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Citigroup: Contemplating Reverse Split

With Citigroup's stock beaten up recently, perhaps now is the time for the company led by CEO Vikram Pandit (above) to undertake a reverse stock split.



) --


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once again raised the prospect of a reverse stock split at its annual meeting but it's yet to pull the trigger.

Since Vikram Pandit & Co. are presumably still mulling the pros and cons of the move, it seemed like a good idea for us to do the same.

First, here's the background:

Citigroup initially put forth the proposal for a reverse stock split in its 2009 proxy statement. This occurred after the stock infamously fell below $1 in March of that year when U.S. equities were at their lows of the financial crisis. Shareholders approved the motion for the board to authorize a reverse split in one of seven ratios: 1-for-2, 1-for-5, 1-for-10, 1-for-15, 1-for-20, 1-for-25 or 1-for-30, through June 30, 2010.

But as the markets stabilized and Citigroup's capital position improved, the split never took place. The stock climbed back to relative respectability, but it eventually stalled out at around $5 in October 2009.

At its

2010 annual meeting

last month, Citigroup proposed to extend the board of director's ability to implement a reverse stock split through June 30, 2011. While the measure was ultimately passed, more than a few shareholders at the meeting were upset that the option for a reverse split would remain on the table.

At the time of the meeting, Citigroup was riding pretty high. The stock had rallied mightily since March and was up roughly 50% year-to-date, having once again popped above $5 on an intraday basis, though it always pulled back before the closing bell sounded. The company had just turned in a surprise $4.4 billion profit for the first quarter, and Wall Street watchers seemed to be in agreement that a proverbial corner had been turned. Credit costs were improving and the promised restructuring of the balance sheet to isolate and offload bad bank assets was viewed as being on or even ahead of pace.

Since then, of course, the stock has sold off along with the broad market on fears about European debt contagion, as well as increasing evidence that financial reform legislation will be more onerous than previously expected. The shares closed Friday at $3.75, and their gain for 2010 has shrunk back down to around 10%. A company spokesman declined to comment for this article.

So what should the company do? Throw it in reverse or no?

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On the plus side of the ledger, the split -- most likely a one-for-five or one-for-ten swap -- would make the per share price of the bank more comparable to money-center peers like

Bank of America

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JPMorgan Chase

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Wells Fargo

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, arguably providing a psychological lift.

The higher price could also potentially help the company secure more institutional ownership, as many funds can't hold stocks under $5. That in turn might lead to Citigroup shares becoming less liquid, which would not necessarily be a bad thing. Right now, the stock is nearly always the most-active issue on the New York Stock Exchange with daily volumes routinely above 500 million, and the company would probably rather not be a favorite name of the high-frequency firms and day traders behind that kind of churn.

Another positive could be that higher price resulting from a reverse split might make the U.S. Treasury's unloading of its TARP-related stake in the company go smoother, according to Dr. Linus Wilson, an assistant professor of finance at the University of Louisiana at Lafayette. He thinks a 1-for-10 ratio makes sense.

"A reverse stock split would probably make it easier for the U.S. Treasury to do a large secondary offering to institutional investors who may shy away from stocks under $10," Wilson writes in an e-mail. "Citi is in a good capital position and of late investors have seen its debt safer than

Goldman Sachs'

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The downside? Well, no one disputes reverse splits have a negative connotation.

"Generally the only companies that consider reverse stock splits are companies that have a failed businesses or a failed period in their business," says Scott Colyer, CEO and CIO of Advisors Asset Management in Monument, Colo. "Forward stock splits are generally

used by companies that are successful with their business plan

and want to bring that stock price down so more investors will participate."

And while it's purely a cosmetic move, retail investors never like to see the number of shares they own go down. There's also some allure apparently in the low stock price, as it makes investors dream outsized gains will follow when the company gets back on solid ground. For some reason, a $4 stock reaching $20 seems more likely than a $40 stock reaching $200, and that may be why vocal shareholders at the annual meeting were so against the measure.

Colyer, who personally owns shares in Citigroup, says retail investors would rather buy 100 shares of a $5 stock than five shares of a $100 stock. "Mathematically there is no difference, but I don't think retail investors understand," he says.

For Citigroup, the biggest issue may be the message undertaking the reverse split sends. The move could be interpreted as a white flag, an indication that executives don't believe they can get the stock price to go much higher the old-fashioned way, by growing revenue and profits.

Why is Citigroup considering the split? In its proxy, the company explains it wants more broad appeal for the stock, saying extending the authorization would give it flexibility to "react to then-current market conditions and potentially improve the marketability and liquidity of our common stock and encourage interest and trading in our common stock."

Considering the daily volume in the stock, it's clear Citigroup shares are already plenty interesting to investors. More likely, the company is tired of its stock price being so far removed from where the other big banks trade and it wants to reduce its number of outstanding shares, which stands at nearly 30 billion, compared to Bank of America's 10 billion, Wells Fargo's 5.2 billion, and JPMorgan's 4 billion.

If it were to effect the split, Citigroup would probably like to emulate the success of fellow bailout recipient

American International Group

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. The insurance giant underwent a 1-for-20 reverse stock split in June 2009, and while shares are down by one-third from a 52-week-high last August of $55.90, the stock has still more than doubled post-reverse split.

For AIG, the split lifted its shares out of zombie-stock territory, and it seems to have been the right move. Citigroup needs to decide if the long-term benefits -- fewer shares outstanding and hopefully a steadier investor base -- outweigh the flack it will initially get about having to go this route. Judging by the range the stock's been stuck in since the financial crisis struck and the sheer amount of stock it already has out there, they probably do.

--Written by Laurie Kulikowski in New York.

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