August 22, 2006 > Column: Delisting punishes shareholders, not companies
Column: Delisting punishes shareholders, not companies
by Ellen Simon
NEW YORK (AP), Aug 18 _ Will Nasdaq really delist Apple Computer Inc.?
Apple and more than a dozen other companies have been warned by Nasdaq of possible delisting because they are late filing their quarterly reports as the companies untangle their options accounting.
Delisting is a scary prospect for shareholders. Delisted stocks from viable public companies don't disappear, they move, either trading on the OTC Bulletin Board, or having their prices quoted on unregulated Pink Sheets, which were once printed on pink paper.
Once stocks are off the major exchanges, they're usually much less liquid. That, in turn, more than triples the spread between a stock's asking price and its selling price, according to research led by Georgetown University professor James J. Angel. A larger ``bid-ask'' spread makes a stock more expensive to buy and cheaper to sell, cutting into investor's profits.
``Shareholders in our sample experience a wealth-loss of 19 percent on average due to delisting,'' Angel wrote.
That's why delisting a stock ``is adding an additional problem for investors beyond the substantive problems going on in the company,'' said Jonathan Macey, the deputy dean of Yale Law School and a professor of securities law. ``It's adding insult to injury.''
But, barring indictments, experts say it's unlikely the companies that have been warned will all be delisted. There's precedent: After the dot.com fizzle of 1998, 10 percent of Nasdaq stocks failed to meet the exchange's minimum price requirement, said Maureen O'Hara, a professor of management at Cornell University's business school who studies delisting and has written papers with Macey.
``They couldn't delist that many stocks, and they didn't,'' she said.
Still, between 1995 and July 2004, more than 7,300 companies were delisted from U.S. stock markets, with almost half of these being involuntary. (Voluntary reasons for delisting include mergers.) On the Nasdaq in the five years ending Nov. 2004, almost 4,000 companies were delisted, which is roughly one for every five on the exchange in any given year, according to the Georgetown study.
While the listing requirements for the exchanges are clear _ ranging from bankruptcy to a failure to trade above $1 a share for a set period _ the delisting process is fuzzier. That's why the shareholders at Apple, Juniper Networks Inc., CNET Networks Inc. and at least 16 other companies facing the possibility of delisting can only hope those companies are treated like Fannie Mae.
Fannie Mae, which finances one of every five home loans in the United States, has been out of compliance with New York Stock Exchange listing standards since 2004 _ the last time it filed a quarterly earnings report. Yet NYSE hasn't delisted the stock.
Federal regulators in 2004 accused Fannie Mae of serious accounting problems and earnings manipulation to meet Wall Street targets, and the Securities and Exchange Commission ordered the company to restate earnings back to 2001. ``We've made significant progress; we still do have a lot of work ahead of us,'' company President and Chief Executive Daniel Mudd said during a conference call with analysts on Aug. 9.
NYSE, in turn, kept Fannie listed, deciding it was too big to remove. The Exchange sent a proposal to the Securities and Exchange Commission saying that in very rare circumstances, delisting a company would be ``significantly contrary to the national interest and the interests of public investors, notwithstanding a delay in an annual report filing that extended beyond one year.'' In January, the SEC agreed. Fannie Mae did not immediately return a call seeking comment.
While the possibility of delisting is a threat that makes companies take listing requirements seriously, ``the perception is that if you're big enough, like so many things, you are more or less in the drivers' seat,'' O'Hara said.
``It's really probably in no one's best interest to delist Fannie Mae,'' she said. ``The problem is, what would happen if they were? They'd get chucked over to the Pink Sheets,'' which are unregulated.
Sometimes a stock can be out of compliance with an exchange's listing requirements for months before it's delisted. Bethlehem Steel Corp. traded below $1 a share for 163 continuous days before it was delisted by the NYSE, but Kaiser Aluminum Corp. was below $1 for only 42 days before its delisting, according to a study co-authored by Macey and O'Hara.
The exchanges make money off trading, which gives them a motive to keep high-volume stocks listed. That's why Macey and O'Hara suggest handing the delisting decision over to regulators, which is how the Hong Kong and London exchanges handle delistings
The two also argue that some listing requirements are outdated, such as the $1 a share rule, which ignores a company's market capitalization.
Finally, they say delisting is too draconian, calling it a ``death penalty.'' Instead of delisting, they suggest stocks that are out of compliance with the exchange continue to trade, but with a symbol after their ticker symbols. That's what's done in Japan.
They call for a more formal market for delisted stocks. They write, ``the current free-fall for firms to a trading venue featuring no listing standards, no corporate governance requirements, and no market regulation is hardly satisfactory.''