In 1999, LeGrand Young, vice president of administration, secretary and general counsel of Connecticut-based Raytech, found his company caught between a rock and a hard place. The NYSE had just announced a change to its maintenance listing standards. Raytech’s market cap had fallen below the new $15 mn cut-off – indeed, the company was in bankruptcy – and the exchange gave it 18 months to turn itself around or be delisted.
Seventeen months and 28 days later, with just 48 hours to spare, Raytech come out of bankruptcy and met its market cap requirements. ‘We barely squeezed in under the wire,’ recalls survivor Young. ‘We came out on April 18, 2001 and the 18-month deadline was April 20.’
Raytech’s complex plan – which included setting up a trust and handing over 90 percent of the company to it – succeeded. But it took a lot of dialogue between the company and exchange officials before the plan got the green light from the NYSE.
What do you do if your company’s listing is threatened? ‘This is not a time to go hide under a rock, nor is it a time to hype your stock,’ warns Jim Flanagan, president and founder of Massachusetts-based IR Strategic Advisors. ‘Anybody who advises a company to go silent is giving bad advice. Those companies that want to be successful and fight for their listing life need to keep management in front of investors and tell their story.’
But failure to meet listing standards is, indeed, a sad story. Unfortunately in this down market, company after company has fallen below those standards, eventually losing their exchange status. Sometimes they trade elsewhere – where listing standards are lower – and sometimes they plunge into Chapter 11. Delisting is indeed serious stuff.
In the first half of 2001, Nasdaq’s regulatory delistings (due to non-compliance) hit 244, outpacing the full-year 2000 total of 240. At the NYSE, however, where listed companies tend to be somewhat larger and more established, officials claim this year’s rate of delistings is virtually unchanged from last year, when about 65-70 companies were dropped.
A Nasdaq source says the two most common deficiencies are failure to meet bid-price or net-worth requirements. Meanwhile, one NYSE official reports that struggling companies ‘usually wind up, more times than not, triggering more than one of the standards.’
Both Nasdaq and the NYSE have formal procedures with pre-set timelines that allow a company to appeal against the prospective delisting and implement a plan to correct the deficiency. Public disclosure of a company’s failure to comply with listing standards is absolutely mandatory. Many wonder whether disclosing a company’s tenuous listing status only makes a bad situation worse. The experts say that’s probably not the case. According to Geoffrey Buscher, president and founder of SBG Investor Relations, a Seattle, Washington-based IR consulting firm, ‘When a company is in danger of being delisted, particularly a company whose stock is trading below a dollar, it’s generally not a random occurrence. Chances are where there is smoke, there is probably fire.’ Buscher says often stock price is just one of the fires the company is trying to put out.
Glenn Tyranski, vice president of financial compliance at the NYSE, confirms this theory: ‘If business is spiraling, bad news is happening, markets are declining, if there are heavy losses and write-offs and bank agreements are falling behind or in default, delisting is one of the series of things that could happen.’
After the fall
A few words of caution for those companies under threat of delisting: don’t hinge your rebound on a PR campaign. IROs who present exchange officials with remediation plans dependent on media glitz get an unfaltering thumb’s down. ‘A plan based on favorable expectations such as a news announcement in a press release won’t work,’ says a Nasdaq official. ‘We can’t tell how the market will react.’
‘Get your ducks in a line before you go in to appeal,’ cautions Jeff Lambert, a principal of Lambert Edwards & Associates, a Michigan-based IR counselor. To win a temporary stay of execution for your company’s listing you need to present your exchange with a remediation plan that focuses on getting your company back into compliance. First you need to get approval, then the plan needs to work. There is no panacea. Every recovery plan is tailored meet that company’s specific needs.
The NYSE’s Tyranski says ambitious companies will organize their affairs and put together a plan before they meet with the exchange. ‘Those that are moving along have hired advisors,’ he says, and may have also prepared a roadshow; whereas those that haven’t adequately prepared can ‘chew up quarters pretty quick,’ he notes, and face a harder climb out of their precarious situation.
‘I don’t think we would have been as successful had we gone in with a plan that we did not feel we could deliver,’ says Robert Lafferty, vice president of finance, CFO and treasurer at Ohio-based Huffy Corporation. Huffy’s business plan led to the achievement of both market capitalization and shareholder equity in excess of $50 mn. In March 2001 Huffy regained its place on the board at the NYSE, well ahead of its 18-month deadline.
Another recovery plan might include a merger, as in the case of California-based E-Stamp Corporation. In June, Nasdaq granted the company approval to continue trading while its planned merger goes through, so long as it demonstrates a post-merger bid price of at least $1 per share.
‘Don’t become an enemy because you think they are trying to kick you out,’ volunteers Raytech’s Young. ‘Work with them as best you can. You still have to meet their requirements. They are not going to bend the rules – they can’t.’
When you are in remediation mode, it is best to be open and to identify the things that jeopardized the listing in the first place. ‘If you are able to separate yourself from that, you can have a new start,’ advises Rich Simonelli, senior vice president of PR firm Manning Selvage & Lee. ‘It’ll take time to build up trust from investors again, but I think that’s a slow process to begin with.’
Simonelli admits some companies have a lot of prestige associated with their listing. ‘So when the exchange says they have fallen below its criteria, that’s a very serious issue for them.’
Forget the prestige, Jeff Lambert suggests. Don’t sacrifice the business to save the listing. ‘Listing on a major exchange should not come before all else. Ultimately there has to be shareholder value created in the listing, so if you are going to go off and do something you traditionally wouldn’t do, pause before you act,’ he says.
Reaction
What’s a company to do when threatened by a delisting? By far the best defense is to implement a solid IR program and keep alert for danger signals.
Know the standards – IROs need to know on an ongoing basis what the listing standards are. Keep an eye on trading – IROs also need to keep a vigilant eye on trading. If your stock trades below $1 on Nasdaq for more than 30 consecutive days (or if it can’t maintain an average share price of $1 for a similar period on the NYSE), regulatory action is imminent. If you don’t take action before your stock is quoted in pennies you’ll have a tougher job.
Consider new strategies – Jim Flanagan, president and founder of IR Strategic Advisors, urges IROs to start thinking about different strategies if they see their stock price heading into a profile below $5 a share. At that point, says Flanagan, ‘Many of the national brokerage firms will cease sell-side research coverage, and no new firms will pick you up.’ Many institutions have a policy for their investment requirements, and a listing on a major stock exchange is often one of them. One remedy Flanagan suggests is a ‘down-market strategy,’ which may include going to specialized institutions such as hedge funds, as well as courting online retail investors.
PR Stigma
Public companies pass a rigorous ‘admission test’ to attain their listing and then comply with strict, albeit more relaxed, maintenance standards. ‘We realize that companies are subject to the vagaries of the business cycle, so we give them room to accommodate the ups and downs,’ says a Nasdaq official. The NYSE takes a similar approach to establishing initial and continued listing standards.
However, this practice may heighten the public relations impact of a threatened listing. ‘If you’re in a delisting mode, your company has changed drastically from where it was when you got listed,’ says Rich Simonelli, senior vice president at New York PR firm Manning Selvage & Lee. Simonelli says the threat of prospective delisting sends a warning signal that your company can potentially fail. ‘It’s not a good situation. Whether it’s the economy that has forced the company or its industry not to perform, or the company has done a bad job of managing, it is an indication that there is a failure.’
Falling down and being disqualified from one of the exchanges is definitely a tough position on the PR side, Simonelli asserts. He advocates open communications that clearly identify what went wrong and what corrective measures management is taking to remedy the situation and move forward.
To split or not to split?
One recovery plan might include a reverse stock split. However, if your stock trades at 50 cents a share and you do a one-for-three split, there’s no guarantee that each share will trade at $1.50 afterwards. Frequently, share prices continue to drop after a reverse stock split, so you could end up damaging long-term shareholder value. Neither Nasdaq nor the NYSE takes an official position on reverse stock splits. However, the NYSE’s vice president of financial compliance, Glenn Tyranski, observes, ‘It makes sense if it is part of the whole recovery process – if it’s done as part of a bank refinancing, or a merger or any sort of recapitalization.’ It typically doesn’t work, Tyranski adds, if it’s done merely as ‘window dressing’.
In 1999, Lambert Edwards & Associates’ Jeff Lambert succeeded in getting Nasdaq to sign off on a remediation plan for his client, Margate Industries, that included a one-for-three reverse stock split. ‘We went in with our slick PowerPoint presentation,’ recalls Lambert, ‘but they were much more interested in the viability of our future prospects, our projections for the quarter, and whether or not we thought the split would stick.’ The company successfully implemented the plan and saved its listing. Lambert attributes the positive outcome to the stock split combined with proactive IR, which included special communications such as a shareholder letter, discussions with market makers and an analyst meeting.
