Virgo Galactic (NYSE: SPCE) Shares fell 16.5% at 10:40 a.m. ET Friday morning on what should have been ho-hum news. This morning, the company filed its regularly scheduled “Convocation for the Annual Meeting of Shareholders” (to be held on June 12). On the agenda: electing directors, approving an accountant and determining the salaries of directors.
Oh, and one more thing.
Virgin Galactic will propose a reverse stock split.
What will a reverse split do?
As the name suggests, a reverse stock split is the opposite of a regular stock split. Instead of getting more shares, you end up with fewer. Virgin Galactic will propose a stock split of 2-for-1 to 20-for-1. So if you own 1,000 shares of Virgin Galactic today, you could only own 50 once the reverse split takes effect.
Investors are angry about this prospect, even though it will not affect the actual value of an investment in Virgin Galactic. Whether you own 1,000 shares worth $1 each or 50 shares worth $20 each, you own $1,000 worth of stock. (Unless, of course, the stock price drops 16.5% after the announcement, as just happened.)
Why a Reverse Split? And why now?
Why did Virgin Galactic take this risk? Basically, because the stock has been trading below $1 per share for the past three days. NYSE rules generally require stocks to maintain an average closing price of $1 per share or risk being delisted.
So Virgin Galactic is trying to get ahead of this problem by ensuring that its shares won’t flirt with the $1 threshold for days, weeks or months at a time. A reverse split will increase the value of each share to somewhere between $2 and $20.
As crazy as it may sound to investors upset by today’s share price drop, this is actually a smart move by management.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Why Virgin Galactic Stock Just Crashed 16.5% was originally published by The Motley Fool
