What is a Reverse Stock Split?
A reverse stock split is a type of corporate action that involves a company reducing the total number of its outstanding shares in the open market. The goal is to consolidate the number of existing shares. It’s also known as a stock merge, stock consolidation or share rollback. It’s the opposite of a stock split. In a stock split, a share is divided into multiple parts.
A reverse stock split doesn’t change a corporation’s value. However, reverse stock splits are usually done as a result of a corporation’s share value has lost significant value.
A biotech company has one million outstanding shares in the market trading at $10 per share. These outstanding shares are held by the shareholders whether individual or institutional investors. The biotech company wants to perform a 1-for-2 reverse stock split. This means merging 2 shares into 1 new share. This means after the corporate action is completed the company will have only 500,000 shares outstanding (1 million shares / 2) with each share valued at $20 ($10×2) each.
Before Reverse Split Market Cap = Original # of total shares x Earlier price per share
$10,000,000 = 1,000,000 x $10
After Reverse Split Market Cap = New # of total shares x New preice per share
$10,000,000 = 500,000 x $20