The Specter of Nasdaq Delisting Haunts Dot-Coms

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Biznessonline.com, eFax.com Feel the Delisting Squeeze

Dot-com troubles and failures have become such familiar affairs that they're hardly news anymore. But one of the more humiliating symptoms of these problems is just starting to be seen: getting delisted from the Nasdaq Composite Index.

A growing number of Internet companies that just months ago gloated with hundreds of millions of dollars in market capitalization after initial public offerings now have share prices hovering dangerously near the $1 threshold that could ship them to the stock world's minor leagues.

Those include such companies as Pets.com(IPET), PlanetRx.com(PLRX) and Musicmaker.com(HITS). Even theglobe.com(TGLO), which kicked off the Internet stock craze when its November 1998 IPO soared 606%, now faces possible delisting. It's trading at about 83 cents a share, down 99% from its April 1999 high.

A stock-exchange listing brings visibility and cachet, which help attract investors. "The Nasdaq listing is critical to the company, and to any company," says Mark Fowler, the chief financial officer of Musicmaker.com, which is fighting to boost its stock above $1. "We will be, and we've proved to be, one of the survivors."

All told, last week 230 companies listed on the Nasdaq had stocks close below $1 for at least one day, according to the exchange. Of course they're not necessarily doomed, because the price has to remain in the pennies for 30 consecutive trading days before a stock is delisted based on share price alone.

No Comfort

But it's also no reason for comfort. Some dot-coms are already resorting to desperate measures to fend off delisting, including the relatively untested maneuver of the reverse stock split.

So far this year, the number of dot-com delistings isn't keeping pace with the steady drumbeat of Internet company failures. Overall, in fact, there have been significantly fewer Nasdaq delistings in 2000 than in either of the prior two years. And few of those are dot-coms that were yanked for falling below the exchange's minimum share-price, asset, revenue or market-capitalization standards.

Declining Delistings But a spike could be on the way.

*As of September 2000 Source: Nasdaq Stock Market

But that could be misleading, according to a Nasdaq spokesman, because the process can be drawn out for months, so the real fallout in terms of Internet flameouts could begin to become apparent toward January.

"It's not unusual if a company falls below a $1, it can be six months until delisting," says Nasdaq spokesman Scott Peterson.

The $1 share-price floor is the most significant change Nasdaq enacted when it tightened its listing standards in 1997, says Peterson. Nasdaq did so because it believed prices below $1 were more easily manipulated.

Leeway

But Nasdaq actually provides considerable leeway in delistings.

If a company's share price falls below a dollar for 30 consecutive trading days, the Nasdaq sends it a warning and gives it 90 days to bring the price back. If it succeeds for 10 consecutive trading days, it's relisted. If the company tries and fails, it can appeal to a hearing panel -- twice.

Aside from the bid-price minimum, listed companies also must maintain a minimum public float and a minimum of net tangible assets or market capitalization, or revenue.

So far this year, the number of dot-com delistings is just a fraction of the 76 Internet firms that have gone out of business, according to the latest "Dot-Com Deathwatch" survey from Fortune.

Some companies are trying to head off a delisting. Musicmaker.com, a New York-based company that has offered a library of digitally downloadable songs since 1996, has set a 1-for-10 reverse stock split for late this month. Its share price has languished below $1 since early September.

True Reflection?

"From our standpoint, the stock price does not reflect the value of the company," Fowler says. "When you're down at this level, most of the time you have no institutional, or very little, institutional shareholders."

Musicmaker decided the reverse split would be more effective in boosting the share price than spending $5 million of its $31 million in cash to buy back shares, he says. The reverse split will consolidate 10 shares into one. Were it to happen now, Musicmaker's new share price would increase to about $3.40, Fowler says.

PlanetRx.com, the troubled online pharmacy, has told the Securities and Exchange Commission it's planning a 1-for-8 reverse split. PlanetRx hit its highest price at $26.125 a share on the day of its IPO last October. Recently it was trading at 46 cents a share.

Whether a reverse split would save the company from delisting is unclear, says Anthony Noto, an analyst at Goldman Sachs. "There's just not enough history of reverse stock splits," he says. (Goldman was an underwriter of the PlanetRx's IPO.)

Noto also says he's not convinced a huge wave of dot-com delistings is coming for one simple reason: "I actually think that we may see companies going out of business before they delist," he says. "That's the bigger issue. ... Are these companies even going to be solvent?"

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