It is rarely a happy occasion when a company announces a reverse stock split. In effect, this usually means that it is struggling to comply with minimum stock price listing requirements on a stock exchange.
This explains the poor performance of the genetic testing specialist GeneDx Fund (NASDAQ: WGS)which was trading flat on Friday, while the S&P500 the index recorded a gain of 0.8%. Although the reverse stock split was fully expected, few investors were happy with it.
That morning, before the market opened, GeneDx announced that its board of directors had approved a 1-for-33 stock consolidation, which will affect its Class A common stock. depending on the division will take place on Thursday, May 4th.
Although a stock split often affects sentiment about a company, it is important to note that it does not change its underlying capital structure. Its market capitalization remains virtually intact; only it is divided into more or less shares.
As is often the case with reverse stock splits, GeneDx makes this decision in order to regain compliance with the minimum offer price to remain listed on the stock exchange – in this case, the Nasdaq (NASDAQ:NDAQ). This piece of financial engineering was approved by shareholders earlier this month, although the exact ratio was left to the discretion of the board.
The result, the 1 in 33 distribution, is close to the middle of the previously proposed range of 1 in 10 to 1 in 50.
GeneDx has other issues besides weak stock price that necessitates a reverse stock split. The company is consistently in the bottom line, and it recently forecast revenue declines for 2023. It needs more than financial engineering to right its ship.
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Eric Volkman has no position in the stocks mentioned. The Motley Fool recommends the Nasdaq. The Motley Fool has a disclosure policy.
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