Skip to main content

It doesn't take Bela Karolyi to see that the reverse split is about to become the go-to move for a host of troubled telecom companies.

Former networking highfliers including





(CORV) - Get Correvio Pharma Corp. Report










TheStreet Recommends

have tumbled uncomfortably below the stock market's $1 delisting threshold. That means that if they don't spring back soon, they'll face an ouster to the pink sheets -- making their shares essentially illiquid and consigning red ink-soaked investors to the poorhouse.

Though these companies obviously have bigger problems than their stock prices, what with the economy threatening to slide back into recessionary torpor and tech spending showing no sign of reviving, the prospect of a reverse split at any of these former tech favorites illustrates how much has been lost in the collapse of the tech bubble. And the reaction of investors to previous reverse-split plans suggests that though splitsville is better than delisting, it's hardly a vacation spot for investors desperately clinging to their remaining pennies.

Great Expectations

Not so long ago, it looked like these networking hotshots would vault ever higher on the strength of ever-expanding Internet Age demand. The companies couldn't churn out their products and services fast enough, prompting many to flip literally millions of new shares onto the market to buy upstart rivals and raise capital.

That action gave some of even the smallest networkers robust multibillion-dollar market caps when times were good. But now, with demand but a fond memory, many of these companies will soon confront the once-unthinkable fate of delisting if they don't boost their share prices. And in an age of deteriorating industrywide fundamentals, the only sure way to do that is to reduce the numbers of shares outstanding -- via the once widely mocked reverse split.

Reverse splits were once considered the last milepost before an unceremonious exit, and typically a last ditch trick by companies trying to forestall a collapse. In a reverse split a company consolidates its share base, essentially giving each holder of five existing shares one new share and (hopefully) boosting the share price by something close to an equivalent amount.

Typically, the




delist companies from their indexes when they determine that the stock is stuck below $1. In Nasdaq's case, 30 days of trading below $1 usually gets you booted. Just the threat of the boot can be plenty painful, though.

Just ask


(T) - Get AT&T Inc. Report

, which in April

shocked even the most cynical observers with its plan to slash its outstanding shares by 80% in a 1-for-5 reverse stock split. The company was driven to the maneuver by a revaluation of its capital following its cable deal with


. And though reverse splits promise to boost share prices, investors don't often react positively.




dropped 13% after its reverse split announcement earlier this month, reflecting investors' unease with the move. But most observers agree that these companies don't really have much of a choice.


Nortel, to take a high-profile example, is staring down a growing list of destitute telco customers, which to all but the most optimistic observers would suggest little by way of a sales upticks ahead. A Nortel spokesman said the company was aware of the consequences of delisting, but declined to comment on a possible reverse split.

Still, investors and analysts say Nortel has few options since demand for new gear is nearly gone and little else will fix the problem. A strong argument for a reverse split is that some institutional investors may be barred from holding over-the-counter or penny stocks. And while the company may fear Wall Street would interpret the move as confirmation that a rebound is still well off, some wonder what else it can do.

"Nortel's stock price is one of the least of their concerns, since bigger issues like their survivability are in question," says Legg Mason analyst Timm Bechter, who rates Nortel and rival


a hold. "I don't think a reverse split is necessarily a bad thing -- I think it just reflects more of a postbubble trend."

Some market watchers say one negative side effect from reverse splits is that the deteriorating fundamentals and new higher price make fat easy targets for short-sellers who benefit from a stock's decline.

You've got your rocks and you have your hard places. That an outfit as august as Nortel finds itself right in between still comes as a shock to some observers.

"It's hard to believe mighty Nortel has dropped to these depths," says one investor. "But they certainly don't want to go to pink sheets."