THE BIG BOARD PICTURE
Although 5 percent is a substantial chunk of the Nasdaq, it's not unprecedented. Over the last decade, the Nasdaq has lost, on average, 12.7 percent of its listings each year. (The Nasdaq's official tally is not limited to delistings; it also includes companies that merge or are bought out.) In recent years, however, the Nasdaq has been able to replenish itself with a new crop of IPOs. But given the overwhelming weakness in the current market, observers say it's unlikely that the IPO market will come back in any significant way.
"This was an overinvestment story," says John Skeen, director of portfolio strategy at Banc of America Securities (dossier). "There was too much money chasing the opportunity. There were too many IPOs. There were too many companies that shouldn't have been public, and now the market is taking care of that."
But one place where the rout isn't on is the venerable New York Stock Exchange (dossier). Critics have long charged the NYSE with being stodgy, and its listing standards as too lofty. But the current market environment has the NYSE looking like a calm port in the storm.
"The problem is that when these companies drop below the listing standard, sometimes they're just too far gone to pull up," says Thomas Rathjen, the New York Stock Exchange's western division VP and a former executive at the Nasdaq. "So yes, getting into the NYSE is a pretty significant hill to climb, but once you're up there, well, you're going to have fewer companies fail on the NYSE than you would on Nasdaq."
Rathjen, whose job is to sell the NYSE to large technology companies, says that the rampant Nasdaq delisting is making his job a lot easier. "I think we are perceived by many as a safe haven during times of trouble," he adds. "So I think there is a higher level of receptivity to our story these days."
NO WAY OUT
So how can companies fight delisting? The reverse stock split is the most dramatic, immediate method to fight delisting. PlanetRx.com (PLRX) tried it. On Dec. 1, the company said it would convert every eight shares into one share. The effect should have increased the share price eightfold. But by the time shareholders approved the deal, the stock was trading at 13 cents. When the reverse split took effect, the stock instantly dropped from $1 to 53 cents.
PlanetRx scheduled a hearing with the Nasdaq to appeal the delisting, but announced in mid-January that it wouldn't even show up for the hearing - the company had run out of defenses and opted not to press its case.
Companies that are kicked off the Nasdaq national market have a number of options, few of them good. According to analysts, the bylaws of most mutual funds and hedge funds do not permit ownership of stocks not listed on the major exchanges. So there are few buyers for delisted stocks.
Those companies can join the OTC Bulletin Board, a lesser exchange set up by the National Association of Securities Dealers (dossier), where penny stocks abound. Failing that, they can even fall to the Pink Sheets, a thinly traded exchange where share prices are quoted on printed, pink sheets distributed among certain Wall Street firms.
Many new-economy companies might try to make it on their own as privately held concerns. And over time, these damaged goods can reapply for a Nasdaq listing. But it's rare that such companies regain the trust of the Street. Another strategy to fight delisting is for a company to buy back its shares in the market, hoping to shore up the price. But that assumes companies have a pile of cash lying around. If that cash is spent buying back shares, it's not available to pay employees, develop new products, pay salespeople or keep the business running.
Of course, many of these businesses are barely running as it is. The fact that the stocks are even worth pennies is a wonder to many on Wall Street. "The music has stopped, but people are still dancing," says J. Carlo Cannell, of the San Francisco-based Cannell Capital hedge fund. Cannell is an expert in small stocks, and expects few of these stocks to survive. "The fact that these things have any market cap at all is what's crazy - they're in their grave, the earth has been thrown on top of them, and yet someone still thinks the stock is worth a few pennies. They won't for long."
Elinor Abreu, Meredith Alexander, Lessley Anderson, Blair Clarkson, Jen Davis, Miguel Helft and Lisa Shuchman contributed to this story.
