2HRS2GO: Market keeps buying into splits

3 min read

Here's some New Economy math: division now equals multiplication.

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Redback Networks (Nasdaq: RBAK). NaviSite (Nasdaq: NAVI). Breakaway Solutions (Nasdaq: BWAY). Engage Technologies (Nasdaq: ENGA). Lam Research (Nasdaq: LRCX). Covad Communications (Nasdaq: COVD). China.com (Nasdaq: CHINA). The now-dotcomless Infospace (Nasdaq: INSP). Ariba (Nasdaq: ARBA).

They have almost nothing in common (NaviSite and Engage do share CMGi (Nasdaq: CMGI) as a parent), but in the past week all nine followed the same Wall Street book: the Stock Split Bible.

Splits allegedly make the share price cheaper, which theoretically makes the stock accessible to more investors. The sudden doubling of shares outstanding makes the stock more liquid.

But we all know it's a symbolic gesture more than anything else. It's a sign that says "We're feeling great". It provides the appearance of doing something to extend shareholder value without actually doing anything.

Not that there's anything wrong with gestures, in and of themselves. But stocks like the ones mentioned above are so hot that efforts to hold prices down are negligible. The split news itself drives more buying, thus making the stock more expensive before the split.

So dividing your stock really means multiplying its price.

Take Redback as an example. On July 22 the company announced its first 2-for-1 split. RBAK shares jumped 14 percent the next day. By the time the split actually took effect in August, the stock price had risen 45 percent.

Of course, companies nowadays know how the market will react. That's probably why the timing and announcement of splits have changed.

Not so long ago, you could count on a company to split its stock when the price reached a certain point. Microsoft (Nasdaq: MSFT) used to announce a 2-for-1 whenever the share price was about to shoot past the 100 mark.

Now companies take the opposite tack with splits. Instead of using them to moderate the stock price, splits are packaged to maximize the impact of other positive news or lessen the pain of possibly negative announcements.

So Redback approves a 2-for-1 split on the day its merger with Siara is finished. NaviSite announces better than expected second quarter results and a follow-on stock offering and, by the way, a 2-for-1 division. Covad's 3-for-2 came sandwiched between an agreement with DSL.net (Nasdaq: DSLN) and the acquisition of LaserLink.net. China.com's 2-for-1 arrived just before the IPO of its hongkong.com unit.

Juicing strategic news with stock manipulations is nothing new, but it has grown more prevalent. So much for the executive cliche, "We'll just run our business and let the market take care of itself."

Everyone knows that kind of CEOspeak is merely a smokescreen also -- but these stock games make it even more transparent.

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  • BellSouth
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    But I wonder if that idea wasn't planted by people with a vested interest in BellSouth. After all, their company has been left by the wayside amid all the telecom wheeling and dealing over the last couple of years.

    Call me overly skeptical if you want, but other than cash and a market that's relatively minor in the global picture, what does BellSouth bring to the party? And if cash is the big hurdle, aren't there are other players that can add bring as much money as BellSouth and a broader international reach? 22GO>