15-8 Splits 2

15-8 Splits 2 - Foundering Software Companies try Reverse...

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Foundering Software Companies try Reverse Splits to retain Listing Source: Wall Street Journal, 2 October 2002 In November 2000 shareholders of i2 Technologies Inc. endorsed the software company's plan to split its stock 2-for-1 and boost the number of authorized shares to two billion. Soon they may be asked to do the exact opposite. The Dallas company, whose shares are foundering below $1, is considering a reverse stock split that would reduce its shares outstanding and keep its stock trading on the Nasdaq market. A decision hasn't been reached and any such move would require shareholder approval. The company underwent three 2-for-1 splits from 1998 to 2000 before its business unraveled and its supernova stock burnt out. It has 431 million shares outstanding and a market value of about $240 mil- lion. Its stock, which was at $220 in March 2000, recently fell to 56 cents a share. A reverse split reduces the number of shares out- standing and artificially raises the share price, but doesn't change a company's fundamentals or market capitalization. For example, if a company with 10 million shares selling at $1 apiece executes a 1-for-10 reverse split, it would end up with one million shares selling for $10 each. The value of the company re- mains $10 million. Reverse splits are typically associated with founder- ing, small companies desperate to remain listed on Nasdaq or the New York Stock Exchange. They are usually frowned upon by investors because they often backfire. "When a company makes that kind of switch they are telling shareholders, `We're pushing the price up be- cause we don't have confidence it's going to grow naturally,"' says David Ikenberry, finance professor at
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This note was uploaded on 05/03/2010 for the course ACCT 202 taught by Professor Yang during the Spring '10 term at UPenn.

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15-8 Splits 2 - Foundering Software Companies try Reverse...

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