The Dangers of Delisting

NEW YORK ( TheStreet) -- Ravi Shukla has a fairly simple morning routine, not unlike many investors: He'll wake around 5:30 a.m. He'll make some tea. Then he'll fire up his computer to check on his financial state: Savings and checking accounts, credit cards and investment portfolio, among others.

But on Monday, Sept. 21, with a cup of black tea at the ready, Shukla stared at his portfolio on Google Finance. There, he saw the announcement that rocked one of his beloved companies. After the previous Friday's close, DayStar Technologies ( DSTI), a maker of thin-film solar products, said that it received a "deficiency letter" from the Nasdaq Stock Market. The company's stock had failed to keep its bid price above $1 for 30 consecutive days, one of several criteria that could cause the exchange to delist the company, or remove it from regular trading.

He was far from alone.

According to data from iMetrix by Edgar Online, 114 companies with trailing 12-month revenue of $1 million or more have seen their share prices slump below $1 between the beginning of this September and the start of this month. The top ten include Sirius XM Radio ( SIRI), followed by the likes of FairPoint Communications ( FRP), Mesa Air ( MESA), Champion Enterprises ( CHB) and ChipMOS ( IMOS).
Top 10 Stocks at Risk of Delisting

The threat of delisting is palpable for all of them -- as each has received deficiency notices from their respective exchanges -- as it is for their many investors.

When we reached out to Sirius about future plans, the company pointed to its Sept. 17th press release on the potential delisting matter. There, in part, Sirius said it plans to maintain its listing on the Nasdaq and will consider "available options" if shares continue to languish below the minimum bid price. When asked about the same, a Fairpoint spokesperson generally noted that it's attempting to restructure its debt and has already made headway in improving back-office service transition issues in its largest markets. TheStreet reached out to all other companies on the top 10 list; the site is awaiting responses.

But in order to understand what to do when the dreaded "d" word begins circulating, it helps to understand how the process works.

As a result of the market's calamitous machinations over the past year, for several months both the New York Stock Exchange and the NASDAQ suspended listing requirements on their indexes, leaving companies the freedom to ride the daily ups and downs without fear of being kicked off the boards. Citigroup ( C), for instance, flirted with the dollar line back in March. But at the beginning of August, with more and more positive economic signs bubbling about, the exchanges began enforcing the rules again.

There are, of course, a slew of requirements that a company has to meet in order to stay listed. Bid price thresholds are one. On the NYSE, that means companies closing lower than $1 over a 30-day trading average face possible expulsion. On the Nasdaq, companies closing lower than a $1 on 30 consecutive days will have to account.

Still, the announcement that a company received a deficiency letter from one of the indices isn't a death blow in itself. Rather, a company will enter into a six-month purgatory of sorts, where the stock continues to trade. If a company wants to stay listed, it'll use those six months to move shares higher.

In the NYSE's case, officials explain that once a letter is sent, the deficient company will present some sort of plan of action to exchange officials. That could include a reverse stock split, a merger or any assortment of options. Generally, in order to be deemed compliant, shares must close above a $1 over a 30-day trading average. At the end of the aforementioned 30 days, the price must also meet the $1 threshold on the closing month's end (or on the final day of the six months following a 30-day run-up) during the proving period.

In general on the Nasdaq, shares must close above $1 for 10 consecutive days for the company to get back in to the exchange's good graces.

If not, generally both exchanges begin the process of formally delisting shares, which could involve appeals and final committee determinations.

In the Nasdaq's case, however, there's an added wrinkle: After the 180-day period, shares for the company can be transferred to a sort-of minor league tier known as the Nasdaq Capital Markets. There, shares will trade while the company in question attempts to use another 180 days to raise share prices. Hypothetically, then, a Nasdaq-listed concern may have as much as a year to raise its share price from the moment it's considered deficient.

Once you break it apart, then, the delisting process is somewhat defanged. Still, few would argue that delisting is a good thing. Most institutional operations are not allowed to own delisted shares. News of a potential delisting, alone, can send shares plummeting. The fear of going from a liquid market to a much more illiquid market presents a risk that many can't stomach. Debt covenants requiring companies to stay listed on a major exchange can be triggered. Then, too, there's the actual underlying fundamentals driving the bid price lower to begin with.

Professor Tim Shumway at the University of Michigan's Ross School of Business says a study he published in the late 1990s showed that companies lose between 30% to 40% of their value when they move from a listing to the pink sheets. While that showing also included bankruptcies, there's a seeming takeaway message for investors.

"On average, you should probably sell before delisting," Shumway says.

Still, back on Sept. 21st, Shukla -- a finance professor himself at Syracuse's Whitman School of Management -- stayed on the sideline and didn't sell a share of DayStar. While more shares of the stock traded on that day than any other this year, and prices flowed from one extreme to the next, Shukla didn't panic. In fact, he still owns every share today and has no plans to sell.

You see, Shukla also teaches courses on investing -- and watching the share price over the past months, he knew the announcement was coming at some point. But he comes at the question of what to do in light of delisting and its impact on his own shares from a different place.

"I'm a believer in solar energy. "I'll either go down with them, or rise with them," chuckled Shulka, who also owns solar panels on his own home.

To be clear, Shulka isn't recommending that all investors in stocks on the delisting chopping block follow this course. In fact, talk to most experts like Shulka and they'll raise caution regarding the myriad potholes that face a delisted stock.

"The impact to the investor is that there will be less trading volume on the stock, since it's not being traded on the big board, and therefore, they are unlikely to get as good a price on the stock," Shulka says. "Essentially, when a stock is delisted, it's going from bad shape to an even more depressed state."

Regardless, some hold. Shulka, for one, says his investment in solar is based on a larger belief in solar technology. It also helps that he considers his investment "fun money" that he's more than willing to lose -- as opposed to, say, retirement funds. He'll still own something and have certain rights, even if the company goes to the pink sheets. There also may be lessons for his students if those shares actually do meet a delisting fate.

Indeed, what the deficiency warning means for the future of his investment is still unclear, as it is with most shareholders in a similar predicament. The company could be bought out. It could make a comeback. Nothing is necessarily preordained. It could get delisted and make its way back onto the NASDAQ at a later date.

Getting the delisting warning isn't cosmetic. It can't be completely dismissed. Still, the finance professor has seen few signs in his analysis that the stock is entirely doomed.

As he puts it: "My irrationality is perfectly rational."

-- Written by Sung Moss in New York

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