Exela Technologies (NASDAQ: XELA) stock should rise 20,000%, or 200 times, at the open today. This is not, in fact, a good sign. It's not a reversal of the capital destruction of the last few years, despite Exela sometimes achieving meme stock status. Actually, this almost certainly just presages further capital raises. Which are not something generally known to increase stock prices as they happen.
There is an underlying business within Exela, something does happen in there. Business automation essentially. Transaction processing, e enterprise information management and so on. All very much the bread and butter of how computing and outsourcing service businesses. But like most bread and butter businesses this is not high margin work. Which is where the Exela problem lies. When they were created and then spun off from private equity they were loaded with debt. Which does need to be paid off - high margins are useful in being able to do that. And if you've not got high margins then you'll struggle to be able to do that. Which is what has happened - Exela is, effectively, sinking under its debt load.
Exela Technologies share price from NASDAQ
That's splits adjusted in that chart there and yes, the price really has gone from $1,200 and change to under three cents a stock.
Something clearly needs to be done and that thing is a reverse stock split. Every 200 shares as of Friday become one share this morning. That's a 200 for one consolidation. The value of the corporation doesn't change as a result, the value of any individual holding doesn't, just the number of shares in issue and therefore the price of each individual share.
As to why do it? NASDAQ doesn't allow penny stocks to keep their listings. Just one of those cultural things, the thought is that penny stocks are the preserve of chancers like The Wolf of Wall Street. So, if your price is below that $1 minimum bid then you've got to do something to maintain the listing - the reverse stock split. Well, that's if you want to preserve the NASDAQ listing that is - being relegated to the OTC markets would make it much more difficult to raise more capital.
Which is what is really happening here. Exela doesn't really have a way out other than raising more capital. So, a consolidation to preserve the NASDAQ listing in order to be able to raise more capital. That is, there's a stock issue coming soon enough. This is not a positive for the Exela stock price.
Yes, it's true, Exela should leap by 20,000% this morning. On a real basis that's no change at all of course. And the reason they're doing the reverse stock split is likely to continue the downward pressure on the price.