Citigroup Considering Reverse Stock Split

Wed, 08 Apr 2009 15:19:56 EST

One of top questions I've heard (over and over) lately has been: What about buying Citibank down here?

As little as two weeks ago, the financial services giant was trading at one dollar (in fact it dipped briefly to 97 cents).

So? How can we miss, right?

Well, I can think of few reasons why this may not be such a hotdeal. But before we get to that, did you ever read the first post Iwrote about Citibank? It was back in November 2007.

First, "word on the street" is the uptick rule may be reinstated.

If you were relentlessly selling short Citibank, the announcement ofthe return of the uptick rule ought to be enough to get you to coveryour short (buy back the stock you sold short). And while it'simpossible to tell, it's my guess we saw a lot of short covering thisweek.

Next, the CEO of Citibank, Vikram Pandit,circulated an internal memo to employees that stated Citi actually madea profit in January and February. That's good, right?

Maybe.

After all, the same company managed to lose $28 billion in theprevious quarter. Twenty-eight-billion-dollars! How can a companymanage (mis-manage?) to do that - in just a 3-month period? Mark-to-market had much to do with the write-downs they took in the previous quarter. And that rule is still in place, it has not been suspended. So, thecompany may still lose money for the entire quarter. Yikes.

What else? There are millions of new shares comingonto the market. Citibank is converting many of their preferreds intocommon stock. This dilutes the value of common shares already in themarket.

Anything else? Well, yes, maybe the worst of all. The company announced they are contemplating a reverse stock split. A study completed in 2008 showed companies that did reverse splits found these reverse splitsunderperformed the market by 50% (on a risk-adjusted basis) during thethree-year period after the action. "Reverse stock splits are a strongindicator the company is going to be a significant underperformerduring the near future," says Jim Rosenfeld, co-author of the study andan associate professor of finance at Emory University's GoizuetaBusiness School in Atlanta.

Many companies consider pulling a reverse stock split to avoidgetting delisted. But many wind up taking that path eventuallyanyway. Can you imagine Citibank getting delisted from the New YorkStock Exchange?

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Citigroup Considering Reverse Stock Split