AIG Reverse Split: Why?

On May 21, 2009, AIG announced that they will do a reverse split (1:20) on July 1, 2009. What this mean is that, if you own 100 shares of AIG, you will now own 5 shares of AIG. This doesn't change the value on your portfolio because if you own 100 shares at $1, it will now be 5 shares at $20. The same $100. The simplest way to think about split is, for example, you have 20 x $1 bill. You head to a bank and exchange it for 1 x $20 bill. The opposite is true for stock split.

Let's get back to AIG case. They gave the following reason for the reverse split.

The primary purpose of the reverse stock split is to increase the per share trading price of AIG Common Stock. AIG believes a reverse stock split will increase the price of AIG Common Stock, and thus allow a broader range of institutional investors to invest in AIG Common Stock, increase other investor interest in AIG Common Stock and help ensure the continued listing of AIG Common Stock on the NYSE.

Many investment funds and institutional investors have investment guidelines and policies that prohibit them from investing in, or holding in their portfolios, stocks whose price is below a certain threshold, which, at current AIG Common Stock market prices, reduces the number of potential investors for AIG Common Stock. AIG believes that brokerage firms are reluctant to recommend lower-priced stocks to their clients. Also, other investors may be dissuaded from purchasing lower-priced stocks because the brokerage commissions, as a percentage of the total transaction, tend to be higher for such stocks. The reverse stock split could address these concerns by helping to ensure that the price of AIG Common Stock attains a level that would be viewed more favorably by potential investors.

The share price of AIG Common Stock has declined significantly since the third quarter of 2008, and, during February and March 2009, and occasionally since then, it has closed below $1.00 per share. With the shares trading at this level, small moves in absolute terms in the price per share of AIG Common Stock translate into disproportionately large swings in the price on a percentage basis.

Click herefor the actual filing.

You should pay particular emphasis to the following phrase, "... and thus allow a broader range of institutional investors to invest in AIG Common Stock" This action tells me that AIG, once the world largest insurance company, cannot and will not earn their way out of the trouble. They no longer have the capability to bring their share price from $1 (if that) to $20. As a results, they have to manipulate their share prices.

You should be mad right about now. Why? Because $80 billions dollar of our hard earned money went to AIG in a form of a bailout and the best they did was try to lure institution investors. On top of that, institution investors are guys from Harvard B-School, I doubt they would fall for such scheme.

The list below are companies, randomly selected, that did a reverse split and their performance since.

AIG 7/1/09 1 for 20 -59%

BTH 2/2/09 1 for 4 +92%

RBS 11/7/08 1 for 20 -48%

BFLY 4/4/08 1 for 10 -75%

VION 2/21/08 1 for 10 -55%

CIEN 9/25/06 1 for 7 -70%

LENS 11/21/06 1 for 5 -20%

The fact that AIG mentioned that they can attract institutional investors should tell you how "smart" the soul call institutional investors are.

Good try AIG, I hope the next time your stock hit $1 that you don't do the same again. If you do, I'll find ways to short it.

Art

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