The Spine Blogger recently heard that an early stage company was interested in splitting its stock. Obviously from a purely psychological position this company is hoping to make the price of a share more attractive to a potential investor. Considering that this company has already failed to raise capital or sell the company, the potential of a split is probably a therapeutic measure to make its CEO and President feel as though they have more stock to trade in the event that someone would want to invest into another “me too” company. By splitting the stock, they would increase the stock’s liquidity, the degree to which a stock can be bought or sold without affecting their assets or stocks price.
Usually companies split stock when the price of the stock becomes unaffordable. An example in our industry would be Stryker. They have split their stock on multiple occasions. Yet, who would want to buy into another “me too” company that has exhibited a lack of discipline and stability on part of its CEO? The Spine Blogger poses this question; is a stock split an advantage or disadvantage to a potential investor when the company has never been traded publicly? If the company’s stock were publicly traded the potential investor would at least have a historical reference to bid-ask spreads. The bid-ask spread would at least provide the market with a reference as to what buyers were willing to pay versus what the seller was willing to accept. But if there were no reference, the only indicator would be to look at the historical stability of the company, its market cap and its revenue stream. But if a stock split is supposed to be a good psychological indicator that the company is doing well, how is this company perceived for its financial and management stability if sales have “yo-yo’d” over a three to five year period what does it say about the leadership qualities of its CEO, the Board of Directors and its investors? What if the majority of the company’s sales are generated by surgeon investors? I would like to think that would influence potential investors because the company’s portfolio would have exhibited an inability to increase non-investor sales revenues. Critics have said that using a stock-split strategy is questionable at best, especially for a company that has a mediocre track record. The most important factor to consider is that there is no effect on the market cap of the company. In closing, the Spine Blogger always looks at the leadership of an early-stage spine company. Are the right people at the helm of the ship? There is a difference between driving an eighteen- wheeler versus an Aston Martin. Why has the company had the inability to raise capital? Is it greed or is it ego? Is there stability in the distribution network? Why has there been such high attrition? Maybe if management at these companies were more concerned with running a business rather than playing make belief entrepreneurs the energy that they expend would probably be better utilized in becoming a successful company.