Falling off the Nasdaq index

Journal Record, The (Oklahoma City), Feb 20, 2001 by Kathleen Pender San Francisco Chronicle

As the number of companies in danger of being delisted from Nasdaq continues to grow, their options for remaining on Nasdaq seem to be shrinking.

Look at what happened to PlanetRX.com. Last November, I wrote about the company's plan to get its stock price above $1 per share -- and avoid getting the boot from Nasdaq -- by doing an 8-for-1 reverse stock split.

It proved disastrous. The stock immediately dove back below $1, and was delisted from Nasdaq in January.

Maybe that's why other companies facing delisting are looking for other options.

Earlier this month, two Bay Area companies trading below a buck have agreed to sell out.

Egreetings Network, whose stock hasn't been above a dollar since Oct. 2, will be acquired by American Greetings. The big card company will pay 85 cents a share for San Francisco's Egreetings, which was trading at 50 cents before the takeover was announced.

Women.com Networks -- whose last trade above $1 was on Nov. 15 -- will be acquired by IVillage.com, in a stock swap valued initially at $47 million. IVillage, a competing online women's magazine, trades around $1.40, but has also seen the underside of $1.

Egreetings did not return phone calls, but a spokeswoman for San Mateo's Women.com said her company's decision to merge with IVillage "had less to do with the specifics of the delisting and more to do with the future of the company. Together we could be more effective than we could singly, competing for the women's market." (Hearst Corp., which owns The Chronicle, owns 46 percent of Women.com.)

Redwood City's Fogdog, which also faced delisting, was acquired by Global Sports in December.

To remain listed on Nasdaq, a company must meet several financial and market requirements, including a stock price that exceeds $1.

When a company's stock closes at less than $1 for more than 30 consecutive trading days, Nasdaq sends a "deficiency notice." The company has 90 days to get back into compliance.

If after 90 days the company's stock is still below $1, it can ask for a hearing, which can take several more months. All told, a company can be trading below $1 for six months before it's shown the door.

Getting kicked off Nasdaq's National Market System is the end of the road for many companies. Their stock might qualify for Nasdaq's second-tier small-cap market, but if not, it's down to the OTC Bulletin Board or the pink sheets, which are illiquid, highly speculative marketplaces.

There are only so many things a company can do when its stock is trading below a dollar, says Kathleen Heany, an analyst with Bluestone Capital. It can do a reverse split, buy back stock, sell out or shut down.

Buying back shares signals that a company has confidence in the stock, Heany says. But if the company is losing money, reducing the number of shares outstanding increases the per-share loss, which can defeat the psychological boost a buyback might provide.

A reverse stock split is equally problematic, as PlanetRx proved.

In a regular stock split, a company gives stockholders two or more new shares for every share they own, which lowers the share price but leaves the company's overall value unchanged.

In a reverse split, shareholders get 1 new share for every 5 to 10 that they own. The goal is to raise the share price to prevent a delisting and/or to attract institutional investors, who generally avoid stocks priced below $5.

In PlanetRX's case, the reverse split was counterproductive.

On Dec. 1, the stock closed at 12 cents. On Dec. 4, the 8-for-1 reverse split went into effect. That should have put the stock at 96 cents. The stock opened at 97 cents, but by the end of the day it had fallen to 28 cents -- equal to 3.5 cents on a pre-split basis.

A spokeswoman for the company says the reverse split "just wasn't perceived well. Everybody who was an institutional investor got out. All that was left was retail investors."

PlanetRX, which moved its headquarters from South San Francisco to Memphis but still has operations in the Bay Area, now trades on the OTC Bulletin Board, at around 44 cents.

Last week, the company said it is abandoning its main business, selling health and beauty products over the Internet, to focus on specialty prescriptions.

Musicmaker.com did a 10-for-1 reverse split in November, and its stock has managed to stay above $1. But it was only a temporary fix. In January the New York company said it is going out of business.

"Investors can see through a reverse stock split," says Morningstar analyst David Kathman. "Usually it's just delaying the inevitable."