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The over-the-counter exchange has given new hope to companies threatened with delisting.
Alix Stuart, CFO Magazine
April 1, 2002
A posh Washington, D.C., hotel conference room, two businessmen, and a congenial lawyer were hardly what Tickets.com CFO Eric Bauer had been expecting for his hearing -- or interrogation, as he'd conceived of it -- before the Nasdaq Hearing Panel last May. After all, the company's stock share price, then just 48 cents, had been loitering below the Nasdaq National Market's $1 minimum for more than six months, and Bauer had already received a letter from the exchange threatening imminent delisting. The letter, although worded clinically enough, had been "a slap in the face," he recalls.
To Bauer's relief, the last-ditch plea for mercy turned out to be a lively, hour-long discussion of business strategy between the panel and Tickets.com's team of Bauer, CEO W. Thomas Gimple, and outside counsel Paul Rowe. The Nasdaq people "were very pleasant," says Bauer. "They were not necessarily the adversary as much as the facilitator."
In this friendly atmosphere, Bauer and colleagues presented a strategy to boost the ticket seller's share price within 90 days -- first by showing how operations were progressing against plan; second, by pointing to a $17 million recapitalization that Bauer had cemented with the company's original venture capital investors just days before the hearing; and third, by describing a 1-for-8 reverse stock split, slated for July. One week later, Nasdaq approved a 90-day reprieve. Tickets.com carried out its strategy, and in early March its stock was trading close to $4 a share. After that, however, the share price began sliding again. As of press time, the share price of Tickets.com had dropped to $2.22.
Such give-and-take between listed and lister will be repeated in months to come, as once-promising companies struggle to maintain their publicly traded status. In 2001, Nasdaq dumped 390 companies, including a number of outfits that rushed to go public during the bull market with little more than a high concept and a dubious business model. "Nasdaq's clearing out the riffraff," comments Paul Blumenstein, a partner with law firm Gray Cary, in Palo Alto, California, who has worked with four companies threatened with Nasdaq delisting. "But if you can make a reasonable case for why your stock is undervalued, they have some incentive to keep you on."
Indeed, some speculate that Nasdaq is feeling the same pain as its clients, given the 64.1 percent year-over-year decrease in net income Nasdaq reported in the third quarter. According to Securities and Exchange Commission filings, Nasdaq relies on annual listing fees for about 10 percent of its total revenues. So when the market relaxed some of its listing rules last fall, some saw an ulterior motive. "I think it was a business decision on their part," says Ken Janke, CEO of the National Association of Investors Corp.
But Nasdaq spokesman Michael DeMeo insists that the SEC-approved rule relaxation was "not because we're afraid of losing all those 'poorly performing' companies. I think those companies will eventually weed themselves out."
Instead, he says, Nasdaq is just trying to help its clients through the terrorism-exacerbated economic slump. "We're here to help the listed companies," says DeMeo. "We know that being delisted really hurts a company and its shareholders."
Reverse Split of Fortune
Making a case for continued listing usually starts with proposing a reverse stock split to boost the share price. While doing so often provokes an investor exodus that can pull the price back down, a reverse split has some chance of working if paired with positive news about operations. A reverse split without anything behind it is just an optical exercise," says Bauer.
E-commerce technology vendor Beyond.com won a stay of delisting from Nasdaq in March 2001 by first arranging a note exchange to bring the company's tangible net worth into compliance, then effecting a proposed 1-for-15 reverse split that took the stock price from 22 cents to $2.14. Despite its efforts, however, the company was forced to file for Chapter 11 in January 2002.
Beyond.com CFO Curtis Cluff thinks that Nasdaq acted responsibly in granting the extension. "The people we met with at the time recognized we had a history of executing on a plan," says Cluff, who notes the company had been improving its net loss and reducing cash burn every quarter for two years. "Notwithstanding the bankruptcy, there was a reasonably good chance of having a different result."
Moving early and quickly was key to convincing Nasdaq, adds Cluff. Beyond.com had projected the tangible net worth default three or four quarters ahead of time, meaning it was ready with a solution before Nasdaq entered the picture. "If you think at all that you might be facing this situation, you should probably already be planning for it," says Cluff. Bauer agrees, saying that Tickets.com probably would have taken the steps it did even without Nasdaq's prodding.
Not the End
To be sure, delisting is still a fearsome prospect for any company. It's often "one of the final steps in going out of business, the law that breaks the camel's back," quips Ron Gruner, president of communications firm Shareholder.com. Not only has Gruner watched numerous clients die a slow death, he experienced delisting firsthand as the CEO of supercomputer maker Alliant Computer Systems in the 1980s. Although Alliant successfully overturned its Nasdaq suspension, it ended up filing for bankruptcy less than two years later. "It was a struggle the whole way," recalls Gruner.
Academic research doesn't offer much hope, either. A study of 568 reverse stock splits executed by New York Stock Exchange, Nasdaq, and American Stock Exchange companies between 1990 and 2000 showed such stocks underperform shares of comparable control companies by nearly 2 percent a month. "I'd be wary of investing in these," notes study author Rodney Boehme, professor of finance at the University of Houston. "They offer returns that are statistically no different from Treasury bills."
Even the threat of being delisted "puts you in a weaker bargaining position," adds attorney Blumenstein. "It's going to be very hard to raise equity capital on favorable terms, or to sell the company on terms people are happy with."
All of which might make some corporate managers think twice about taking their companies public. Eric Bauer says the process of appealing Tickets.com's delisting was a strong reminder that a company can survive without the imprimatur of a stock market listing. "You get so wrapped up in the passion of the moment, you forget to think about what it really means," he says. "So I get delisted. Big deal. It wouldn't be the end of the world -- and certainly not the end of the company."
In the meantime, it seems Nasdaq is suffering through a delisting of sorts. Through April 26, 24 companies have launched initial public offerings in the U.S. this year. Of those, 16 have chosen to list their shares on the New York Stock Exchange (NYSE). Part of the reason for downturn on the Nasdaq: few investors are interested these days in tech stocks, Nasdaq's bread-and-butter. Moreover, the NYSE has relaxed some of its listing requirements over the past two years, and now allows units of companies already listed on the Big Board to list there as well.
So far this year, Nasdaq's biggest IPO was for JetBlue Airways. The JetBlue IPO was valued at $158 million. To date, the Citigroup spin-off of Travelers Property Casualty is the largest initial public offering on the NYSE in 2002. The value of that late March deal? $3.9 billion. That's a slight difference.
Sidebar: A Clean Slate
In the wake of September 11, Nasdaq has been in a particularly supportive mood. From September 27, 2001, to January 2, 2002, it suspended its policy of serving notice (the first step toward delisting) to companies whose stocks dropped below the minimum bid price of $1 for more than 30 consecutive business days or whose market cap fell under $50 million for more than 30 days. That decision saved at least 209 borderline stocks, according to Nasdaq's quarterly filings. When the requirements were reinstated on January 3, all issuers were granted a clean slate. What's more, any National Market company threatened with automatic delisting now gets an extra 180-day period if it phases down to the Nasdaq SmallCap Market before being officially consigned to the OTC Bulletin Board.
Of the major exchanges, Nasdaq has gone to the greatest lengths of late to retain its listees. By contrast, the American Stock Exchange has tightened its listing requirements, after the U.S. General Accounting Office took it to task for being too easy. According to a November report by the GAO, Amex officials' overly broad discretion meant that about a third of the exchange's new listings in the first eight months of 2000 did not meet its official guidelines (which are lenient enough--no minimum maintenance bid price is required). About 70 companies, or 10 percent of the exchange, were out of compliance in some way as of July 31, 2001; 32 of those companies had been struggling for more than a year.
Amex is now proposing to call its guidelines "standards," limit its discretion to list noncompliant companies, and "impose definitive time limits with respect to how long a noncompliant company can retain its listing," according to a letter from Amex to the GAO.
Meanwhile, the New York Stock Exchange has made no allowances for the recessionary environment, although a special committee organized in February is currently reconsidering listing requirements.