Updated from 7 a.m.
So far, so good for
Investors cheered the fallen bubble-era favorite for the first time in a long while last week. The San Jose, Calif., optical networking company is asking shareholders to approve a
reverse stock split that would boost the share price by reducing shares outstanding.
The company cited the need to attract institutional investors, many of whom are prohibited from buying stocks that trade for just a dollar or two. JDSU shares jumped 17% over five days, clearing $2 for the first time in six months.
But the recent run-up aside, investors boarding the JDSU bandwagon could be in for a bumpy ride. A look at recent reverse splits in tech and telecom shows that few companies flourish after the move. Of 11 stocks tracked by
, only four have gained since the reverse split took effect.
Of course, companies that do reverse splits tend to be in a tough spot, and JDSU is no exception. The stock fetched as much as $124 in the summer of 2000, at the tail end of the Internet building boom. But then customer orders went into a deep freeze and the company, then known as JDS Uniphase, endured a $50 billion write-off of acquisition overpayments as well as numerous rounds of layoffs. Its shares swiftly plunged into the single digits, where they have been stuck for more than four years.
Beyond its tattered business, the root of the JDSU mess lies in the stock-swap acquisition binge that first vaulted the company into the spotlight. In that regard, JDSU isn't alone. Lots of huge telecom and networking supply outfits, ranging from giant
on down to tiny
, printed mountains of new stock during the Internet boom. The companies used the shares as currency to pay employees and for acquisitions. Since then, though, the market for tech stocks has tanked, and many onetime highfliers find themselves sitting on mounds of stagnant stock.
Recoveries from postbubble plunges are rare. One tech favorite that did it without resorting to a reverse split was
, which traded for as little as $1.10 in October 2002 but has since recovered to about $20. Even so, that's just a fraction of the stock's August 2000 peak of $108.66.
Others have found less success.
, with 4.4 billion shares stuck in the low $3 range, last year got the go-ahead from shareholders to roll out a reverse split.
is in much the same situation, but hasn't proposed a so-called share consolidation.
Still other networking shops like
were ready for the reverse move. But Redback ended up in bankruptcy and Riverstone was delisted and now trades on the pink sheets for 67 cents. And that's the category of stocks most investors think of when the playbook is open to the reverse split.
In many cases, a reverse stock split is the last-ditch effort to keep a stock price above $1 mark and maintain a listing on the
. But as market observers note, the move is entirely cosmetic and has no bearing on the underlying business.
Some investors even warn that reverse splits can easily invite more stock declines. This is particularly true if the company's fundamentals are deteriorating and the new, higher price starts looking like a fat target for short-sellers who benefit from a stock's decline.
To be sure, JDSU has made a flurry of moves aimed at revitalizing its business and its image. Just this month it has dropped the JDS Uniphase name and acquired tunable laser maker Agility. Still, the company lost $261.3 million in its latest fiscal year on $712.2 million in sales, and nonacquisition-related growth continues to be hard to come by.
In any case, this reverse move is no layup.
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