TCS Daily


Nothing Wrong With Breaking a Buck

By James K. Glassman - January 31, 2003 12:00 AM

One of the consequences of the 9/11 terrorist attacks, the recession, the three-year bear market and the impending war with Iraq is that investors have fewer choices. For example, between January 2000 and December 2002, the number of stocks listed on NASDAQ, the hot-white center of dynamic capitalism, has fallen by about 1,000, or more than 25 percent.

More than 800 companies were listed for the first time on NASDAQ during that period - an encouraging figure. But many more dropped off - because they merged with another firm or went out of business, or because they failed to meet the market's standards for corporate governance or financial strength.

After the attacks on New York and Washington, NASDAQ wisely eased one of its financial requirements - which had forced the de-listing of companies that traded below $1 per share for four months. Now, NASDAQ wants to extend that policy.

Frankly, I don't understand why NASDAQ - or the New York Stock Exchange, which has a similar policy - de-lists companies simply because their stock prices are low in dollar terms. It's a dubious measure even in the best of times.

Right now, investors need all the help they can get. Certainly, many decrepit companies richly deserve de-listing, but others simply need time for the economy to recover, geopolitical risks to die down and their own business strategies to pay off. De-listing consigns a company to something called the "bulletin board" - a dim purgatory that practically insures further stock price declines and, often, a trip straight to the netherworld of capitalism.

De-listing does the most harm to a company's loyal shareholders - the ones who are willing to stick with a company through thick and thin, to hold on during the bad times in order to reap the benefits during the good times.

To gain a listing on NASDAQ in the first place, a company needs, among other things, either $30 million in shareholder equity or $75 million in market value. Those are good standards for financial stability. The market's new proposal is that, under certain circumstances, if a company can maintain those levels, it won't be summarily de-listed just because its stock price has been lower than $1 a share. Instead, the company will be given up to two years, to get its price back up.

If it were up to me, I would eliminate the dollar requirement entirely. The price of a stock is completely arbitrary. If you were starting a company and needed to raise $1 million in equity capital, you could sell 10 million shares for 10 cents each, 1 million shares for $1 each or 100 shares for $10,000 each - or variations on that theme. Your choice would be strictly a marketing decision, not a substantive financial one.

Consider two U.S. stocks. Alleghany Corp. is a conglomerate with interests ranging from insurance to (literally) nuts and bolts. Alleghany was trading Thursday at $165.78 per share. The second is more familiar: Sun Microsystems, maker of workstations and servers. Sun, at the same time, was trading at $3.20.

Which is the larger company, with more financial resources?

Sun, by far. With 3.1 billion shares outstanding, its market capitalization is about $10 billion. Alleghany, by contrast, has only 7 million shares out, for a market cap of less than $2 billion. At last report, Sun had $9.8 billion in shareholders' equity; Alleghany, $1.4 billion.

By promoting the idea that a low dollar price necessarily indicates a dangerously weak company, exchanges do investors a disservice. Of course, it is often true that a 50-cent stock is close to worthless. But not always. Even at 50 cents (and let's hope it never gets there), Sun would be worth well over $1 billion.

In other countries, stock prices that we would consider low are commonplace. In Britain, for example, prices are quoted not in pounds but in pence. Cadbury Schweppes, for instance, the giant food products company, was recently trading at 332 p., or about $5.47, a share. BT Group, the country's main telecom firm, was trading at 166 p. And several components of the FTSE 100, Britain's equivalent of the Dow Jones Industrial Average, were trading at around a buck, including Invensys at 48 p. (79 cents).

It's true that "penny stocks" acquired a bad name, especially in the 1980's when unscrupulous promoters defrauded innocent investors. Exchanges need safeguards and tough enforcement, and both the NASDAQ and the NYSE have shown they are serious about weeding out bad actors. But breaking a buck should not mean automatic exile to the bulletin board. There's nothing at all wrong - and a good deal right - when healthy companies trade at low, affordable prices.
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