Citi Mulls Reverse Stock Split: Anger and Applause

Posted by: Lauren Young on March 20, 2009

The blogosphere is filled with opinions from folks who are either angry or applauding news that Citigroup (C) is considering a reverse stock split to boost its share price. Citigroup closed up slightly Friday at $2.62.

While you often see reverse splits from smaller companies in trouble with low share prices, “you rarely see it from companies that are the size of and that are important as Citi,” writes 24/7 Wall Street. Dave, who commented on the NYT’s DealBook blog, captures the sentiment of some frustrated retail investors who simply want to short Citigroup’s stock: “I hope it goes over $5 after the reverse split because my broker won’t let me short unless its over 5.”

As for my own post, Is Citi’s Reverse Stock Split a Smart Move?, the comments range from laudatory to angry to constructive. For example, reader Hugo suggests “demerging” (read: breaking up) up Citigroup into 100 separate business units. “Then let them sink or swim or be bought out. It’s likely there are highly profitable parts of Citi that could be worth more than $3 a share right now…” Hugo says.

Several readers also mentioned that a reverse split would help attract institutional investors who are unable to invest in a company when the stock falls below a certain level, such as $5.

I’ve done a considerable amount of digging on the threshold rules for institutional ownership in the past week. As far as I can tell, it is an urban myth that institutional owners must sell when a stock falls below a certain price, such as $5 or $20. (I checked this out with the largest mutual fund and pension funds.) If you know of a mutual fund firm or pension fund with specific threshold rules requiring funds to sell stocks when the price goes below a certain watermark, please tell me who they are.

And tell us what you think about Citigroup’s future, too. Is a reverse stock split the best way for Citi to increase its stock price? If not, what’s the right way to make this company more appealing to investors?

Reader Comments

Joe

March 21, 2009 2:54 AM

Citi should simple put all plans on hold and broker a deal to buy the goverment interest on a delayed payment plan. The idea of generating more stock to sell and at the same time doing a reverse is inane. It only robs the small investor of most of his ownership while increasing the coffers of the execs bonus options.

JB

March 21, 2009 11:09 AM

I don't think a reverse split will make this stock considerably more attractive to investors. JP Morgan stock closed yesterday at 23.15 a share. The stock has remained largely at this price for a while now, even after banks, namely BAC,Citi and JPM reported more positive news that they were profitable for the first two months of this year. BAC and Citi stock soared on the news while JPM trickled upward. Large, institutional investors are apprehensive to say the least when it comes to investing in financials. Yes, some institutions have stayed with JPM, buoying its price, but I do not see its price seriously trending upward (i.e. it is not attracting new investors) until there is REAL assurance out there that the worst is behind these companies. If Citi reports a very successful first quarter, surprising investors more than they already have, they will see their stock price rocket past 5. A promising 1st and second quarter could yield a stock price challenging 10/share. Furthermore, any decisions should be deferred until Geithner unveils his plan. A promising plan with good first quarter results could result in a stock price that is significantly "more attractive." If congress enforces the uptick rule, the idea would become more palatable as well.

tony sacco

March 21, 2009 9:40 PM

22 years ago I retired from Citi after 42 years with them, I'm still holding on to their stock and as a loyal worker, I will go down with the ship.

Don

March 22, 2009 12:28 AM


Reverse splits seldom lift stocks for long and the shorts will continue to feast.

steven tedner

March 22, 2009 12:34 AM

Citigroup's current situation constantly reminds me of the many corporations that have gone down despite government intervention.
Many Asian corporations that have received government support during the asian financial crisis have sold most of their business divisions while raising capital by diluting their share by a tremendous factor.
Most of these companies still exist so in a way they have "survived", but they are no longer as good/big of a corporation they used to be.
Citi epitomizes that same example. Citi has already diluted their shares so much by government intervention and common shares will eventually be diluted when the conversion is completed (7.31 to 1).
In terms of their business; they sold half of Smith Barney and they are pursuing to sell Nikko Cordial and Banamex for a cheap price.
So the low price/bookvalue that used to attract investors is not true anymore once these asset sales are completed.
The companies that can only weather this out are the ones that are not diluting their shares by raising capital.
If you're still not convinced, look at Aozora bank (used to be Nippon Credit Bank). It's been almost 20 years since the blow up, and they are still striving to break-even.

Still want more? Hynix. Since breaking apart from Hyundai group in 1998. They have been bleeding their guts out. The best news out of the company so far was that they were close to breaking even in the fourth quarter of 2008.

Sooner or later it will all boil down to the issue of liquidity and when that happens, the government will face a bigger issue.

Although, I must say things look like they're starting to pick up in the real estate market. i just hope the cringing inflation won't come back to bite us again. Crude at $51/brl seems very threatening in this climate.

Coupled with rising unemployment, the artificial market that the government is trying to support with removing mark to market seems ever so dubious. It could have worked a year ago, but now it's too late. Even if it worked a year ago, we would have faced an even bigger inflationary pressure today.

This is a very good opportunity to reset the entire system and build a strong fundamental economy that will bring us back on track and frankly, it's the only way it's going to work.

Ambar Bansal

March 22, 2009 10:45 AM

It is common that after reverse stock split, the price falls. It seems no investor should buy Citi today, as after reverse stock split, the price will fall further to today's equivalent of 0.5 or lower. Here is another problem with the conversion of pref shares ~ Citi would have outstanding shares of 21 bn. Citi's earnings power is in $10-$15bn range (probably in 2012-13). This means EPS of $0.47-0.71. Apply 7 multiple, the max. price anybody should expect to sell at is $3.29-$4.97. Investors who probably are holding this stock at a price higher than this range, would be better off selling and moving on to something else. This price range is pre reverse stock split. So, when Citi stock price falls after reverse stock split, investors will lose money further.

VeeKay

March 22, 2009 7:36 PM

They say Citi is too big to fail. So lets break it up into smaller parts so that none of them is too big to fail!!
Let the good ones survive and the others die...and the same for AIG and BofA too.

Thomas Joseph

March 23, 2009 8:54 AM

stock splits may cause investors to expect more about how the company performs. If these expectations are not met investor confidence may be shaken and the result could be a further drop in share prices.

The bottom line is a stock split does nothing to affect the worth or performance of a company. It may be nice to own more shares, but in the end your 2 five-dollar bills are still worth the same as your ten-dollar bill.

sd

March 23, 2009 10:38 PM

I worked for Citigroup for 15 years. 1/3 of my 401K is in Citigroup stock. When I left there 2 years ago the stock was $55 a share. How do you think I feel about it now. And just how do you think I feel about a stock split at this point.

mattmcalcait

August 24, 2009 4:26 PM

I am a vigin to playing the stock market. My husband and I are a young couple (24 yo) that had a few dollars we would not miss and invested in citigroup.We bought 1310 stocks when it was 3.50 a share. I think i understand that the split will mean that we will receive 1 share per every 5 shares owned. Is this correct? Alos..will citigroupp stock crash after this transaction. Like will people sell quickly after? We are not missing the money invested, so should we just sit on it a for about 10 years or so!!! HELP ME??? Don't know how to get the most bang for my buck! All input will be greatly appreciated!!!!

Mary

August 25, 2009 11:36 PM

I need some advice. My husband and I are a young newly married couple and we invested in Citi Group when it was
3.50 and bought 1350 shares. Will this split be a positive turnout, or should I take my little earnings and run? We don't need the money at this time, but I would also hate to see it flush down the drain. Any advice would be greatly appreciated!!! Please.....help.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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