Delcath Systems, Inc. (NASDAQ: DCTH) is an interesting company to follow, one that I’ve personally covered quite a bit as of late. While the topic of discussion on my side has been the fundamental value of the company’s assets and the potential for a takeover, I had the opportunity to debate this with one of our avid followers. Believe it or not, my opinion has changed a bit following an incredible discussion.
Let’s Backtrack A Bit With DCTH
First and foremost, I want to talk about why I believe that the buyout potential is there. At the end of the day, Delcath Systems is an oncology company that already has a product on the market in Europe and is currently working on 2 clinical studies to bring the product to the United States. However, with a market cap of around $80 million, the company is a relatively cheap target for any larger oncology firm that wants to get their hands on what the company has going for them.
While I still believe that there is potential for a DCTH buyout, after my debate with a reader, I’ve come to terms with the fact that the buyout isn’t likely to happen any time soon. That’s not the big news we’ve been waiting on. Instead, there’s another piece of news that’s likely coming soon. That’s news of a reverse split.
While Reverse Splits Can Be Scary, This One Is Not
Here’s the truth of the matter, after digging into the financial data provided by the company, one thing is clear. They need to raise capital. The reality is that DCTH needs money in order to continue operating their business. However, this money is inaccessible at the moment. So, how does the company go about making the money accessible? They do so through a reverse stock split.
While a reverse split causes no real change in the market cap of a company, it does cause a difference when it comes to the investors, especially institutions that may be interested in the company. At the moment, because Delcath Systems is trading well below that magic $1 number, many of the larger investors simply won’t even look at the stock. However, a 1-for-10, or to play it safe, 1-for-15 reverse split would likely change things in a big way. This could give Delcath Systems access to the funds that it so desperately needs.
The Idea That RS Never Works Is A Farce
The reality is that when you say the term “reverse split” to an investor, the first thing that’s going to pop into their minds is that the stock is going to fall, and while that’s generally the case just after the split, it’s not always the case for the long-term outlook. The truth is that there have been plenty reverse splits throughout history that have worked. In fact, here are 3 examples of reverse splits that have worked:
- Priceline.com (PCLN) – In 2003, PCLN processed a 1-for-6 reverse split, bringing the price of the stock from $3.50 per share to $22 per share. Today, the stock trades at nearly $2,000 per share – something that we likely wouldn’t have seen without the 2003 split.
- Liberty Corp. of America (LH) – In 2000, LH processed a 1-for-10 reverse split. This split has been so successful that the company has done multiple 2-for-1 regular splits since, to maintain accessibility for smaller investors.
- Corrections Corp. of America (CXW) – CXW was trading at about $0.60 per share before a 1-for-10 reverse split back in 2001. Today, the stock trades at nearly $30 per share, and the beginning of the growth was largely thanks to the fund accessibility that the RS provided.
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The Bottom Line
The bottom line here is that, in my opinion, DCTH is a great company. As mentioned in previous articles, they have made some financial mistakes, and those mistakes have put the company in a tough position. However, a reverse split, if carried out correctly, has the potential to solve many of the problems the company is facing. From there, they will be able to move forward, likely with positive news ahead. However, in order to do so, the company needs the support of its shareholders when it comes to the reverse split. After a hefty debate, I’ve come to grips with the fact that this is what needs to happen, and I hope that the shareholders of the company do too! Once this is behind us, we can expect quite a bit of positive news ahead!
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