Reverse Stock Split

Tomorrow, Biotech firm Cell Therapeutics Inc. will hold a shareholders' meeting in Seattle, Wash., at 10 AM local time, to elect directors to its board, approve a reverse stock split, and conduct other business.

It doesn't appear that there will be any fireworks at this meeting, but I'm intrigued by the company's dual listing -- it is listed both on Nasdaq and on the MTA, the Italian stock exchanged headquartered in Milan. [For those who need to know what initials stand for in any language, the MTA is the Mercato Telematico Azionario.]

Looking at the Nasdaq one-year chart, I have to say: it isn't a pretty sight. A share of CTIC was worth $3.50 a year ago. It had a brief upward move to $5 in mid-July 2007. But it has been steadily downhill ever since, and at close of business yesterday that share was fetching just $0.52.

Hence the "reverse stock split," a strange expression but one to which the business world seems accustomed. I've always wondered, "why not call it a stock meld?" or some other word with a meaning antithetical to "split"? If a company has a stock split, and I own two shares, then tomorrow I'll own four. Presumably if nothing else changes in the meantime the price of a share of that stock will be cut in half by the split, too. If my company has a stock meld (aka a reverse split) and I own two shares, then tomorrow I'll own just one share, presumably of twice the market value.

This is a matter of cosmetics, but a share price of $1.04 looks better to many observers than a share price of $0.52.

It doesn't go that smoothly for everybody. As the proxy materials warn, the reduction in the number of shares will increase the number of shareholders who hold less than a “round lot,” or 100 shares. Typically, the transaction costs to shareholders selling “odd lots” are higher on a per share basis, so somebody is going to get hosed for this cosmetic improvement.

And it still sounds like a strange expression.