Voluntary Delisting From an Exchange to Find Profits

Initial public offerings (IPOs) have become one of the most exciting events on Wall Street after the dot-com heyday created more paper millionaires than at any other time in history. Even though IPOs continue, many small investors are instead beginning to discover the vast opportunities available in delistings, which are the opposite type of transaction.

Key Takeaways

• Delistings offer vast opportunities for small investors.
• Companies voluntarily delist their stock from stock exchanges to privatize or move to over-the-counter (OTC) markets, or an exchange forces a company to delist itself because it fails to meet the exchange’s listing requirements.
• Reasons for delisting can include capital savings, a strategic move, or regulatory concerns.
• The best profit opportunities are found in companies that voluntarily delist to go private and cash out their shareholders.
• Investors can find delisting opportunities in filings on the Securities and Exchange Commission’s EDGAR database.

How Do Delistings Work?

Delistings occur when companies decide to delist their stock from stock exchanges in a move to privatize or simply move to the over-the-counter (OTC) markets.

This process occurs in one of two ways:

1. Voluntary Delistings: These occur when a company decides that it would like to purchase all of its shares or move to an OTC market while in full compliance with the exchanges. Usually, these are the types of delistings that investors should carefully watch.
2. Forced Delistings: These occur when a company is forced to delist itself from an exchange because it fails to meet the listing requirements mandated by the exchange. Typically, companies are notified 30 days before being delisted. Share prices may plunge as a result.

Advantages and Disadvantages of Voluntary Delisting

Companies may decide to deregister for a variety of reasons that can be either good or bad for shareholders.

A few of the most common reasons include:

• Capital Savings: The costs of being a publicly traded company are substantial and are occasionally difficult to justify with a low market capitalization, especially after Sarbanes-Oxley laws called for increased disclosures. As a result, deregistering can save a company millions and reward shareholders with a higher net income and earnings per share (EPS).
• Strategic Move: Company shares may be trading below intrinsic value, compelling the company to acquire its own shares as a strategic move. This typically results in shareholders being rewarded with substantial returns over the short term.
• Regulatory Concerns: Stock exchanges such as Nasdaq and the New York Stock Exchange (NYSE) have minimum requirements for companies to remain listed. If a company does not meet those requirements, it may be forced to delist itself. Causes for delisting may include failure to file timely financial reports, lower-than-required stock price, or insufficient market capitalization. In the end, companies can have a clear bottom-line incentive for delisting their stock from public exchanges—it’s not necessarily a bad thing!

How to Profit from Delistings

Delistings may make sense for companies, but how can the average investor take advantage of the situation? Well, the best opportunities are found in companies that voluntarily delist to go private and cash out their shareholders. Typically, this is because management is confident that the company is undervalued or could save substantial money by operating as a private enterprise. These efforts to cash out shareholders can often yield substantial returns to investors willing to do a little homework.

The key to this strategy is finding instances where tiny companies are trying to “cheat” the U.S. Securities and Exchange Commission (SEC). The SEC mandates that companies file paperwork if they choose to go private, but can avoid the extra efforts if they have fewer than 300 shareholders. Consequently, small companies often issue large reverse stock splits to reduce their number of shareholders and pay off the remaining shareholders holding less than that amount with cash compensation.

Fortunately, many institutional investors avoid these stocks due to the lack of liquidity and risk associated with these deals. However, small shareholders can often net a handsome profit from the strategy.

For example, let’s say company XYZ issued a 600:1 reverse stock split and then repurchased its shares at $5. Incredibly, shares traded at $4.24, well below the repurchase price after the stock split. This occurred despite the plan to privatize, which was being considered as a result of the stock’s lack of liquidity and the fact that it wasn’t covered heavily by any institutions. Not many individual investors would turn down nearly 18% gains in a matter of weeks!

Shareholders may also find other opportunities in obscure payoffs offered in privatization deals. Sometimes, companies will offer rights offerings, warrants, bonds, convertible securities, or preferred stock to entice shareholders to tender their shares in a move to privatize. Unfortunately, many of these offers are restricted to larger shareholders who are able to bargain more effectively.

Finding Opportunities

All significant corporate events must be recorded in filings with the SEC. As a result, investors can quickly find delisting opportunities in SEC filings that are publicly available through SEC’s EDGAR (Electronic Data Gathering, Analysis, and Retrieval) database.

Delistings are found in three types of SEC filings:

• 8-K Current Events: 8-K filings tell investors when and why the company is delisting and are often the first public notification of such intent. This includes the initial announcements of stock splits, which may be a precursor to privatization in smaller companies.
• Schedule 14A Proxy Statements: Proxy statements enable shareholders to vote on whether to go through with delisting (if it is voluntary). This usually occurs during a going-private transaction and may also be the first public notification of such intent.
• S-1/F-1 Registration Statements: These filings detail any new securities being issued as a result of delisting, which may include preferred stock, bonds, warrants, or securities in the private company being formed as a result.

What Is Delisting?

Delisting is the removal of a listed security from a stock exchange. The delisting of a security can be voluntary or involuntary and usually results when a company ceases operations, declares bankruptcy, merges, does not meet listing requirements, or seeks to become private.

Do the U.S. Stock Exchanges Publish Pending Delistings?

Yes. Nasdaq publishes a list of pending suspensions or delistings, and the New York Stock Exchange (NYSE) publishes a list of pending delistings.

How Can an S&P 500 Delisting Differ from Other Exchanges?

The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the United States. While companies can be voluntarily or involuntarily delisted for the same reasons discussed above, the index also adapts to changes in the market by adding companies that better reflect the economic landscape and removing those that no longer meet the criteria. This is to maintain the S&P 500’s status of representing the largest and most influential companies in the U.S. economy.

The Bottom Line

In the end, delistings can provide profitable investment opportunities or lose major money for shareholders. Everything depends on the motivations behind the privatization, the size of the company, and the terms of the offer.

Investors willing to put in the time and effort to find and research opportunities may uncover some gems for their portfolios that can perform extremely well in the short term.