Tucows (TCX) is an accredited registrar with the Internet Corporation for Assigned names and Numbers, or ICANN, and generates revenue primarily through the provision of domain registration and other Internet services to service providers who offer such services to their own customers in a process known as wholesale distribution. TCX has a solid position in the domain name registration market. It is one of the largest providers of wholesale domain name registrations in the world, with more than 8 million domain names under management. It has a large and growing distribution channel. Since entering the domain name market in January 2000, TCX has grown its distribution channel to more than 9,200 active resellers in more than 100 countries.
The company has been improving operations in the last few years and has a decent balance sheet as a result of consistently generating positive cash flow from operations, providing a solid foundation for future growth. Further, 2013 has been a great year for the stock. Now, TCX is taking two major steps toward catching investors' eyes. First, the company is moving to the NASDAQ, second the company is going to implement a 1 for 4 reverse split. The justification for the reverse split is that the post-split investment prices will be more attractive for buyers, particularly institutions that often are prohibited from owning shares of stock that trade beneath $5.00. In this article, I will discuss both, with a focus on the impact of the reverse split and my recommendations for shareholders.
The Move To The NASDAQ
TCX will transfer its U.S. stock exchange listing to the NASDAQ market from its current listing on the NYSE. Tucows' shares will continue to trade under the symbol TCX. The first day of trading on the NASDAQ is expected to be December 30, 2013. In Canada, Tucows will continue to be listed on the Toronto Stock Exchange and trade under the symbol TC. This move is appropriate, as the company is a tech company. President and Chief Executive Officer Elliot Noss stated:
We are pleased to join NASDAQ's roster of growth-oriented technology companies. NASDAQ provides investors with fast, high quality trade executions within the context of a cost-effective cost structure and high visibility for issuers.
As far as the impact on the stock is concerned, it could be muted. However, for the company, greater exposure to potential clients is a key benefit of this move.
When The Reverse Split Will Occur And What Will Happen to Your Holdings
In this article, I want to explain a bit about what happens during a reverse split and highlight the implications. I will also weigh in on what investors should do with TCX ahead of the split. First, it is important to note that no other company, competitor or tech index will be affected by this split. The reverse split will be conducted at a ratio of 1 for 4 and will apply to shareholders of record at the close of the markets on December 30, 2013, and will begin trading at the adjusted price December 31, 2013. The ticker symbol for the fund will not change. The reverse split will increase the price per share of the fund with a proportionate decrease in the number of shares outstanding. In a 1 for 4 reverse split, every four pre-split shares held by a shareholder will result in the receipt of one post-split share, which will be priced four times higher than the value of the pre-split share. The following example best illustrates what to expect:
Example 1: If you hold 10,000 shares of TCX priced at $3.00 each, then after the reverse split you will hold 2,500 shares valued at $12.00 each. As you can see, the reverse split does not change the value of a shareholder's investment, it still remains $30,000.
TCX Fractional Shares?
One of the common issues with reverse splits is the potential creation of fractional shares. Shareholders who have quantities of shares that are not a whole number with an exact multiple of the reverse split ratio will be left with what is known as a fractional share. A fractional share will be created and affect any shareholder who does not hold a number of shares that is a multiple of four. After the reverse split occurs, fractional shares are generally redeemed for cash and sent to your broker of record, generally within two to three weeks post-split. However, TCX is taking a different approach. If fractional shares are created, then TCX will round the fractions up to a full share and issue a whole number. Thus, investors win on this deal (even if it only means a couple of dollars).
Those Holding TCX Options
You should be aware that holders of options contracts will be affected, and they are an important consideration as well. Traders who may be holding options on TCX should realize that this split will affect your contract(s), albeit minimally. Once TCX conducts the reverse split, the contract undergoes an adjustment referred to as "being made whole." When contracts are adjusted to be "made whole", it simply means that the option contract is modified accordingly so that options holders are neither negatively nor positively affected by the split. While we know the reverse split will adjust the price of the underlying shares of the TCX options, the options will be adjusted so that the changes in price due to the split do not affect the value of the options. The options clearing corporation will automatically adjust the price of all existing contracts to maintain the option market. For those who want an estimate of what their current TCX option will be worth, the calculation is rather simple.
Example 2: Each TCX option contract is (generally) in control of 100 shares of TCX at some predetermined strike price. To find the new share coverage of the option after the split, you take the split ratio and multiply by the old share coverage (normally 100 shares). To find the new strike price, take the old strike price and divide by the split ratio. For example, assume you own a call option contract for 100 shares of TCX at a strike of $5.00. Since the split is 1 for 4 we divide $5.00 by 1/4, generating a new strike price of $20.00. The option will now cover 25 shares because we multiply 100 by 1/4. Thus, your new call option contract which still expires on the same day as originally scheduled, will be good for a purchase of 25 shares of TCX for $500.
On your brokerage account, the contract may be adjusted to read "TCX1", TCX1A" or similar and may still state it is worth 100 shares at the original price, but for redemption purposes, the contract would be redeemed for 25 shares at the post-split price. One important consideration is that volume on these contracts often dries up, especially when new contracts are written at the newer strike level. Thus, wide bid/ask prices can result.
Takeaways From The Split
After the reverse stock split, TCX will have approximately 10.9 million common shares outstanding (reduced from approximately 43.6 million common shares outstanding), subject to rounding up of all fractional shares to the nearest whole share. The number of options outstanding following the reverse stock split will be approximately 1.6 million (reduced from approximately 6.2 million). Again, this split has implications for the future of the company's trading action.
In conclusion, TCX has had a great year. Often a reverse split is done to stocks that have been obliterated. This is not the case with TCX. Shares currently are trading at $2.82. I personally believe the stock is a buying opportunity for long-term investors looking for exposure to the domain name registration sector. In fact, buying pre-split (if you believe the company will continue to execute), can be advantageous because even though your investment value doesn't change, a higher price does tend to attract more volume and more money. To bring the product to an investment price that TCX believes is more attractive, it is conducting this reverse split. No fractional shares will be created; the company will round up your fraction and issue a whole share. Owners of options contracts will not be affected besides being faced with owning a new contract at a different strike price for a different number of shares. The total value of the contract will, however, remain the same. Despite the value of the contract not changing, I recommend not purchasing any options ahead of this split, given that volume generally dries up leading to wide bid/ask prices. Thus I recommend getting out of any options positions you may have now. My sentiment is to buy common stock ahead of the split. I think it has the potential to the number of potential investors and future equity analyst coverage. Shareholders should benefit through less volatility in the share price, lower transaction costs and greater liquidity.