Reverse Splits at JDSU and Ciena: The Effects

Investors are often skeptical of reverse splits - for good reason. Some believe the reverse split of a company’s shares is the “kiss of death” because it usually occurs on the smaller OTC exchange when the price is severely depressed. The reverse split is often used as an attempt to bring back the share price to more respectable levels, reduce the amount of shares on the market and continue again raising capital.

Typically, this dilution hurts existing shareholders as their stake in the company becomes less and less valuable. The reality then becomes one of a company in the business of selling stock, rather than creating value through sound business fundamentals.

It is also often seen as a “kiss of death” because the company can ignore shareholders apprehension of a reverse split by declaring a stock split without shareholder approval. Although the Securities and Exchange Commission has authority over a broad range of corporate activity, board of directors can bypass shareholder approval through a company’s articles of incorporation and by-laws governing reverse stock splits.

In the vicious bear market after the dot-com bubble, reverse splits were necessary because the stocks fell far enough for their listings on the New York Stock Exchange or Nasdaq to be threatened. A delisting action by those stock exchanges would help to seal the doomed fate of those troubled companies.

But times have changed. With larger cap stocks in better economic times, the outcome and reasoning behind declaring a reverse split is much different. The reverse stock split is intended to enhance investor visibility into the company’s profitability on a per share basis. The split will also broaden appeal to investors, in addition to reducing per share transaction fees and certain administrative costs.

Based on that reasoning, JDSU (Nasdaq: JDSU) and Ciena (Nasdaq: CIEN) have approved reverse stock splits.

Here are the effects it will have on JDSU:

The 1-for-8 reverse split will reduce the number of shares of the Company's common stock outstanding from approximately 1.7 billion to approximately 211 million. The number of authorized shares of common stock will be reduced from 6 billion to 1 billion.

Here are the effects it will have on Ciena:

The total number of common shares authorized under Ciena's Third Restated Certificate of Incorporation will be reduced from 980 million to 140 million shares. There were approximately 590.9 million shares of Ciena's common stock outstanding and effecting the 1-for-7 reverse split will reduce that total to 84.4 million shares. The reverse split will not change the number of shares of Ciena preferred stock authorized of 20 million shares.

Comments

[DharmeshVyas]

The article in reference to reverse split is not completely accurate. What stocks like MSTR and PALM.
There are many stocks that have prospered from reverse splits. I think you need to post complete study on this. I have to admit in the past this has not been successful however please go back six years. I think there can be a benefit to investors from reverse splits.