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Citigroup’s reverse split won’t work as planned

Dear Mr. Berko: My broker told me that Citigroup is going to have a 1-for-10 reverse split and that I should buy 5,000 shares right now at $4.52 for $23,000.

He is positive that after the reverse split the shares will (and these are his words) “firm up, attract the attention of institutional investors and rise to the mid-$60s in the next year.”

This sounds like a good deal to me and almost a shoe-in. I missed out on the AIG reverse split last year, which, as you know, did very well, and I don’t want to miss this one.

But I’m leery about this. Don’t know why. So I’d appreciate a little push from you. –D.H., Columbus, Ohio

Dear D.H.: Thomas Jefferson wrote: “I … believe … that banking establishments are more dangerous than standing armies and that the principle of spending money to be paid by posterity under the name of funding is but swindling … on a large scale.”

JPMorgan, Bank of America, Wells Fargo, Goldman Sachs, etc., are proof of the pudding. And this is just the moral reason I wouldn’t buy Citigroup.

The other reason is that I think Citigroup (C, 52-week high of $5.15 as of Jan. 14) will fall about 15 percent to 25 percent after the 1-for-10 reverse split.

Citigroup is a mess.

Investors consider Citigroup a loud, vulgar bank that’s a hodgepodge of PVC connections, oddments, disparate parts, ragged edges, split ends and disparately managed divisions with no corporate cohesion and an overcompensated board of directors who don’t know “boo” about banking.

The purpose of a 1-for-10 reverse split, which would turn your 5,000 shares at $4.52 into 500 shares at $45.20, is to lift C’s price out of the penny-stock category, attracting institutional investors who won’t buy a stock trading under $5 per share.

However, I think the higher price will encourage more short sellers, who believe that C’s downside potential significantly exceeds its upside potential.

They cite C’s desperate and ill-conceived attempts to shore up its capital base. One example is management’s complex sale of Smith Barney to Morgan Stanley. They cite dissatisfaction with CEO Vikram Pandit. They cite a possibly serious decline in C’s important overseas business that accounts for 60 percent of revenues and 76 percent of profits, and they cite C’s embarrassingly low (0.54 percent) return on assets.

And they note a 2008 tracking study of 1,637 companies that engineered reverse splits and underperformed the broader market average by 50 percent within three years after the split.

Yes, AIG did well after its reverse split. So did Priceline, Time Warner and JDS Uniphase. However, those are statistical anomalies.

Sun Microsystems, Palm, Ciena and Conexant Systems all trade below their post-reverse-split prices and are examples of recent failures.

Be mindful that good companies with good customers, management, service, products, balance sheet statistics, income statements, numbers and prospects for the future do not need a reverse split to increase the price of their shares.

The price of C’s shares will rise when the investing public perceives its share price deserves to be higher. Frankly, I’d seriously consider selling C short or buying some puts.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com.

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