Bed bath and beyond
is planning a stock split, the company announced on Friday, sending shares tumbling after hours trading.
Bed bath and beyond
(ticker: BBBY) the stock fell nearly 20% to 83 cents.
In a reverse stock split, each outstanding share is converted into a fraction of the share. So, if a company declared a one-for-10 stock split, all 10 shares would be converted into one. This decision is usually made to increase the price of the stock, according to the Securities and Exchange Commission.
“Our proposed reverse stock split will allow us to continue to rebuild cash to execute our turnaround plans and better position the company financially,” CEO Sue Gove said in a press release.
The move comes just weeks after Bed Bath completed a public equity offering to raise more than $1 billion. Equity offerings inject more shares into the market, diluting existing shares.
The reverse stock split would have the opposite effect. The proposal would reduce the number of shares outstanding, Bed Bath said in a filing with the SEC.
The proposal could also improve the perception of the company’s common stock, Bed Bath said in the filing, as it will likely drive up the trading price. This, in turn, could help increase broker interest, especially among institutional investors and investment funds, the company added. A higher stock price could also help reduce volatility in the stock, according to the filing.
That said, there are some risks involved with this move, including that the reverse stock split will not increase the price of common stock or decrease the overall stock market.
Additionally, markets tend to view reverse stock splits negatively, meaning investors may lose money due to post-split trading price fluctuations, according to the SEC.
“Companies that perform reverse stock splits are often financially distressed, with dim prospects for recovery,” says a blog post from Titan Global Capital Management. “It can encourage investors to sell and move on.”
Holders of common stock in the company at the close of business on March 27 will be allowed to vote on the proposal at a special meeting of shareholders later this year. The time, location and other details of the special meeting will be released at a later date, Bed Bath said.
Bed Bath & Beyond’s board has yet to determine the ratio for the proposed split, but it will be between a one-to-five and one-to-10 ratio, the company said on Friday.
The reverse stock split “would have no effect on the actual or intrinsic value of our business or a shareholder’s proportionate ownership in the company,” Bed Bath said. It will also not impact the company’s business operations or unpaid debts.
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