First American Financial Seeks to Merge Stock
First American Financial Corp. said Tuesday that it wants to merge its two classes of common stock and issue new shares of the combined stock to raise up to $38 million to bolster its financial strength and buy a bigger piece of the title insurance market.
The parent company of First American Title Insurance Co., the nation’s second-largest title insurer with 16.2% of the market, said it must first seek approval from its Class A and Class B shareholders to combine the stock.
Proxy statements will be mailed shortly, said Parker S. Kennedy, the corporation’s executive vice president. If it receives shareholder approval, the company plans to issue 2.25 million shares of new common stock, which would bring the combined total of common stock to more than 11 million shares.
The stock would be sold at the market price at the time of the sale. That would give the company $38 million, after costs, at today’s market price.
“We want to beef up our balance sheet,” Kennedy said. “It’s important in this day and age to be as strong financially as you can be. We feel we can derive great benefits by being a bigger insurance company.”
He said the proceeds will also be used to take advantage of “frequent opportunities” to acquire title companies and real estate financial services companies.
Having two classes of stock didn’t work out as well as First American had hoped. The company created the Class B common stock in 1989 as a way of funding acquisitions and employee benefit plans. But it used the stock for only one of its acquisitions since then.
Also, the Class B stock, which carries a tenth of the voting rights of Class A shares, has been trading at almost the same value as the original shares, which can confuse the market. Both classes closed Monday at $19 a share. At Tuesday’s close, Class A stock gained 25 cents a share while Class B stock gained 12 1/2 cents a share on the NASDAQ market.
More importantly, Kennedy said, certain investors won’t or can’t invest in dual-class stocks and won’t invest in companies below a certain value. Combining the classes would solve both problems, he said, leading to increased trading and higher stock prices.
“People also are concerned that the dual-class structure is an anti-takeover measure, and it was never intended to be that,” Kennedy said.
Under the stock merger proposal, each share of Class A stock would receive 0.04 share of combined stock in recognition of its historical higher trading value. That means the owner of 100 shares would get four additional shares. Holders of Class B stock would receive full voting rights of Class A stock.
