Looking to a Reverse Split to Save Your Dot-Com? Investors Might Still Split

PlanetRx.com is the latest to learn what other troubled businesses have learned: reverse splits often don't work.
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When online pharmacy PlanetRx.com (PLRXD) began the day Monday, the company hoped to boost its share price and fend off delisting through a reverse split -- consolidating eight of its shares into one.

By the end of the day, the Memphis, Tenn., Internet concern found out what a number of other troubled businesses have learned as they've tried to keep their share prices above the $1 threshold to remain on the

Nasdaq

market: Reverse splits often just don't work.

PlanetRx's stock price, which had closed at 12 cents a share on Friday, rose briefly to just 97 cents Monday after the reverse split. Then it plummeted, even more quickly than has happened with a number of other desperate companies. By Monday's close, PlanetRx's stock price had fallen 72% from the day's high to 28 cents a share. PlanetRx officials declined requests to comment on the reverse split this week.

It was a sobering failure for a company that had traded at almost 750 times that much -- a split-adjusted high of $209 -- after its initial public offering on Oct. 7, 1999.

In Theory

The theory behind such reverse splits is simple: Reduce the number of shares trading, and each is worth more. Essentially it's the opposite of a normal split, in which the number of shares is increased so the price of each will be lower.

But in practice, reverse splits rarely produce the effect, says Samuel Hayes, a finance professor at the

Harvard University Business School

.

"Jacking the price up by a factor of 10 or something only provides further downside for the stock to slide," Hayes says. "My observation has been that it has happened quickly -- within a year."

Events of recent months have borne that out.

Numerous companies facing delisting from the Nasdaq have announced reverse splits to try to boost their share prices. Many that went through with the maneuver found that it failed. They include companies like

Carematrix

(CMDCQ)

,

eGlobe

(EGLOD)

,

DonnKenny

(DNKY)

and

Iwerks Entertainment

(IWRK)

.

Hanging On

Iwerks, a Burbank, Calif., company that designs and manufactures entertainment attractions like specialty theaters, carried out a reverse split on its stock on Jan. 18, when its share price had dropped to 71 cents. The price rebounded, but by May it was regularly trading below $1 again. On Nov. 2, the firm was delisted from the Nasdaq small-cap market.

"We hung on for a while, which was great," says Jeffrey Dahl, Iwerks' chief financial officer. "I don't think we had our operations in order yet. ... Once we did get it in order, which we are now, it was too late."

Dahl says the company considered another reverse split, but decided against it. "I think the success rate isn't that high," he says.

Beverly Eichel, CFO of New York women's and children's apparel maker DonnKenny, agrees. DonnKenny carried out a reverse split on April 20, consolidating every four of its shares into one. On Nov. 15, it too was delisted from the Nasdaq small-cap market. By then its share price had closed at 50 cents.

Eichel's advice for any firm considering a reverse split: Don't count on the maneuver to save the share price unless it's accompanied by a substantive good news announcement about the company.

"I didn't have anything, if you will, that would have given me that boost," she says. "It's a very hard process."

Still Trying

Still, some firms, like

Musicmaker.com

(HITSD)

, are hoping to defy the odds.

Musicmaker, a New York company that maintains a library of digitally downloadable songs, carried out a reverse split on Nov. 3, when its share price had dropped to 34 cents. The 1-for-10 reverse split drove it up to about $2.50, where it has remained ever since.

The company is among a number of dot-coms facing the

threat of delisting as their shares on the shell-shocked Nasdaq sank to near or below the $1 mark after the decline in the market for tech stocks that began earlier this year.

And

On-Point Technology Systems

(ONPT)

, a San Marcos, Calif., designer of lottery ticket vending machines, carried out a 1-for-3 reverse split on Nov. 7. The maneuver moved the share price from a presplit 87 cents to a high of $2.91, and the price has remained above $2.

Charles Broz, On-Point's director of finance, says the firm hopes the reverse split will help maintain the share price at a level that's attractive to institutional investors.

"Like anything else after a split, you have to take a look at the market," he says. "Usually you can expect up to a 10% adjustment until the stock is comfortable."

Other firms are still considering reverse splits to bolster their lagging share prices. For example, the Austin, Texas, Internet health network

drkoop.com

(KOOP)

on Wednesday

said it would hold a special stockholders' meeting to decide whether to carry out a reverse split after Nasdaq notified the firm that its price had fallen below the minimum listing threshold.

But Dahl, of Iwerks, says the real key to a stock price with a reverse split is the health of a company. If that isn't there, the market will see right through the maneuver. "It ultimately will catch up with you," he says.