Key points:
- Exela Tech's nominal stock price is up 1,270%
- This is actually a 35% fall in XELA's real stock price
- Reverse stock splits don't always work out as hoped
Exela Technologies (NASDAQ: XELA) stock has achieved the rather unlikely feat of dropping 35% on the completion of a reverse stock split. This isn't what was intended at all of course but it is what seems to have happened. History isn't, perhaps, on the side of XELA stock anyway, the price has fallen 99.5% since the addition to the market 5 years back. This latest change doesn't exactly improve matters either. For the aim of a reverse stock split – consolidation to Brits and possibly Canadians – is to increase the real stock price, not just the nominal. So, gaining a 35% decline in the real price from the reverse stock split – no, that's really not what is intended.
But that is what Exela stock has managed. Last night the stock was trading at 15 cents. Then in comes the one for twenty (1:20) reverse stock split. The XELA stock price should, therefore, rise 2,000%. The only thing that has changed is the number of shares in issue, 20 times fewer – therefore each share should be worth 20 times more. The target price for Exela post-consolidation is therefore $3. With a current price of $2.11 (at pixel time) this is thus a 35% or so decline in the real price even as we get that 1,270% or so rise in the nominal price. Really, just not what people were hoping for.
As to why the consolidation this is about the NASDAQ minimum pricing rule. Allow a stock price to languish below $1 for too long and the NASDAQ quote will be taken away. That would mean falling back to the less liquid OTC markets, where capital is much more difficult to gain. So, a change that leads to being able to stay on NASDAQ should – all else equal – increase that real, not just nominal, price. It hasn't, quite the opposite, so far at least this should be considered a failure.
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As to why there are stock splits, or reverse ones – consolidations – the answer is fashion, nothing more. There just does tend to be a belief in New York that share prices should be between $10 and $100. Lower than that and it's a risky, speculative stock. Under $1 and it's a “penny stock” which of course it is by definition. As such it's not to be allowed on any of the grown up exchanges. The proof that this is all fashion is that in London the price range is £1 to £10 for a solid and dependable stock. Which is why American Depositary Receipts (ADR, or sometimes ADS) tend to be 10 pieces of the London stock, to hit that desired price range in each market.
Fashion may seem silly but then tell that to the people who go buy clothes – it's important at times. Conforming to fashion should – should – raise the price of the company as a whole. But here, with Exela, that's obviously not true. Increasing the nominal price, retaining the NASDAQ quote, seems to have led to a loss of value. Which isn't, when we come to think of it, a vote of confidence in the long term prospects for XELA stock.