Citigroup seeks reverse stock split

Measure expected to help offset the massive conversion of government's preferred stock into common shares.

NEW YORK (CNNMoney.com) -- Citigroup unveiled plans Thursday to pursue a reverse stock split, and the company officially gave notice of its previously announced plans to convert the government's massive preferred share stake into common stock.

The New York City-based bank said it would authorize its board of directors to carry out the reverse split, but it requires a shareholder vote before it can take effect.

The move would help reduce the number of shares outstanding for Citi, which are expected to swell after the Treasury Department completes its conversion of part of its $45 billion stake in the company. The bank currently has a total of 5.5 billion shares outstanding.

Shares of Citigroup (C, Fortune 500), initially surged on the news, climbing nearly 23% in Thursday morning trading. But the stock lost ground as the day wore on and wound up finishing Thursday down nearly 16%.

Late last month, the government said it would convert up to $25 billion of preferred shares, matching dollars that Citigroup is able to bring in from other investors. Approximately $52.5 billion in preferred stock will be converted as part of the agreement. This could leave the government with as much as a 36% stake in the bank.

Regulators announced the move to help boost Citi's tangible common equity, a closely watched measure of a bank's ability to absorb losses. The agreement is expected to increase it from the fourth-quarter level of $29.7 billion to as much as $81 billion.

The reverse stock split would also bolster Citi's lagging stock price, which fell below $1 earlier this month and closed on Wednesday at $3.08.

Many large investors, such as mutual funds and pension funds, tend to shun stocks trading below $5 a share. Some are even prohibited from investing in stocks trading below that level.

When a company completes a reverse split, it lowers the number of total shares outstanding and the stock price rises as a result. But the value of the company is unchanged.

For example, if a company has 100 million shares outstanding and a stock price of $5 and decides to split its shares at a 1 for 5 ratio, it would then have 20 million shares that trade at a price of $25.

In a regulatory filing, Citi proposed seven different possible ratios that it could use to split the stock.

Bad bets on the U.S. housing market and a deteriorating global economy has made Citigroup one of the hardest hit companies in the ongoing financial crisis.

The government has had to step in three times to help prop up Citigroup, but has stopped short of seizing complete control of, or nationalizing, the company.

Citi is not the first financial institution that has gotten extensive government aid to consider a reverse stock split. Mortgage buyer Fannie Mae (FNM, Fortune 500), which was seized by the government last fall, announced in late November that it may undertake a reverse stock split in order to lift its ailing stock price.

Citigroup shares, which are off sharply from where they were just a year ago, have gained 63% over the past two weeks as investor fears about the underlying health of the firm have subsided.