E*Trade resorts to reverse stock split (1:10) to boost share price - 23 Mar 2010

E*Trade resorts to reverse stock split to boost share price

If approved by shareholders, move would hike price
of online brokerage to $11.50

By Aaron
Elstein

March 23, 2010 1:31 pm ET

To remedy this embarrassing situation, E-Trade Financial Corp.
announced Monday that it would do the corporate equivalent of plastic
surgery: It will lift its share price by undergoing a 1-for-10 reverse
stock split. The move would immediately boost the price of E-Trade stock
to about $11.50, although someone who now owns 1,000 shares would have
only 100 shares after the reverse split.

The move is “a logical
next step for the company as we complete our financial and managerial
restructuring,” E-Trade Interim Chief Executive Robert Druskin said in a
statement.

Also on Monday, E-Trade announced Mr. Druskin would
be replaced by former Citigroup executive Steven Freiberg.

E-Trade
is well known for its clever advertising, such as its recent
commercials showing babies trading stocks. Earlier this month, famously
hard-partying starlet Lindsay Lohan sued the firm, seeking $100 million
in damages, because a “milkaholic” baby named Lindsay appeared in an ad.

But
the Manhattan-based company is still struggling to recover after
stumbling badly into the mortgage business during the housing mania.
E-Trade has posted losses for three consecutive years, and last year's
revenues, at $2.2 billion, were 38% lower than 2007's.

E-Trade
might have collapsed in 2007 were it not for a $2.5 billion cash
injection from Chicago's Citadel Investment Group, which remains its
largest shareholder, according to Thomson Reuters data.

The stock
has traded for less than $2 a share since November 2008, and the reverse
stock split, which must be approved by shareholders, suggests
management is struggling for ideas to get it higher. Besides the sheer
embarrassment associated with having such a cheap stock, shares that
trade under $1 apiece are at risk of being delisted by exchanges.
(E-Trade fetched as little as 61 cents a share 12 months ago in the
depths of the financial meltdown.) In addition, many institutional
investors refuse to buy stocks that trade for less than $5 a share.

But
while the reverse split would surely give E-Trade shares a much-needed
lift, research suggests it will won't last long.

Companies that
use reverse splits underperform the market by

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