What Happens if a Company’s Stock Falls to Zero?

It’s
happened
before.
Enron
and
Lehman
Brothers
stocks
fell
precipitously
to
or
close
to
zero
before
being
delisted
by
their
exchanges.
More
recently,
it
happened
to

Silicon
Valley
Bank’s
parent
SVB
Financial
Group
and Bed
Bath
&
Beyond
(BBBY),
whose
stock
fell
to
71
cents
and
28
cents,
respectively,
before
trading
was
suspended.

Here
is
a
guide
to
why
stocks
may
plummet
to
zero
and
what
it
means
for
investors.

When
a
Stock
Hits
Rock-Bottom

If
a
stock
falls
to
or
close
to
zero,
it
means
that
the
company
is
effectively
bankrupt
and
has
no
value
to
shareholders.

“A
company
typically
goes
to
zero
when
it
becomes
bankrupt
or
is
technically
insolvent,
such
as
Silicon
Valley
Bank,”
says
Darren
Sissons,
partner
and
portfolio
manager
at
Campbell,
Lee
&
Ross.

On
rare
occasions,
a
stock’s
value
could
fall
to
zero
due
to
regulatory
freezes
imposed
on
a
company
for
illegal
activity
or
regulation
breaches.

A
company’s
stock
may
lose
all
its
value
for
a
variety
of
other
reasons,
such
as
poor
management,
weak
financial
performance,
corporate
fraud,
or
external
factors
such
as
economic
downturns
or
industry
disruption.

A
publicly-traded
company
exhibits
several
signs
of
distress
well
in
advance
of
declaring
bankruptcy. Some
of
these
signs
include
“over-leveraged
balance
sheets,
erratic
share
price
trading
and
lots
of
insider
sales,
that
is,
management
getting
out,”
says
Sissons.

Significant
and
persistent
declines
in
profit
and
revenue,
negative
auditor
reports
and
debt
rating
agency
comments
are
also
key
red
flags,
“although,
on
these
latter
two
groups,
there
are
many
instances
in
which
they
failed
to
capture
the
obvious
data,”
he
warns.

The
Deep
Impact
of
Bankruptcy

For
investors
who
own
shares
in
a
company
that
goes
bankrupt,
the
equity
is
wiped
out,
rendering
their
investment
worthless.

Big
stock
exchanges
set
limits
on
how
low
a
stock
can
go
before
they
take
it
off
their
platform.
Typically,
if
a
stock’s
price
stays
under
one
dollar
for
a
certain
number
of
days,
the
exchange
will
remove
it
from
their
listings.
Once
delisted,
it
becomes
an
over-the-counter
(OTC)
stock
that
speculators
can
buy
and
sell
on
alternative
exchanges.

“Once
the
failing
companies
fall
below
minimum
trading
thresholds,
market
makers
do
not
make
a
market
in
the
name,”
says
Sissons,
adding
that
“you
may
see
a
name
kicked
from
the
big
TSX
board
to
the
Venture
Exchange.”

When
a
company
goes
bankrupt,
debt
investors
switch
to
an
“as
converted”
basis
and
essentially
become
owners
of
the
company,
Sissons
notes.

“‘As
converted’
basis
refers
to
the
situation
where
debt
investors
or
bondholders
have
the
option
to
convert
their
debt
or
bonds
into
equity
shares
of
the
company.
This
means
that
debt
holders
become
equity
shareholders,
and
“control
of
the
firm
then
falls
to
the
most
senior
debt
instrument,”
says
Sissons.

Making
Profits
from
Sinking
Stocks

Is
there
an
opportunity
for
investors
to
make
money
when
a
stock
price
goes
south?
According
to
Sissons:
yes.
“You
can
buy
the
bonds,
which
are
likely
trading
at
a
discount,”
he
says.
“If
the
firm
is
capitalised
as
50%
debt
and
50%
equity,
then
the
value
of
equity
drops
to
zero,
so
the
[holders
of]
50%
debt
control
the
firm
and
convert
[the
debt]
to
equity.
The
company
then
becomes
debt-free
in
effect.”

Alternatively,
investors
can
buy

puts
or

short
the
company.

Can
a
stock
ever
rebound
after
it
has
gone
to
zero?
Yes,
but
unlikely.
A
more
typical
example
is
the
corporate
shell
gets
zeroed
and
a
new
company
is
vended
[sold]
into
the
shell
(the
legal
entity
that
remains
after
the
bankruptcy)
and
the
company
trades
again.

“Some
upside
can
be
re-captured
at
that
time”,
says
Sissons,
but
adds,
“on
balance,
the
equity
investment
is
typically
completely
lost.”

A
Final
Word
for
Investors

Are
companies
in
some
sectors
more
susceptible
to
going
bankrupt
than
others?
“In
theory,”
Sissons
says,
“any
company
can
become
bankrupt,
but
in
practice,
it’s
typically
mature
companies
that
have
too
much
debt.”

He
points
out
that
“high-growth
tech
companies
that
run
continuous
net
losses
and
then
run
out
of
money
are
also
at
risk,”
citing
Canadian
telecom
giant
Nortel,
which
collapsed and
went
bankrupt
in
2009.

If
for
some
reason
you
end
up
owning
stock
in
a
company
that
is
not
on
firm
footing,
it
is
critically
important
to
understand
the
risk
going
in
and
ensure
the
investment
still
remains
appropriate
for
your
strategy.

Sissons’
wisdom
is
straightforward:
“do
not
buy
companies
with
bad
balance
sheets.
Review
the
auditor
and
debt
rating
comments
and
read
research.”
You
can
read
analyst
notes
too.

There
is
much
to
monitor,
though,
and
it’s
a
time-intensive
process.
“If
that
work
is
burdensome
then
employ
a
professional
to
assist
with
wealth
planning,”
he
asserts.

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