As Stocks Tumble, the Ranks of Nasdaq’s Delisted Grow
Richie Rich, Casper the Friendly Ghost and other comic book characters controlled by the once highflying Harvey Entertainment company in Los Angeles were unceremoniously kicked off the Nasdaq Stock Market this year, as Harvey became one of a growing number of companies nationwide to be delisted.
The move can be the beginning of a death spiral for a company, as firms that lose their Nasdaq listings often find it difficult to be taken seriously by investors again.
“It’s certainly a negative to be delisted,” said David Bowers, spokesman for Harvey, which did not fight its eviction from Nasdaq only because another company is buying Harvey’s assets.
The crash of technology companies over the last year, and this year’s slide in many other stocks as the economy has weakened, have boosted the number of companies that no longer meet Nasdaq’s listing requirements.
Through March 19, Nasdaq had delisted 89 companies this year for noncompliance with market rules, compared with 27 in the same period last year.
When a stock is kicked off Nasdaq, it usually lands on the Over-the-Counter Bulletin Board. But that is considered the home of the most speculative shares. Often, analysts refuse to follow Bulletin Board-listed stocks, and brokers can’t recommend them to clients.
Some of the stocks being delisted would be headed for ruin even if they stayed on Nasdaq. That includes many Internet-related companies that a year ago were rocketing but now are headed for liquidation.
Many analysts believe that these companies went public before they were ready, without viable business plans, and are now simply being weeded out by the market.
“They IPO’d way too early. Then they got valuations that were insane,” said Bob Rodriguez, principal at Los Angeles-based First Pacific Advisors, with $3 billion under management. “It’s no surprise they are getting delisted now.”
Nasdaq companies delisted this year include BigStar Entertainment, a New York-based online seller of movie videos; Memphis, Tenn.-based PlanetRx.com, an Internet health-care site; and PopMail.com, an online fan club marketing company based in Irving, Texas.
BigStar found itself in danger of being delisted in December when its stock price plunged below $1 a share for more than 30 days. The company appealed to Nasdaq at a January hearing but was delisted Jan. 17.
BigStar officials did not return phone calls regarding their stock’s status.
More companies may be at risk of delisting because of tighter Nasdaq standards that took effect in 1998. Those standards resulted in a surge of noncompliance delistings in 1998 and 1999, though the total declined last year.
Under Nasdaq’s rules, a small company can be delisted if its stock drops below $1 for more than 30 consecutive trading days, if it has a market capitalization (stock price times number of shares outstanding) of less than $5 million or if the firm’s capital reserves are less than $4 million.
Many firms that are delisted fall into at least two of those categories. Once in violation of listing standards, companies have a grace period to try to fight a delisting.
“We apply our rules equally in good markets as well as bad markets,” said David Donohoe, counsel for Nasdaq, who attends hearings for companies fighting the delisting process.
In the case of Harvey Entertainment, Bowers said Nasdaq called the company, warned it was in danger of being delisted and asked if the firm wanted a hearing. But the company declined because it was in the middle of merger negotiations, Bowers said.
“We have no gripes with Nasdaq,” he said. “They handled it well.”
If the bear market on Wall Street continues, more Nasdaq companies will find themselves trading below the $1 level, said Fred Roberts, a longtime investment banker in Los Angeles who serves on Nasdaq panels that determine whether a company will be delisted.
“You are going to see more delistings based on price. When you have bear markets, obviously what you see is that companies’ stocks fall below the minimum price and market values fall below the minimum,” he said.
It’s likely that summer will bring another wave of delistings because they typically rise in May, June and the beginning of July. That seasonality stems from the fact that most companies report financial results on a calendar year basis, and those annual numbers get filed with Nasdaq between March 31 and April 15.
It’s difficult for companies to recover once they drop below listing requirements, Nasdaq’s Donohoe said.
A company facing delisting can try to merge or raise more capital, but in volatile markets both can be difficult to do.
Many companies in Nasdaq hearings argue that they just need more time for their stock price to rebound.
“In general most companies claim their problems are temporary and if they are given six months to a year, their prospects will recover,” Roberts said. But “that’s not what the [listing] rules are for.”
To fight a delisting, some companies attempt a reverse stock split--exchanging one new share for, say, 10 existing shares outstanding. Although the goal is to boost the stock price back above Nasdaq’s minimum, a reverse split doesn’t change a company’s financial picture and is often seen as a red flag by investors.
PlanetRx, for example, attempted a reverse split, but the stock went down anyway and was delisted. The company decided not to attend a Nasdaq hearing on the delisting.
Investors left holding the bag of a delisted stock often are undecided about what to do next.
Portfolio manager Rodriguez believes that investors in a delisted stock should check the company’s balance sheet. If revenue and cash positions are strong, debt is low and the company’s business plan is viable, investors should hold on, he said.
But if the financial picture is bleak, he said, investors may as well turn the stock into a tax shelter by using the loss to offset capital gains.
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Falling Off the Nasdaq
Fewer companies have been delisted from the Nasdaq Stock Market in recent years, but that is reversing this year, given the plunge in so many tech shares. Delistings can occur either because a firm is taken over or because the stock no longer complies with Nasdaq’s minimum standards. Nasdaq tightened listing standards in 1998, producing a surge in non-compliance delistings. Those delistings are rising again this year.
Total Nasdaq delistings each year, and the number delisted for non-compliance:
TOTAL 1996: 557 companies
Regulatory non-compliance: 200
TOTAL 1997: 688 companies
Regulatory non-compliance: 250
TOTAL 1998: 876 companies
Regulatory non-compliance: 596
TOTAL 1999: 873 companies
Regulatory non-compliance: 440
TOTAL 2000: 700 companies
Regulatory non-compliance: 240
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Source: National Assn. of Securities Dealers
