WeWork (NYSE: WE) stock is down 19.55% on the back of their reverse stock split yesterday. WE stock should - should, in theory - have gone the other way because a stock split - whether reverse or forward - is supposed to be value additive. That’s the point of doing a stock split after all, to increase the valuation of the company stock. As here with WeWork this sometimes doesn’t work.
We noted the reverse stock split yesterday at WeWork: “The specific problem to be solved today is that WeWork is in danger of losing the NYSE listing. It’s necessary to maintain a minimum $1 bid price to stay on the major markets. This is somewhere between fashion and culture - penny stocks are just viewed as not being serious. So, something must be done.
That something is simply to declare 40 old pieces of stock as one new share - a one for forty reverse stock split: “WeWork WE.N said on Friday it will proceed with a one-for-forty reverse stock split of its outstanding class A and class C common stock, which was previously authorized by shareholders. The reverse stock split will be effective at 4:01 p.m., Eastern Time, on September 1, 2023.” That’s after close on Friday, then Labor Day, so this morning’s open is when the price change takes effect.”
WeWork stock price from Google Finance
As we say, this should be value additive. WeWork keeps the NYSE listing, it’s worth more than if it falls down to the OTC markets - liquidity is, after all, valuable.
There’s also another way of approaching stock splits - the number illusion. It’s well known that we humans don’t think wholly logically about nominal numbers. That’s why things are priced at $399.99, not $400. It’s also true that we have ideas in our heads about what stock prices “ought to be”. Penny stocks are the homes of charlatans so any penny stock - not run by charlatans - is devalued because of that association. For forward stock splits we see above $100 as being “expensive” for a stock price. So, if we reverse split, or in the second case forward split, then the market capitalisation of the company should increase by whatever amount that number illusion was depressing it.
Therefore the WeWork reverse stock split should have increased the real stock price - it didn’t, it dropped by 20%. The best assumption is that we all know that WeWork is a dog. We’ve indicated that we think it’s going to go to zero - an opinion, not a fact. So, the number illusion works the other way. At 15 cents, well, that sounds about the right price for a dog, right? $4? No way, that’s too high.
It’s really is just one of those things. We humans are not necessarily entirely rational about nominal prices. Therefore reverse stock splits sometimes do lead to further waves of selling.