Travelzoo's Splitting Headache
Although not uncommon, the reverse/forward split Travelzoo is effecting is rare enough to make it an oddity. While the reason for the move is standard -- saving money on account administration -- the online travel site's situation is unique in that it was self-inflicted.
Travelzoo will effect a 1-for-25 reverse stock split that will be immediately followed by a 25-for-1 forward split. Management has estimated it will reduce the number of shareholders from more than 90,000, to fewer than 10,000.
Most investors are familiar with a regular or "forward" stock split. In a 2-for-1 split, for example, a company gives you an extra share of share of stock for each one you own. In a 3-for-2 split, you get 1.5 for every share you own. At the same time, the price of the stock is reduced by a like percentage. In the 2-for-1 scenario, the stock price is cut in half.
While essentially a zero-sum transaction -- nothing really changes except you have more shares at a lower value -- splits are often interpreted as a bullish signal and stocks will often rise in value following the announcement.
On the other hand, a reverse split is often done by companies in financial trouble. Their stocks have fallen dangerously low and they might be threatened with a delisting by the stock exchange because the price is too low. So companies move their stock in the other direction, reducing the number of shares outstanding and raising the price. You'll often see announcements of a 1-for-100 reverse split, meaning that for every 100 shares you own, you'll get one in return. The reverse split boosts the share price by a like percentage.
A reverse/forward split like Travelzoo's is an altogether different animal. It's usually an attempt to shed investors who own just a handful of shares, which admittedly can bleed a company with the drip, drip, drip of accounting costs. Thinning the herd, as it were, lets a company save a few dollars.
Some companies like Disney have tried to entice small shareholders with offers of cash to give up their stakes. Because the entertainment powerhouse is a favorite stock to gift as a means of introducing kids to investing through sites like OneShare.com, it can build up a substantial following of very small shareholders.
Other companies offer perks to those who own greater numbers of shares. For example, Carnival Cruise Lines offers investors owning 100 shares or more discounts on cruise ship staterooms, while racetrack operator and Kentucky Derby owner Churchill Downs gives 100-share owners two free admission passes to any of its tracks. Ford gives 100-share investors access to its "X-Plan," allowing them to buy Ford vehicles for just a little above employee pricing.
Travelzoo brought about its large number of small stakeholders by itself. In the late 1990s, before it became a publicly traded company, it offered three shares for signing up for a deals newsletter, and seven more if you referred a friend. Some enterprising "investors" even created websites dedicated to referring people to Travelzoo to earn more shares. It apparently worked, as the travel deals site anticipates it will fractionalize approximately 655,000 of its outstanding shares.
While gimmicks abounded back in the tech boom era, Travelzoo was rather unique but took on the headache of having to do the actual accounting for the shares itself after it went public. This was because the stock certificates weren't held at a brokerage firm, as is most often the case when you buy and sell stocks, but rather were held by the company. So getting rid of all of these small shareholders is really a process of streamlining its accounting without having to change much of anything else.
As reader definer told me, it will simply put an extra $200 in his pocket for having done nothing more than sign up for a newsletter many years ago, and really, there's nothing to prevent him from turning around and using that money to buy a handful of shares again.
The reverse/forward split may reduce Travelzoo's accounting costs for a minute, but over time it could see that cost rise again, and the strategy may prove ultimately fruitless.
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The article Travelzoo's Splitting Headache originally appeared on Fool.com.Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Apple, Ford, and Walt Disney. The Motley Fool owns shares of Apple, Ford, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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