INVESTMENT OUTLOOK : ASSESSING 1987 : ILLUSORY LOSSES : Those Who Suffered Losses on Paper Aren’t Exactly Broke
Weep not for Dick Clark. He was dumped unceremoniously from Forbes magazine’s roster of the 400 richest Americans this year because of January’s “dismal public offering” of stock in his production company. Then he watched the share price of Dick Clark Productions take another harsh beating in the post-crash market.
In all, his 5.7 million shares of DCP stock plummeted in value from $35.4 million in January to $24.9 million last week. That seemingly made the ubiquitous, eternally boyish game-show host and impresario one of the market’s walking wounded.
And yet, like many entrepreneurs who racked up big, albeit temporary, paper profits by taking their companies public during the bull market euphoria of the 1980s, Clark’s wealth didn’t come only from stock holdings. He cut lucrative personal deals with the company that last year brought him at least $2.7 million.
Clark’s situation isn’t unique. Although many entrepreneurs show eye-popping gains in their paper wealth when they take their companies public, the savviest of the lot don’t rely on new stock market holdings to maintain their fortunes. They often pull out fat salaries, bonuses and perks, particularly if they keep control in their own hands.
Beyond that, even though most of the best-known rankings of businessmen’s wealth treat paper assets as real, the explosions of net worth that entrepreneurs racked up when their companies went public during the 1980s are misleading. A company’s ongoing business prospects, which aren’t likely to swing as abruptly as stock prices, provide a more realistic measure of an entrepreneur’s wealth.
As for Dick Clark, in 1986 his company paid him $1.6 million as an officer, plus another $1.1 million in fees as a performer. His wife was also on the payroll.
The fledgling production company depended so much on Clark as its only substantial asset that it took out a $5-million insurance policy on his life. But he also is permitted to “spend such time as is necessary” on his personal business, and is to be paid licensing fees by the company itself for the use of his name and likeness outside the television and movie business.
On top of keeping hefty salaries when their companies go public, many entrepreneurs continue lucrative side deals with their own outfits. The parent company may lease its office space from a partnership owned by the entrepreneur, and so on. Analysts say that although these sorts of deals are not uncommon, they are often particularly pronounced in the entertainment field, where a production company’s only real asset may be the star who took it public.
In any case, majority or controlling owners of big public companies consistently show up on rosters of the nation’s wealthiest people. For several years, heading the top of the Forbes list has been Sam Walton, controlling owner of the Wal-Mart retailing chain.
With the stock market’s troubles, most of these same people have shown up on the list of the biggest losers in the crash. Walton’s family, for example, is said to have lost an estimated $1.8 billion as Wal-Mart stock took its tumble; other industrialists and entrepreneurs whose paper wealth went up in smoke include William Gates III, the young founder of Microsoft (down $254.6 million) and Leslie Wexner of the Limited (lost $1.5 billion).
Analysts say, however, that the entrepreneurs who suffered the biggest percentage paper losses were those whose companies went public just before the crash. “Every company that went public in the 60 days before the crash is down substantially,” said Paul Simmonds, an editor of the newsletter New Issues.
Ted Arison, the founder and chairman of Carnival Cruise Lines, a successful Miami-based cruise and casino concern, saw his holdings of Class A common stock in the company--that’s the class of stock that was marketed to the public in an offering this June--drop from $17 a share to about $8. Arison’s net worth on paper of $1.2 billion--his share of the company’s Class A stock valuation--fell by about $642.4 million.
But Arison’s grip on Carnival Cruise Lines was unaffected by the crash. According to the prospectus issued upon the public offering, Arison still owns all of the company’s outstanding Class B stock which, combined with his and his family’s holdings of Class A shares, gives him the right for the foreseeable future to name three-quarters of the company’s board and otherwise to control the company.
There also is the example of McCaw Cellular Communications, which went public on Aug. 21 at $21.75 per share and by the close of its first day of trading had shot up to $26. At that point, the family’s overall holdings were valued at $1.26 billion, largely from its holdings in McCaw Cellular and related companies.
Post-crash, the company is trading around $13. Yet that again scarcely tells the story. For the McCaw family--brothers Craig, Bruce, John Jr. and Keith--share control of the Kirkland, Wash.-based company through their ownership of its 55% parent, McCaw Communications. In fact, through a complicated structure of stock holdings, in which the McCaw family controls Class B stock with 10 votes per share, and the public owns Class A stock with one vote per share, the family actually controls 99% of the voting power of all shareholders.
Then there’s Gary Comer, a former advertising copywriter who founded Land’s End, a Wisconsin-based direct-mail merchant of casual clothing, luggage and the like. After 24 years as a closely held corporation, Land’s End went public in 1986 at $33 a share. That gave Comer’s 61% holding a value of $201 million. By Oct. 21, the second day after the crash, Land’s End stock had plunged to $17, and Comer’s 61% stake had an indicated value of $103.8 million. Late last week, the shares were trading at just under $17.
Yet, as always, one should examine exactly what Comer sold when he took Land’s End public. In mid-1986, when the offering was made, Land’s End’s book value, or net worth, was $2.94 per share. That meant new investors were paying as much as 10 times the company’s real value per share of stock. The existing shareholders, including Comer, bought in at the equivalent of nine cents per share--meaning that even with the stock sliding sharply in price, they are still richer today than before the offering.
