Stock Bonus for Loyalty
A Century City company put a new twist on its initial public stock offering--one apparently designed to benefit not only the people who buy the shares, but the new company and the underwriting firm as well.
Stellar Communications, an electronic mail and overnight courier service, called it a stock “loyalty” plan. To participate, an investor would have had to buy stock in the initial offering, and register for the plan with the company. Then, after one year, if the investor still owns some or all of the shares, he or she will be issued bonus shares--the reward for loyalty--at the rate of one common share for every four shares held for the year. For example, someone who purchased 100 shares and held on to them for the year would get a bonus 25 shares.
The program was intended as an incentive for long-term shareholding, said Wade Davis, chairman of Stellar. Such incentives also may lure an investment-banking firm to serve as underwriter, but some securities experts look upon them as “gimmicks.” Although they admit that some smaller firms might need to offer incentives to stock buyers and to underwriters, they say that “established, reputable” investment bankers prefer the stock issues to be sold on the merits of the company, its executives and its business plan. Admittedly, those larger underwriting firms can pick and chose among flocks of companies eager to go public.
The larger firms also have the resources needed to support a company’s stock during periods of rapid turnover or price declines. Jeffrey Peterson, a managing partner at Bear, Stearns in Los Angeles, said that it is common for as much as 25% of the stock to change hands in the first couple of weeks after issue.
But such frequent turnover--as much as 100% of the stock can turn over three times in the first year of a company’s life--is disruptive and forces company officials to worry more about stabilizing the stock than in building the company, Davis said.
Steve Frenkel, an account executive at Hickey, Kober, one of two New York firms underwriting the Stellar offering, said the loyalty plan provides a company with a nurturing period. “Baby companies,” he said, “have to have a long-term outlook. Anything that encourages that is marvelous.”
Stellar’s Davis, whose business plan calls for the 2-year-old company to become a sort of 7-Eleven of business communications, isn’t quite sure how much breathing room the loyalty plan will provide. However, he estimates that of the 2.4 million shares (in 600,000 units of four shares each) offered in the initial outing, about 20% will be held for the year and qualify for the loyalty bonus. While that would add 120,000 shares to the total outstanding, it also would add value to the company, he believes. “Part of developing a company,” Davis said, “is to develop stockholders and have them stick with the company.”
Whether it works that way, he said, “time will tell.”
