INVESTMENT OUTLOOK : ASSESSING THE MAJOR MARKETS : Tackling the Choices After Restructuring : Exotic Deals Can Create Mystifying Challenges
The August meeting of the Sum Seekers Investment Club of Torrance found members scratching their heads over what to do with their 100 shares in Marion Laboratories.
The pharmaceutical company had agreed to merge with a division of Dow Chemical Co. in a mind-bending deal that would, in part, distribute a type of security--a contingent value right--to Marion shareholders. Shareholders would be able to sell the right on the market begining in December or wait up to three years and sell it to Dow.
Would the Sum Seekers tell their brokers to sell Marion on the open market for cold cash, or tender to Dow and wait for a future payoff?
“We just decided not to deal with it and so we sold our stock,” said Roslyn Bodanis, a club member. “It was too complex a deal.”
The wave of corporate restructuring that swept through the business world during the 1980s has left behind many a confused investor. The 1990s might see the pace of takeovers and restructuring slow, some financial observers argue, but that will still leave investors with difficult decisions to make as complex deals continue. The advice to stockholders: Either follow the Sum Seekers’ lead and sell your shares for cash, or tender your shares and proceed with great caution.
Matters have been complicated by exotic offers loaded with mysterious securities whose value sometimes eludes even Wall Street veterans. Investors must decide whether to trade familiar common stock for packages that often include stub stocks, junk bonds, rights and securities that multiply into more securities.
“You don’t know what is going on, and it’s very confusing for the average guy to stay on top of and make the best choice,” said Hugo Quackenbush, senior vice president at Charles Schwab Corp., a discount brokerage house, which publishes a pamphlet to help clients on corporate restructuring. “Investors have to sit down and figure out what is their best option.”
That’s not always easy. Take this summer’s merger between Time Inc. and Warner Communications.
Under the deal, Warner stock holders will get $70 in cash for each share and three types of securities: preferred stock yielding 8.75% in cash; another preferred stock yielding 11% in the form of more stock for three years and then cash, and shares in a spin-off company--BHC Communications--that includes several broadcast television stations. Both preferred stocks would later be convertible to Time common stock at certain prices.
Time Warner, which will pile up $12 billion of debt to finance the deal, said the three securities should be worth $70 excluding the cash payout--but no one is really sure.
“I don’t think people would wait around for the three pieces of paper . . . because of the uncertainty,” said industry analyst Jeffrey Logsdon at the Los Angeles investment firm of Crowell, Weedon & Co.
As the Warner deal shows, a corporation is likely to be left with a lot of debt on its books after a restructuring. “People don’t like debt,” said Ernest Wiggins, manager of the Fidelity Value Fund. “So you are better off getting out right away.”
If investors do not want to abandon a stock, Wiggins suggests that they may want to sell only half of their holdings to lock in some profits. Professionals also suggest that investors who can stomach the risk familiarize themselves with a company’s industry and keep up and analyze the flurry of proxy statements and news reports.
All that work might lead to some sweet rewards.
Supermarket giant Kroger Co., for example, last year fought off unwanted suitors by assuming $5.3 billion in debt to finance a restructuring. Shareholders ended up with a one-time $40 cash dividend for each share, a junk bond and Kroger stock valued at about $8.50 a share that does not pay quarterly dividends.
Kroger stock--dubbed “stub stock” because it represents the shrunken amount of equity remaining in the company--has nearly doubled in value and has traded as high as $19.75 a share. But highly leveraged stub stocks have proved volatile. They tend to outperform the market during bullish times but suffer more during market declines. “Even the average person does not want a company with a lot of debt going into a recession,” said Wiggins. “So they sell.”
Many Marion investors wish that they had sold their shares for cash instead of accepting Dow’s offer--which Marion shareholders finally approved Friday. Members of the Pacific Coast Investment Club, unlike their brethren in the Sum Seekers, chose to sell their 100 Marion Laboratories shares to Dow Chemical and have regretted the decision.
“Our observation,” said Pacific Coast President George Baker, “is take your money and run.”
For starters, Dow would pay cash--$38 a share--for only 41 of the 100 Marion shares and issued rights for the remaining stock. Dow says it will buy those rights for up to $15.77 each in September, 1991, or wait another year and pay up to $20.20. The amount would depend on the price of stock in a company formed by the merger of Dow’s pharmaceutical division and Marion.
The people at Marion can sympathize with their stockholder’s confusion.
“It’s one of the most difficult and screwy of deals,” says Larry Wheeler, investor relations director at Marion. “I’ve been (explaining) this for six months and it still confuses me.”
MERGER ROAD MAP A look at what holders of 100 shares of Warner Communications received if they tendered their shares in the merger with Time Inc. Earlier this year. Complex deals such as this are increasingly confusing investors.
CASH $70 for each Warner share=$4,060 58 SHARES WARNER COMMUNICATIONS: 100 shares of common stock 42 SHARES Time-Warner Series C Convertible Preferred Stock 29.16 shares 8.75% divident paid in cash Convertible to common at $200 a share Each share worth $50 =$1,458 Time-Warner Series D Convertible Preferred Stock 22.08 shares 11% dividend paid in more stock during the first three years and then cash Convertible to common at $225 a share Each share worth $50 =1,104 BHC Communications * common stock 6.1 shares no divident Each share worth 61.96 =$378 Total Value = $7,000 * A spinoff of Warner’s jointly owned broadcasting properties Source: Warner Communications
