Markets

Blockbuster Shareholders Reverse Course on Reverse Stock-Split Vote

By Carol Tice

Updated on: July 12, 2010 / 5:05 PM EDT / MoneyWatch

When you're a company in financial trouble, it pays to be a clear communicator. This reminder comes as small shareholders at Blockbuster (BBI) have banded together to ask for an emergency meeting so they can vote again on a reverse stock split proposal they voted down at the annual meeting a couple weeks back.

Why do they want to vote again? Because, the investors say, they didn't understand that voting it down would get Blockbuster's stock delisted. Which happened immediately after the proposal failed. So now their shares are worth pennies. They are shocked, shocked to discover that their investment has become nearly worthless. What we have here is failure to communicate on a pretty spectacular scale. When a company needs a measure passed to ensure its financial survival, managers should take the time to make sure investors understand the implications of their vote. Sure, a reverse split usually results in diluted value for existing shareholders, so they tend to not be enthusiastic about this move. But the company needed to get on the loudspeaker and help investors understand it was the only option left to keep the company publicly traded.

After the meeting, the miscommunications continued, with Blockbuster first announcing the reverse-split had been approved and that the New York Stock Exchange (NYX) had agreed to forestall delisting the company. Then, about a week later, Blockbuster quietly made a public filing to the effect that actually, the measure had failed. And the NYSE tossed Blockbuster right off the exchange, leading to the ensuing shareholder panic.

Now a group of nearly 200 small shareholders led by scrappy Bronx investor Harry Niko Celentano have banded together to demand a revote, which Blockbuster says it's considering. They also want Blockbuster to crawl back to the NYSE and find some way to get the company back on the exchange while they schedule that new vote. Good luck with that.

With its communication bungles, Blockbuster has compounded its financial problems by showing it's got some honesty issues. By being frank with investors about the company's dire position, the whole mess likely could have been avoided. Now, the company faces a tougher road -- in convincing NYSE to list the company, in keeping existing investors on board, and in convincing new investors to help bail it out of debt.

At the end of last week, the company announced it had hired a restructuring officer in an effort to deal with its $900 million debt problem, Jeffery Stegenga of the turnaround firm Alvarez & Marsal. If they'd hired him a few months back and he could have helped the company better communicate with shareholders, his work would have been a lot easier.

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