Sun Microsystems isn't so lucky. The stock has shed half of its value since last November's reverse split. It joins JDS Uniphase
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
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.
Reverse the clock to revisit these related stories:
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Longtime Fool contributor Rick Munarriz knows that you can't turn back time, but you can take back shares outstanding. He does not own shares in any of the stocks in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.