If approved by company shareholders, the move would instantly hike the price of the online brokerage to $11.50. But research says the market isn't overly fond of such maneuvers.
At E-Trade, it costs about $10 to make a stock trade. In contrast, it costs only about $1.50 to buy a share in the discount broker.
To remedy this embarrassing situation, E-Trade Financial Corp. announced Monday that it would do the corporate equivalent of plastic surgery: It will lift its share price by undergoing a 1-for-10 reverse stock split. The move would immediately boost the price of E-Trade stock to about $11.50, although someone who now owns 1,000 shares would have only 100 shares after the reverse split.
The move is “a logical next step for the company as we complete our financial and managerial restructuring,” E-Trade Interim Chief Executive Robert Druskin said in a statement.
Also on Monday, E-Trade announced Mr. Druskin would be replaced by former Citigroup executive Steven Freiberg.
E-Trade is well known for its clever advertising, such as its recent commercials showing babies trading stocks. Earlier this month, famously hard-partying starlet Lindsay Lohan sued the firm, seeking $100 million in damages, because a “milkaholic” baby named Lindsay appeared in an ad.
But the Manhattan-based company is still struggling to recover after stumbling badly into the mortgage business during the housing mania. E-Trade has posted losses for three consecutive years, and last year's revenues, at $2.2 billion, were 38% lower than 2007's.
E-Trade might have collapsed in 2007 were it not for a $2.5 billion cash injection from Chicago's Citadel Investment Group, which remains its largest shareholder, according to Thomson Reuters data.
The stock has traded for less than $2 a share since November 2008, and the reverse stock split, which must be approved by shareholders, suggests management is struggling for ideas to get it higher. Besides the sheer embarrassment associated with having such a cheap stock, shares that trade under $1 apiece are at risk of being delisted by exchanges. (E-Trade fetched as little as 61 cents a share 12 months ago in the depths of the financial meltdown.) In addition, many institutional investors refuse to buy stocks that trade for less than $5 a share.
But while the reverse split would surely give E-Trade shares a much-needed lift, research suggests it will won't last long.
Companies that use reverse splits underperform the market by 50% over the following three years, according to a 2006 study by New York University's April Klein and Emory University's James Rosenfeld. The study, which examined 1,600 companies over 30 years, also found that companies after a reverse split subsequently post poor operating performance. That's because the pressures that caused the stock price to fall so low in the first place tend to linger, even after the cosmetic move of a reverse split.
[This story first appeared in Crain's New York Business, a sister publication of InvestmentNews.]
