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What's a Reverse Stock Split?

By Brendan I. KoernerPosted Thursday, Aug. 8, 2002, at 4:41 PM ET

Salon Media Group is asking its shareholders to approve a reverse split of the company's stock. What's a reverse stock split?

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A reverse split boosts a stock's price by reducing the number of available shares. Let's say an investor currently owns 1,000 shares of Salon stock, which trades at 8 cents per share. If a 1-for-20 reverse split is OK'd at Salon's annual shareholders meeting in September, that investor would suddenly own only 50 shares. However, the per-share price would soar to $1.60, 20 times its original value. Salon has yet to decide on an exact ratio for the split, but it will be between 1-for-5 and 1-for-50.

Reverse splits are common among on-the-ropes companies desperate to avoid penny-stock ignominy. The Nasdaq National Market aggressively delists companies whose share prices dip below $1 for an extended period, so reverse splits are often employed to avoid the ax. Just last week, for example, former tech darling MicroStrategy, whose shares once peaked at $333, announced a 1-for-10 reverse split to stay out of Nasdaq's doghouse. Salon hopes a reverse split will vault its stock over the $1 mark for at least 10 consecutive days, which would be enough to preserve its listing on Nasdaq's SmallCap Market. (Click here to read more about Nasdaq's listing rules.)

Struggling companies also hope their post-split, higher-priced stock will attract new institutional investors, many of whom are forbidden from purchasing shares valued at less than $5. But reverse splitting is a risky gambit, since it carries a last-ditch stigma. It may inflate share prices in the short term, but it doesn't address the fundamental problems that alarm fund managers.

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