The company said on Friday that Bed Bath & Beyond is planning a reverse stock split, sending shares into a decline in after-hours trading.
In a reverse stock split, each outstanding share is converted into a fraction of a share. So if a company announces a reverse 1 share for 10 share split, all 10 shares will be converted into 1 share. This step is generally taken to increase the share price, according to the Securities and Exchange Commission.
“Our proposal for a reverse stock split will enable us to continue rebuilding liquidity to implement our transformation plans and better position the company financially,” CEO Sue Goff said in a press release.
The move comes just weeks after Bed Bath completed a public stock offering to raise more than $1 billion. Stock offerings inject more shares into the market, thus diluting existing shares.
Announcement – scroll to continue
A reverse stock split will have the opposite effect. The proposal would reduce the number of outstanding shares, Bed Path said in a filing with the Securities and Exchange Commission.
The proposal could also improve the perception of the company’s common stock, as it has the potential to drive up the trading price, Bed Path said in the filing. This, in turn, could help increase broker interest, especially among institutional investors and mutual funds, the company added. A higher share price can also help reduce a stock’s volatility, according to the filing.
However, the move comes with some risks, including that a reverse stock split does not increase the price of the common stock or reduce the publicly traded market for the shares.
Announcement – scroll to continue
Additionally, markets tend to view reverse stock splits negatively, which means that investors could lose money as a result of fluctuations in post-split trading prices, according to the Securities and Exchange Commission.
“Often companies that undertake a reverse stock split are in some financial straits, with bleak prospects for recovery,” explains a blog post from Titan Global Capital Management. “This may prompt investors to sell and move forward.”
Holders of the company’s common stock as of business close on March 27 will be allowed to vote on the proposal at a special shareholder meeting later this year. Bed Bath said the time, location and other details of the private meeting will be announced at a later date.
Announcement – scroll to continue
The company said Friday that the Bed Bath & Beyond board of directors has not yet determined the proportion of the proposed split, but that it would range from one-for-five to one-for-10.
Bid Path said the reverse stock split “will have no effect on the actual or intrinsic value of our business or the shareholder’s relative ownership in the company.” Nor will it have any impact on the company’s business operations or outstanding debts.
Write to Sabrina Escobar at [email protected]