Investors guide to special situations in the stock market

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Investors' Guide to SPECIAL SITUATIONS . in the Stock Market By MaureceLSchiller, Author of

FORTUNES IN SPECIAL SITUATIONS IN THE STOCK MARKET

AMERICAN RESEARCH COUNCIL Larchmont, N. Y. ')/

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Preface

COPYRIGHT

o

1966, BY MARECE SCHILLER

ALL RIGHTS RESERVED, INCLUDING THE RIGHT TO REPRODUCE THIS BOOK OR PORTIONS THEREOF IN ANY FORM.

LIBRARY OF CONGRESS CATALOG CARD NUMBER 66-26925

Printed in the United States of America.

The information in this Report is ased on sources and conpuwiions belieticd to be reliable.

It has

been carefully checked for completeness aJld accurac>· but cannot,

be guaanteed. Noth ing in ehis Report is to be token as advice to buy or sell s�ci­

fic securities.

SPECIAL SITUATIONS! What an exciting and mysterious-sounding name, filled with such promise of extraordinary rewards! However, contrary to what many uninformed investors believe, Special Situations investing does not mean taking a "flyer" in a risky, end-of-the-rainbow stock. Rather, it is an extremely selective and informed approach to investing based upon very real advantages. Some of these are: SAFETY: The basic prerequisite for "real" Special Situations is ready availability of hard facts and sound premises. This is often in contrast to some so­ called Special Situations having, in the main, nothing. more than a typical business venture offering hope and expectation. Special Situation investors want to know where the "real" is and where fancy takes over. A prime benefit of this approach is greater safety and peace i mind, particularly during turbulent market days. In many types of Special Situations, too, the investment follows a p redictable course of work-out within a specified period, regardless of the course of the mar­ ket as a whole. CAPITAL GAINS: In many cases, Special Situation investing offers a broader m arket horizon for capital gains than is usually ond in ordinary secur­ ities. The potential gain can be calculated in many instances and the field is suf­ iciently wide to satisfy the needs of all types of investors. With the level of tax rates so high, capital gain has become virtually the only way to accumulate large sums of capital.

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IllDDEN VALUES: In addition to more specific benefits, many Special Situ­ ation investments often have the quality of "romnce" - that is, the possibility of additionl inc9me and capital gain developing even after the calculated Special Situation objectives have worked out. These windfalls can often be a very happy extra. PERSONALITY: It is important to understand that securities investing is not only the proper placement of money in well-chosen investments, but, to a great extent, the proper placing of the investor in the right security suited to him person­ ally. Successful investing often complements the investor's personality, whether individual or institutional. A speculatively-minded investor would be unhappy with a slow, plodding, growth-type security. Incompatibility could hasten isposal of the investment before maturity and cause him to lose out on many benefits of the situation. A conservative investor would be unhappy, too, in a speculative venture, since he would be psychologically unsuited to ride with market gyrations, the usual

Contents

pattern of the average investment. He, too, would no doubt dispose of the security at its earliest stage of development and thus lose the major benefit of a dynamic venture. The many categories of Special Situations make it possible for investors to find the right type of security to meet their needs and interests. Special Sitation investing has arisen out of many-changes that have taken Page

place in the securities market over the years. In the early part of this century, such factors as (a) income tax, (b) capital gain tax, (c) anti-trust litigation, (d) stockholder relationships and rights, (e) trading rules regarding margin and

1. ABOUT SPECIAL SITUATIONS

Corporate Action ............

manipulation of orders, and (f) responsibilities of underwriters of securities,

Fundamental Characteristics ....

either did not exist or had little or no influence. All of these factors have con­

Trading Methods .......... ..

tributed to changes in the securities market and play a significant role in capital

How Special Situations are Unlike Ordinary Investments

gain potentials. In the following pages the reader will find various types of Special Situations described. Discussion of significant features and characteristics of importance to

2. HISTORICAL BACKGROUND ...

capital gain potential is calculated and sought. Sources of information are indicated

3. HOW TO RECOGNIZE SPECIAL SITUATIONS . Market Activity is a Clue

outlined for inividual Special Situations. Where possible, to further illustrate the

Types of Securities

interest are described or mentioned. However, nothing is to be taken as recom­ In addition, this volume describes traing methods and techniques that apply

4.

The Investor's View .

It is hoped that, with the help of this book, the intelligent investor can en­

September,

Maurece Schiller

1966

The Trader's View ....

5.

BACKGROUND KNOWLEDGE FOR SPECIAL SITUATION INVESTORS .. What is a Corporation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6. ANALYTICAL APPROACH TO SPECAL SITUATION INVESTING. Comparative Values and Quality .................. . Other Factors in Corporate Action Analysis and Investigation VI

13 14 14 15 17

THE MEANING OF SPECIAL SITUATIONS The Stockholder's View

tions, it is the trading method that may assure the profit. large his area of opportunities in the stock market by taking advantage of the

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TO: STOCKHOLDERS - INVESTORS - TRADERS

revolving fashions often bring old techniques into use. And in many types of Situa­

benefits offered by Special Situations.

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Stages of Development

mendation for purchase of ny security. to Special Situations. Traing techniques of prior years are also included, since

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Where to Find Special Situations .

type of Special Situation within the meaning of this book, situations of current

3 3 4 8 9 10 10

Special Situation Investing .

investors is supplemented by examples, past nd current, worked out to show how for specific types of investments, while analytical and investigation approaches are

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20 20 21 23

25

26 30 32 32

VII

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7. DISCOUNT SPECIAL SITUATIONS ................... . Characteristics of Discount Situations . ... . . .. . . ... . ... . . Origin of Discount Situations .. . . . . . .. . ... . . .. . . .. . .. . Trading Concept . . . . . . . . . . . . . . . . . ... . . ... . . . . . .. . Banking Concept .. . . . . ... .... . . . .. . . ... . ...... ... Revolving Portfolios. . .. . .. . . . . . . . . . . . .. . . .. . . .... . .

.... . . . . . .. . . . . . . .. . .. . . . . . . . . . ...... . . . . . . . .. . ·. . . . .. . . . . . . .. . . . . . . . Liquidation Classifications . . . .. . ... . . . . . . .. . .... . . . . Liquidation Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Analytical Approach . . ... . . . ... . .. ... . .. . . . . . . . . Examples .. .......... . . . .... .. . . . . ... . . .. . . .. . .

8. L.UIDATIONS

Why Discounts Exist

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Capitl Gain Potentials

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9. STUBS

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.... . . .. . .. . . . . . .... . . ... . .. Idenifying Names ... . . . . . .. . . . .. . . . . . ...... ..... . Analysis of Stubs . .. . . . . . . . . ..... . . . .. . . . . .. . . . . . . Estimating Maximum and Minimum Values. . . . .... . . . . . . . Hidden Vlues . .... . .. . . .. ... . . ...... . . . . .. . . ... . Types of Stubs . . .. . . . . . .. . . . . . .. . . . . . . . . . . .. . . . . . 10. DIVESTITURES

.

35 36 37 38 38 39 40 41 41 4 47 50 53

53 54 55 55 56 56

... . ... . .... ........ . .. ... ... ........ 59

Origin of Divestitures. .. .. . ............. ... . .. . .... 59

Voluntary Divestitures

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. .. .. .. . ..... . .. .. . . .. ..... . 60 . . . . . . . . . . . .. .. . .. .. . 61 Where Capital Gain Potentials Lie . . . . . ...... .. ........ 62 Impact of Divestiture on Eanings.

11. TRADNG PROCEDURES. . .. . .. . . . ... . ... . .. ...... ...... �hort Selling . . . . . .. .. . . . . .. .. . .. . ... . .. . . . . . ... . Arbitraging.. . . . . . . .. . . . . . . . . . . . • . . . . . . • . ...... . Hedging . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . Convertible Securities . . . . • . . .. . . .. . . . . . . . . . .. .... . Stock Splits -- A Hedging Medium . . . . . . . . . . . . . .. . . ..... Contracts . . . . . . . • . . . . . . . . . . • . . ..... . .... .. .. . .. Why Profit Potentials Exist . . . . . .. . . . . ... .. . .. . . . ... . Sources of Information . . .. .. . . . .. ...... . . . .. . . . ... . 12. TENDRS. .

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Where to Find Capital Gains

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Uses of Tenders.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advantages of Tenders . . . .. , .... . .. . . . .. ... . .... . . .. Disadvantages of Tenders . . . . . . . , .. . ... . . .. . . . . . . . . . Analysis and Procedures ..... . ... . .. . . .. . . ... . . . . .. . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . • . .. ... .. . 13. APPRAISAS

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The Stockholder Creates Proit Potential .

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The one Wolf Approach

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76 76 79

80 81 81 83

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Stocholder Obligations . . Pitfalls

66 66 67 68 70 72 74 74 74

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VIII

85

86 88 BB

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14. OVER-SUBSCRIPTIONS .. . .... . . . . . . . .. ..... . ..... . . . . . 89 The Over-Subscription Privilege . .. . .. . .... . . .. . . . . ... 9 1 Capital Gain Potentials . . . . . . . . . . . . . . . . . . . . . . . . . . . . • 91 How to Calculate the Value of a "Right" . .. ... . . . .... . .. .. 92 The O\rer-Subscription Play. . . ..... . . ..... ... . . . . . . . . 92 Analysis . . . . . . . . . . .... . . . . ..... . . . . . . . ... . . . . . . 93 Sources of Information . . ... . .... ... .... . . . .. . . .... . 93 Summary of Steps in Over-Subscriptions . .... . . .. . . . . . ... 93 15. MERGERS AND ACQUISITIONS ............

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95 96 The Common Denominator . . . . . . . . . . . . . . . . . . . . . 97 Convertible Preforred as a Common Denominator ..... 97 Where to Find Capital Gains in Me1·gers/Acquisitions.. . 98 Convertible Preferred as an Exchange Medium .... . .....100 How Opposition Creates Capital Gain .............. . .. .. .101 liwesting Approach in Mergers/Acquisitions ......... . .... . 102 When to Get In . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... .103 What Corporate Actions Lead o Mergers/Acquisitions ... . . • . .106 Financial Analysis . . . . . . . . . . . . . .. . .....108 Sources of lnfonnation . .. . . . . . .. . . . . . . . . ... . .110 Current Merger IAcquisition Participants . . . . .. . ... .111 The Railroads ..................... . . . . . . 113 Relative Values - Keys to Profit Potentials .........

16. REORGANIZATIONS.

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...... . . . . . . . . . . . . .. .. . Capital Gain Potentials . . . . .......

.. .. .. .. .. . . New Securities Command a Higher Price . .. .. Characteristic Steps in Reorganizations . . .. . . Protective Committees . ... ....... . . Getting In . . . . ... . . . . . . . . . . . . . . . . . . . . .. . . Investigation and Analysis ... . . ... .... . . . . . . . . . . Uses of Reorganizations

The Step Approach to Analysis of Reorganization Situations Summary

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Railroad Reorganizations. .. . "Mark To

Public Utility Holding Companies Investing and Trading Procedures.

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Summary of·Steps in Break-Up Situations.

Summary

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. .. . . . . . . .. . Analysis . . . . . . . . . . . .... . .. . . . The Ten-Step Approach. . . . . . . . . . . When to Invest in a Recapitalization. . . . . . . . Stock Splits . . . . . . ... . . . . . . . . . . . . . . . Summary . . . . . .. . . · · · · · ·

17. U\'1QUE SITUATIONS

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How Capitalizations are Processed

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.122 . 122 . 123 . . 123 . .125 . .126 . 128 . 129 . 129

. . . . . . . 130 . . . . . . 133 . . .. .134 . . . 134 . . . . . 135 . . . . . 13 5 .......... 136

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18. THE

"SOMETHING DIFFERENT" GROUP .... .

he Analytical Approach

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Financial Analysis ......... . Corporate Action Analysis

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Investing Approach ......... . llustrations of Uique Situations.......

19.

PYRAMIDING

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Pyramiding Concept . .

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Pyramiding Procedure ..

Some Trading Aspects...

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Where to Find Pyramiding Canidates ..

20. TURNABOUT SITUATIONS ..... .

"Tunabout" Characteristics .... .

"Tunabout" Background ......... .

Examples of "Tunabout" Situations .. .

Analyticl Approach ..... . Meaning of Insider Buying ..

Sources of Information ... . Investing Procedure ..... .

21. CHANGE

IN LINE OF BUSINESS ...... .

Concept in Change of Operations .. . Backgrond Motivations ....... .

Capital Gain Potentials ........ . Procedures for Chnging Product Lines ... Analytical Approach ..... . Where to Find Situations . Sources of Information .. Summary .......... .

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. 149 . 149 . 150 . 151 .151 .. . 152 . .152 . .. 153 . 154 . 155 . 156 .156 . 157 . 158 . 158 . 159 160 . 160 . 163 . 164 . 165 . 165 i

22. EMPRE BUILDRS ............. . Illustrations of E mpire Builders .. Investing Concept ...... Capital Gain Potentials . . Investing Procedures .. .

Analytical Approach .... Fraud and Chicanery.... Financial Analysis .... . Sources of Information ....

23.

INTERNAL DEVELOPMENT SITUATIONS . Special Interest Companies .......

Analytical Approach ........... . Capital Gain Potentials .. Investing Approach ..... Sources of Information .. GLOSSARY. INDX ................ .

137 138 139 139 139 140

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167 167 168 168 169 169 170 170

. 172 . 172 . 175 175 176 176 178 180

About Special Situations

SPECIAL SITUATIONS are capital gains investments. They are special because chaTacteristic features distinguish them from ordinary security investments. One main theme identifies them, a unifying common denominator, namely: CORPOR­ ATE ACTION. This is the key to capital gains for Special Situation investors. CORPORATE ACTION To clarify Corporate Action, we divide a company into two principal parts . One, familiar to all, deals with products and services, plants, facilities, people, under the direction of operating management. The other face of the corporation is the administrative group comprised of Officers and the Board of Directors.

Here,

officials deal with the corporate structure, its capitalization and changes in busi­ ness directions, identified by Mergers/Acquisitions, Divestitures, Reorganizations, and company policies. While these activities have an impact upon products and services, over a period of time, the Special Situation element arises from Copor­ ate� initiating the program. For example, in a Merger/Acquisition, an ex­ change of shares is the Corporate Action; in Divestiture, he distribution of shares of a subsidiary company is the Corporate Action. In a Merger/Acquisition, capital gain often arises 'from the exchange of shares; in Divestiure, capital gain may be in the latent value of the company being distributed. Until the Coporate Action has been consummated, it would not inluence a

ected employee litigation.

In some Liquidation s ,

securities holders welcome t h e opportunity to ith Federal, State, and Mu11icipal

and claims are spelled out and unsold properties fully described. The company ' s

governments . Company ' s balance sheet and "notes" will show whether reserves

annual and interim reports give background information. The company, too, i s

have been set aside for tax contingencies. Are reserves adequate to meet claim s ?

cooperative in response t o direct communications . Liquidations with l egal aspects

Has company claims against Government for tax rel'unds ? Stockholders have been

such as condemnation and bankuptcy have voluminous reports issued by Trustees

pleasantly surprised in this area since Liquidations due to business losses may be

and government agencies as well as other l egal channels . This material is avail ­

beneficiaries of previous years ' tax adjustments . A not unusual tax adjustment o r ­

able to all interested parti es . Protective committees are often present in this

iginates in condemnation suits and sales o f properties t o governmental authorities .

group and a good source for current information. SPECIAL INVESTING PROCEDURES

RESERVES Funds set aside for reserves are explained under notes in the small type of a company' s financial statement. Careful examination of res erve provisions can be rewarding. Reserves may be overstated o r actuall y uimeeded and such funds would redound to stockholde rs . Conversely, if understated, the reserves may be con­ sumed by claims . Neverthel ess, reserves are areas where additional liquidating values may a ri s e . LITIGATION Legal aspects in a Liquidation could be a two-edged sword; therefore, ade­ quacy o f provisions made for claims must be analyzed. It is important that indicated l iquidating value not include funds called upon to pay claims. Litigation benefiting stockholders includes condemnation suits, tax adjustment suits, claims against company officials , and commercial suits being adjudicated. Since outcome of l egal

HOW TO CREA TE STUBS Liquidations designed for cash payments lend themselves to the c reation of stubs.

(See following chapter for discussion of Stubs) . This m edium offe1·s parti c i ­

pation in future distributions . The objective in this approach is to purchase the security prior to first distribution and at a price below, equal to, or not much above the amount of the first payment. Since this first distribution will return all or most of the money invested, subsequent payments will be free of, o r represent minimal cost. Don ' t lose sight of the fact that final distributions would include any hidden values that come to light at the last moment. Since we are familiar with TERMINAL TRANSPORT CO. desc1·ibed earlier, we use this company as an illustration.

TERMINAL was available around l l

3/8

to

so

INVESTORS' GUIDE TO SPECIAL SITUATIONS IN THE STOCK MARKET

1 1 1/2 a share. The l iquidating plan called for initial payment of $1 2 a share. Thus purchase would give buyer a small profit in hand at the first distribution. Further ­ more, he would participate in subsequent distributions that could amount t o a s much as $ 1 . 35 to $1. 50 a share. This participation would cost nothing. In addition, stock­ holders would be accruing 50% of earnings until consummation of the liquidation sale. USE OF HEDGING Where the liquidating p rocedure calls for distribution of securities and of cash and s ecurities , consideration should be given to hedging (see chapter on "Trading P rocedures ") by s elling the securities in anticipation of distributions o protect profits from market erosion. USE OF CREDIT Liquidating situations at a time prior to initial distributions are often viewed as having l ittle or no risk. At such periods securities may be used as collateral for loans. In this way, potential profit percentage on investment is substantially in­ creased. A situation showing $1, 000 profit on investment of $10, 000 would afford a retun of 10% if money was employed for one year. However, if $7 , 500 could be borrowed, then investor would use but $2, 500 of his funds. After deducting interest for one year of $450 , the net profit would amount to $550. This would represent a return of 22%. f the situation matured in six months , on a cash basis the rate of return would be 20%, compared with 44% when using credit.

LIQUIDATIONS

51

BOSTON & PROVIDENCE RAILROAD: The Interstate Commerce Commission ap ­ proved a plan for paying off securities holders of this bankupt company. The commi ssion ruling ll give the N. Y. , NEW HAVEN & HARTFORD AILROAD clear title to BOSTON & PROVIDENCE tracks linking these cities that currenly are being leased as part of the New Haven System. The arrangement provides, among other things , for the NEW HAVEN to pay about $110 a share for the 20, 770 shares of BOSTON & PROVIDENCE outsanding. In addition, the public shareholders will receive certificates of Contingent beneficial interest secured by BOSTON & PROVIDENCE real estate holdings. "Street" estimates of the value of BOSTON & PROVIDE NCE stock ranges from $400 to $500 a share. CONSOLIDATION COA L CO. : Proposal to sell all coal and related assets to CON­ TINENTAL OIL CO. Liquidating plan provides for distribution of O. l shares of CONTINE NTA L OIL; 0 . 35 shares of CHRYSLER CORP. ; and approimately $47 in cash. At current price, this amounts to $73. 57 compared with price of $65 for CONSOLIDATION COAL common stock. No date has been set for consummation but it is believed the plan will be effective within a year. FE LMONT OIL CORP . : While engaged in oil and gas exploration , the company is believed to be in a position of entertaining sell -out proposals at some time. GENERAL AMERICAN OIL CO. : News released indicate discussions with s everal companies regarding possible merger or sale of the company.

EXAMPLES For illustrative purposes we p resent the following brief summary of com­ panies that are in a phase of liquidation, or have been considered as potential candidates for liquidation, merger or acquisition, at the time of writing: A VC CORP. is the former AVISCO CORP. which sold its assets in Liquidation and retained as its major holdings cash and MONSANTO CHE MICAL stock. A tax matter that may take five years has inluenced the company on two occasions to offer a ten­ der invitation to stockholders to sell their shares to the company at asset value. Sub­ sequent to the offer, the shares declined. Each share of A VC CORP. has underlying assets of 0, 83 share of MONSANTO, a certificate of participation (issued to stock­ holders who tendered their stock) estimated to be worth $3· a share to stockholders , and about $35. 50 in cash, the total package being worth about $107 . 74 compared with market price of $91 for the stock. There are about 108, 000 shares of stock out­ sanding. Whether the company will extend another tender invitation is a matter of conjecture. However , one investing approach is to deduct the amout of cash and in­ dicated value of the participation certificate to estimate . cost base for 0 . 83 shares of MONSANTO. This works out to a rate of $64 a share compared with the market price of $78 for MONSANTO. Pricing the discount at 17% from indicated asset value is another view of the package. A ZTEC OIL & GAS: This domestic, independent natural gas and crude oil producer has been subject of umored sell-out or merger. Asset value is alleged to be sub­ stantially above market price.

GREAT WESTERN PRODUCERS: Company, in process of Liquidation, paid first liquidating distribution of one share of TAYLOR wE CO. for each five shares of GREAT WESTERN and provided for second distribution of l TAY LOR WINE for each 6 held. Small amount of cash is also anticipated. Company ' s operations has been at deficit levels for the past few years. HUDSON & MANHATTAN CORP. (formerly Hudson & Manhatan RR): The New York Supreme Court decision, in condemnation proceedings for the company' s p roperties brought by the Port of New York Authority, amounted to $7 2 . 8 million. The Port Authority has indicated it will appeal he award. Although the company sought sub­ santially more than $72 million, the award represents a major victory. The major beneficiaries, because of terms of reorganization of the old HUDSON & MANHATTAN R CO. , would be the Class B stockholders of which there are but 58, 849 shares out­ standing compared witl1 10 times that amount in Class A. This came about from the company's charter calling for holders of Class B to share pro rata in net proceeds up to $18. 5 million. The excess over $18. 5 million would accue at the rate o f 90% to Class B holders and 10% to Class A. ased on the award of $72. 8 million, the Class A stock would have a value of $56 compared with its market price of S40 (ASE ) . However, the Class B sock would be worth $693 a share compared with its current price in the Over-the-Counter market, of around $300 a share. The unique­ ness of this s ituation is in the fact that the "B" shares were distributed as a peace offering to the old adjustment bond holders in the ratio of 3 1/2 shares of Class B for each $1, 000 adjustment bond. At the time of issue, the adjustment bonds were priced around $20 o $25 per $1, 000 bond.

INVESTORS' GUIDE TO SPECIAl SITUATIONS I N THE STOCK MARKET

52

KEWANEE OIL CO. : Company is a crude Oil p roducer and recently sold some assets for over

$30

"'"'"' 9

million. While frquently mentioned as a sell -out candidate, nothing

specific has been indicated. KRBY P E TROLEUM CO. : Dissident stockholders of KIRBY P E TROLEUM filed papers with the S. E . C . indicating intention to solicit proxies in a bid to take over the company. Dissident group claimed control of desire to liquidate the company to accept

a

57%

of stock, and expressed the

purchase offer from an unidentified

a share. This compares with market price at time of announcement of

$36. 75

on the A. S. E . The roup fiure for Liquidation is stated to be in the neighborhood of

$70

a share. The figure was disputed by the company.

LNC CORP. : The company is in process of ull Liquidation and distributions of

$7 . 5 0

have been made. Residual assets have been estimated to be in the neighbor­

hood of

LEE

$4

to

$5

a share.

NATIONAL

CO. :

Mentioned in other parts of this book (see index) . The

company voted to change its capital structure as an aid to finding uses for its large cash position. The latter is qual to about ket price around

$24-1/2.

$3 1

a share compared with mar­

Should company not find satisfactory investments , then

liquidation is a possibility. MERRITT-CHAPMAN

&

SCOTT CORP . : A news release stated the company's

Stubs

management believes that it might be better for shareholders to liquidate the com­ pany unless the c ompany is able to acquire some businesses with "desirable oppor­ tunities . " The annual report noted that the company has sold four of its operations since

1964.

standing to

Through a tender offer the company reduced its common stock out­

2, 275, 000

from

are said to amount to about

2, 868, 000. 29%.

Management and

related holdings

of common

PARMALEE TRANSPORTATION CO, : This member o f a threesome, comprised of PARMELEE TRANSPORTATION, CHECKER MFG. , and CHICAGO Y E LLOW CAB, has the background for potential liquidation or m e rger. PAR ME LEE has disposed of most of its operating facilities and its main holdings are cash , government secur­ ities, and

58%

of Y E LLOW CAB outstanding stock. The indicated asset value is

substantially above the

$52

level of the stock.

sell -out or acquisition. Oil reserves are estimated to be around

$45

a share.

TEXAS PACIFIC LAND TRUST is often rumored as a potential l iquidation or sell out. UNION SUGAR CO. : Company has large land holdings in California, is often men­ tioned as a potential liquidation to urther land development.

STUBS REPRESENT RE SIDUAL INTERESTS of companies in process of liquida­ tion. These terminal securities exist because of specific and contingent values maining· to be processed. Reserved

and

re­

unliquidated properties a r e repositories

of real assets while litigation usually holds clues to contingent interests. Stubs come into being as

a

result of a major distribution of ass ets by a company in liqui­

dation . The withheld portion of total assets and claims to be cleared are assets

SUNRAY DX OIL: The company has been subject of recurring rumors regarding

II

I

source. One member of the group is believed to have said the offer was qual to

$55

II

1 1!

underlying

the residual Stub. A Stub then i s unfinished business.

CAPITAL GAIN POTE NTIALS Bona ide values inherent in Stubs harbori ng capital gain potentials may be uncovered in the following Corporate Financi al reports :

1. 2. 3. 4.

Reversionary provisions in an agreement between company and

5.

Reserves established for specific contingencies that may or

Stated net assets. Tax litigation. Litigation wherein company is claimant . security issue. may not materialize. 53

INVESTORS' GUIDE TO SPECIAL SITUATIONS IN HE STOCK MARKET

54

Capital gain pote11tials in Stubs relect discount from indicated value and lo

extent they are undervalued. The rate of return on money invested should be vi ewed in relation to expected duration period for holding the Stubs . Stubs represent non­

operating companies and as such it is unlikely that earned income will accrue.

55

STUBS

unusual for a stock to be priced around or even lower than indicated initial distri­ butions during the early part of the l iquidating procedure or at time of announce ­ ment o f proposed liquidation. Since t h e amount o f the first distribution is nown, it is a simple matter to calculate cost of Stub by deducting amount of indicated

Therefore , the sole retun on money invested will arise as capital gains. Where

distribution from market price. Purchase of stock in expectation of a liquidating

could be projected over a five-year period. If such "timing" would offer a 10% re­

"return of capital" and as such reduced the investo r ' s cost basis .

cost price is relatively low compared to expected potential gain, then rate of return turn, then the situation holds interest.

A usual practice in Sub liquidating procedures is distribution in smll doses

of the remaining assets. Therefore, a good approach when investing in Stubs is to calculate when final distributions are being made so that little or no money remains in the Stub. Thus , in the life of a Stub while time is a factor, it is not a source of concern. Stubs are money deals in that one invests X dollars and expects X plus dol­ lars in return. While there is little expectancy of additional values developing, it has been observed over the years that Stub situations, particularly thos e involved in tax litigations , can bring windfalls of substantial, unexpected additionl pay­ ments. IDENTIFYING NAMES

Residual interests in a company are not only known as Stubs but are also

called Certificates of Participation; Certificates of Beneficial Interest; Certifi­ cates of Contingent Interest; Liquidating Certificates ; and Reversionary Certifi ­

�·

These are negotiable instruments and are traded in s ecurities markets .

Physical Stubs are original stock certificates over-stamped with the legend des­

cribing distributions. Some liquidating programs do not use Stubs .

·n

these circumstances , stock

c ertificates are deposited with a bank or trustee who processes the remaining liquidating steps. Distributions are made directly to securities holders whose

names appear as registered owners at time of first distribution. While this does not make for ready negotiability, nevertheless these residual interests may be traded, i . e. purchased and sold in the securities market by use of "contracts . " Generally , contracts are recognized by trustees of l iquidating companies as legal transfers. A point to keep in mind is that since Stubs represent the final s tage of a company's existence, assets may be placed in care of a trustee. The liquidating company and bank processing liquidating distributions can advise on location of the

distribution poses no tax p robl em since the distribution generally is treated as

ANALYSIS OF STUBS

Financial analytical procedure separates real assets from contingent poten­ tials . Indicated net worth of a Stub is often stated by a company in its liquidating program . Asset value can also be gleaned from a company 's balance sheet issued

at time of the p roposed liquidation plan, deducting initial distribution from indicated asset value. True res idual assets show up clearly -- and since a terminal situation

has little or no expenses, these assets should remain constant. Principal a s s ets of Stubs comprise cash, marketable securities and unsold properties . Ultimate values may be inluenced either beneficially or adversely by disposition of reserves and litigation. Having calculated an indicated asset value, the amount of reserves and composition of litigation must be evaluated. This is generally found in Notice of Meeting dealing with liquidation or other corporate actions . The schedule of esti­ mated payments should b e checked s ince you want o know why funds are being held for distribution.

Values in Stubs arise from two sources, real assets and contingent claims. Real ass ets are usually clearly defined since, by definition, a Stub represents re­ maining assets after liabilities have been satisfied. However, litigation o r claims are not fixed amounts and settlement usually is subject to compromise and adjust­ ment. Since contingencies offer potential capital gains , it is advisable to estimate values of claims on a basis of win all -- a m idway comprom i s e -- or lose all . This spread of values offers a basis for estimating ultimate worth of the Stub. ESTIMATING MAXIMUM AND MINIMUM VALUES A helpful approach to Stubs is to evaluate maimum and minimum values. To do this we look at real and contingent values from many angles .

Step One relates res idual net ass ets to cost of Stub. If Stub was acquired by purchase of stock prior to first distribution, then cost is price of stock l es s amount q f that distribution. For example, if stock cost $21 a share and distribu­

$1 a share. f stock cost $19 a a share, then cost basis is minus $1, or no cost. Direct purchase of Stub, of cours e , immediately establishes your cost price.

trustee. It is helpful to have your name on the trustee residual interest list since

tion was

this is the main source of information. The trustee will keep you informed on final

share and distribution was

action, litigation and distributions . HOW TO ESTABLISH A S T U B POSITION Investors can acquire Stubs through two procedures. One , of course , is direct purchase in the market after they have been established. When residual assets are complex and a Stub is subject to price luctuations , this approach is most practical .

DE.LHI CONTACT UNITS is n eample of fluctuation of Stubs

s ince issuance, having been priced at

$4 and then around $3.

The other method offers possibility of creaing a Stub position at low or

no cost basis. This is a more frequently used procedur e . The m ethod is to pur­ chase stock of a company i n liquidation prior to the primary distribution. It is not

$20

a share, the cost of Sub would be

$20

n Step Two we assume company is the defendant in contingency actions and we view these claims as having been lost. On this basis, reserves held for such claims have been consumed. Therefore, the only values accruing to the Stubs will be net value. This amount is the minimum expectation. Step Three views the situation assuming that claims against reserves are n that case, reserves accrue o Stubs. The reserves and net asset

not upheld.

value are added to give maximum expectancy based on no erosion of reserves. Step Four views the company as a claimant in litigation. In this cas e ,

claims may redound t o Stub holders. However, i f claims are lost, nothing is added

:·

56

INVESTORS' GUIOE TO SPECIAL SITUATIONS I � THE STOCK MARKET

to asset value. If claims are won , then value of claims and assets are joined to give maximum epectation. In the oregoing circumstances, minimum and max­ imum expectations have been conjectured under varied conditions whereby company wins or loses as a defendant and company wins or loses as a claimant. HIDDEN VALUES Where distribution to Stubs includes securities of another company, it would be advisable to check the tax status of that company. This may have great value in bringing to light a tax loss carryover applicable to the shares. Such a sit­ uation arose a number of years ago when AMERICAN POWER & LIGHT distributed shares of PORTLAND GAS & COKE . A tax ruling permitted the cost of PORTLAND GAS & COKE stock o be computed at $69 . 87 a share. Since the stock was priced under $20, shareholders were in a position to create a substantial loss position. Subs that reflect litigation as the main cause of their protracted existence include BRITISH COLUMBIA POWER and HOLYOKE SHARES. TYPES OF STUBS The individual characteristics of a Stub represent their motive for existence. The Common Stub comes about from residual assets in a l iquidating company. RIDGEWAY CORP. is represenative of a Sub having definite assets awaiting sale. Stubs such a s DELHI TAYLOR OIL and PRODUCING PROPERTIES exist because of precautionary measures against claims that may arise. Certificates of Participation represent interests in a reserve fund c reated to expediate liquidation. AVC CO. Participating Certificates is an example of this type. Revers !Certificates re­ lect the tuning action implied in the name. This type of Stub may be viewed as a return of property at expiration of a lease. However, a reversionary agreement may not be confined to a Sub , as seen in the WESTERN UION situation. Here he company has an agreement with GOLD & STOCK TELEGRAPH CO. to return sub­ s antial assets at termination of a long-term lease due on January 1, 1981. Funds to meet this reversionary claim are carried on W ESTERN UNION's books as a deferred non-interest bearing liability and is included on the balance sheet in Long Term Debt. The Reversionary Certificates of WESTERN RY OF A LABAMA, on the other hand, are entitled to one share of stock of the railroad when reversion be­ comes effective in 1980. INC. where Other Stubs represent interest in varied claims, such as PACO, · the Sub ' s interest is based on the amount of tax refund. Certific,t_?_§_of leneficial Interest a1·ise where assets of a l iquidating sit­ uation are placed in trust. This may be seen in CANAL BANK & TRUST CO. where income would be subject to depletion charges and thus free from tax.

P roducing Properties __Stubs created through sale of assets and liquidation. Expcctation - -$0. 25 to $0. 50 a share. Del Penn Created from l iquidation of SANDUA COR P . Expectation about $2. 00. Gafulco Co. >ormerly G. A. FU LLER. Name changed in liquidation. Reserve fund holds about $5. 00 a share. J. K. Corp. Formerly TERMINAL TRANSPORT CO. Stubs represent interest in reserve fund held for claims. Expectation around $0. 50 a share. 1 Araphoe Corp. Company sold assets. Stub value about $2. 00 a share. Delhi Taylor Oil Corp. _ Stubs have estimated value up to $2. 00 a share from liquidation of company. Ridgeway Corp. Company is in process of liquidating its last property comprised of land in Florida. B . P . C . Liquidating Company created for purpose of liquidating BOW MAN PRODUCTS. _REVERSIONARY CERTIFICATE S Western Ry. of Alabama & Atlanta & West Point RR.

These Certificates arose from the reorgani zation of the GE ORGIA RAILROAD & BANKING CO. , WESTEHN RY. OF A ABAMA , and A T LANTA & WEST PONT RH. Each have outstanding re­ versionary certificates entitling holders to one share of stock of the respective railroad when reversion becomes effective in 1 980.

PARTICIPATING CERTIFICATES A. V. C. Corp.

Citadel Industries

Franco Wyoming Oil

SOME EXISTING STUBS Ambassador Oil Co.

Stubs came into being as a result of sale of assets and liquidation. Argo Oil Created from liquidation. British Columbia Power _ Residual value is in l i tigation. Cosden Petroleum Created from liquidation. Paco, Inc. C reated from PARKERSBURG AETNA liquidation. Stubs represent interest in litigation.

Sl

STUBS

Holyoke Shares

Company established a reserve fund at time of liquida­ tion of A VISCO CORP. Additions to fund are created by interest, income ax credits and re­ funds. Deductions arise from losses , expenses and the amount of all income and other axes paid after September 1 963. Certificates c reated out of liquidation of AMERICAN LOC0\0TIVE CO. The participating certificates share in a residual fund that had an original value of $4. 00. Residual certificates paid th e third l iquidating dis­ tribution of $1. 91. Hemaining assets include cash reserve against claims, and about $4 million of contingent notes, the payment of which depends on outcome of pending litigation concerning gas prop­ erties in Califonia. Certificates of participation in a stockholders ' realiza­ tion fund. Net asset value as of December 1964 was $4. 63 a share.

58

INVESTORS' GUIDE TO SPECIAL SITUATIONS IN THE STOCK MARKET

CERTIFICATES OF BENE FICIAL INTEREST New York, New Haven & Hartford Railroad Boston & Providence Rail road

CHABR

The CBl's are a residual interest from an earlier bankruptcy of the New Haven RR. Certificates are to be issued to holders of common stock at time NEW AVEN RR pays $110 a share to stockholders. Certificates ll represent interest in real estate properties .

10

Divestitures

THE FORCE D DISTRIBUTION OF AN OPERATNG UNIT by a parent company is called a Divestiture. Therefore, when we speak of Divestitures, in he Special Sit­ uation sense, we mean epected arrival in the securities market of an independent operating business whose shares are no longer controlled by a parent company. ORIGIN OF DIVESTITURES Widespread reorganizations of public utility holding companies during the 1940's alerted the investing public to inherent invesment potentials in Divestitures. Utility operating companies were hidden in the maze of parent, grandparent, and great-grandfather holding company structures. These complex interrelated hold­ ings permitted he top company to control many operating units through stock control of intermediate holding companies. Public utility reorganizations came about through bankruptcy proceedings and through enforcement of the Public Utility Holding Company Act by the Secur­ ities & Exchange Commission. It is interesting to note that many of today 's high­ grade public utility companies came o public onership through Divestiture. A few of the more popular are: UNION E LE CTRIC CO. , CONSUMERS POWER CO. , CENTRAL ILLINOIS LIGHT CO. , OIO E DISON CO. , and NEW ENGAND E LE C TRIC CO. 59

60

INVESTORS' GUIOE TO SPECIAL SITUATIONS IN THE STOCK MARKET

Subsequent to the public utility holding company period, Divestitures were generally quiescent. However, recent years have fowid Divestitures gaining mo­ mentum. They sometimes appear in the guise of spin-offs , dividends in kind; and sale of operating assets. Prompted by Federal agencies in recent years, Divesti ­ tures are now almost daily occurrences. A Justice Department action requiring DuPONT to distribute its GENERAL MOTORS stock to its own stockholders is lhe most widely nown Divestiture of recent years. The Federal Trade Commission is the genesis for many Divestitures. MARTN MARIETTA's disposal of numerous miscellaneous operating units , mostly concrete pipe manufacturing properties, is a well -knO\m illustration. FOREMOST DAIRIES ' sale of its Southern region milk and ice cream holdings is typical of re­ cent action to meet Divestiture orders. llustrations of other actions are: LONE STAR CEMENT CORP. was granted an extension to complete the di\•estiture of 25 of the 3 1 concrete plants it has taken over through the acquisition of SOUTHERN MATERIAS CORP. and PIONEE R SAND & GRAVE L CO. SC HLITZ BREWING CO. was ordered to dispose of its holdings of BURGERMEISTER BREWING CORP. and GENERAL FOODS o dispose of S. O. s. CO. since the acquisition violated the antitrust law. The F ederal Home Loan Bank is another source of Divestitures, as when it ordered LYTTON F INANCIAL CORP. 's Divestiture of a subsidiary which it con­ trolled, BEVERLY HILLS SAVINGS & LOAN CO. n the public utility field, he Securities & Exchange Commission recently brought action against NEW E NGAND E LE CTRIC SYSTE M. However , Divestiture is subject to a court order remanding the case to the S. E. C . VOLUNTARY DIVESTITURES Voluntary Divestitures bring to the market a wide variety of independent companies. Commercial enterprises often use Divestiture procedure for two basic reasons: (1) As a result of Merger/Acquisition a company may find that an acquired operating unit does not fit into their policy or corporate posture. In such a case it is best to divest the operation as a whole ; (2) it is deemed advisable to give independent expansion to a subsidiary. An illustration is NEW PARK ITNING CO. 's Divestiture of 24. 8% interest in the outstanding stock of EAST UTAH MINING CO. to its stocholders. Since both companies are engaged in the same general field, the object of the m ove was to give EAST UTAH MINING complete independence . UNITED PACIFIC CO. , a flour milling enterprise, proposed a plan to spin­ off its UNITED PACIFIC INSURANCE CO. subsidiary. According to an official r e ­ lease, the subsidiary is a general insurance underwriter authorized t o d o business in 34 states . The spin-off provides a broader base for the company to grow as an independent. PRENTICE -HALL, INC. distributed shares of its subsidiary, WADSWORTH PUBLISHING CO. in he belief that the spin-off would enable the company to improve its competitive position and faciliate growth in the textbook field. Action of the stock, in this instance, is interesting since the shares were traded around 4 1/2 at time of release and subsequently doubled in price. Liquidating companies often resort to Divestiture in distribution of assets. RE LIANCE MANUFACTURNG distributed PIONE ER AEROMOTIVE stock in Liquida-

DIVESTITURES

61

tion. At the time the shares were around 3 1/2 and subsequently moved to the 10 level. MIDSTATES BUSINESS CAPITAL distributed stock of PARKVIEW DRUGS and HENRY'S DRIVE -IN as a part of their liquidating program. Companies in partial Liquidation resort to Divestitures also. NAUTEC CORP . approved a spin-off of part of the company ' s operations, l eaving the concern with a yacht and lithogmph division. BRADEN AEROMOTOR CO. , a new corporation, was formed to expedite he Divestiture. Use of Divestiure procedure to accomplish a corporate move is illustrated in the following: KRKEBY-NA TUS CORP ' s announced plans to transfer the bulk of its assets to a new real estate investment tust and to distribute beneficial interests in the tust to stockholders. One benefit of the move is tax savings . F IRST FINAN­ CIAL CORP. OF THE WEST stated its plans to spin-off its principal subsidiary, HUNTINGTON PARK FIRST SAVL!GS & LOAN ASSOCIATION to enable the subsid­ iary to acquire oher associations. IMPACT OF DIVESTITURE ON EARNINGS Stock of a parent company is influenced in a Divestiture when a subsidiary is sold . . The procedure may be sale o outside interests or to its o\m stocholders. The investor's interest is concerned with the impact upon earnings and dividends. A phase of this can be illustrated in the p roposed Divestiture of NORTHWEST PPE LNE by EL PASO NATURA L GAS. The plan calls for NORTHWEST PIPE LINE to assume some $180 million of E L PAS01s debt and NORTHWEST will issue to E L PASO all its common stock. E L PASO will offer the NORTHWEST shares to its own holders in exchange for E L PASO stock. As a result, the Divestiture would reduce outstanding E L PASO stock so that per share eamings and common divi­ dend would not be impaired. In other instances where subsidia1·ies were sold to meet Divestiture· orders, companies could face loss .of revenues , despite the fact that the parent company would have received cash . Management's capability in putting funds to work would be the important factor. FOREMOST DARIES ' stock was priced around $13 a share when the company was confronted with much cash and loss of operating unit 's revenues. However, a favorable use of the unds was reflected in the stock's move to substantially higher levels. DIVIDEND N KIND An area related to Divestitures is dividend-in-kind distributions . This arises where a substantial number of shares are held by a parent company. The divested company, released from this type of control , is permitted more inde­ pendent action. Market evaluation may be on a higher level in the light of ePanded prospects and operations. While the market would reflect improved s tatus of d i ­ vested company 's shares , this could redound t o the parent company 's benefit i n case all the holdings h a d not been distributed a s dividends . CONFLICTS OF INTEREST A potential source of Divestitures , recently come to the limelight, is con­ tained in the New York Stock Exchange's policy concening "conflicts of interests . " News reports have highlighted the Exchange ' s view regarding instances wherein

62

INVESTORS' GUIDE TO SPECIAL SITUATIONS IN THE STOCK MARKET

officials of a parent concern have an interest or options in a subsidiary corporation; and where officials have an interest in a c ompetitor's business ; and in cases where executives lease property to or from their company. The following is an example of the meaning of "colicts of interest" ; the Exchange advised directors of McNEIL CORP. to divest their personal holdings in a concern controlled by the parent com­ pany. Specifically, the suggestion referred to stock of SUN RUBBER CO. (35% owned by McNEIL). Serious enforcement of the Exchange policy could open wide areas for Divestitures . The inter-relationship and cross -holdings of s ecurities by corporations and officials is an increasingly large field and in recent years has become even more s o . Statis tical and financial s ervices often issue lists of " holdings of other corpora­ tions . " This may initiate another source of Divestitures since it has lways been of great interest. Perhaps a financial statistical s ervice will publish lists showing im ­ portant .holdings of officials in subsidiary or related companies . At any rate , the E xchange policy should be closely observed for mol'e direct enfo rcement in the areas of "conflicts of intere st. " Much information can be obtained from prospec­ tuses, notice of meeting, Securities & Exchange Commission reports, published news items, and reports in finahcial publications. WHERE CAPITA L GAIN POTENTIALS LIE Basically, investing in Divestitures is approached in a double-barreled way. In the early stage, opportunity for capital gains may be present in the par­ ent company ; later, profit potential arises when shares of divested company are in the ma'ket. Regardless of the approach, inherent capital gain opportunities arise from undervalue of the shares and from favorable prospects in the offing for the divested company. Let us examine the first area of capial gain potentials , anticipation of release by parent company of a profitable subsidiary. GRINNELL CORP. s erves as a fine example of how this works . GRNNELL was ordered to file a plan for Divestiure of its controlling interest in three companies - - AMERICAN DIS­ TRICT TELEGRAPH, HOLMES ELE CTRIC PROTECTIVE CORP . , and AUTO­ lATIC FBE ALARM CO. The case was brought as a civil suit by the Anti -Trust Division of the Department of Justice. It is interesting to note the market action of GRINE LL's stock following the Divestiture order. The shares, responding favorably, rose from just under 100 to 140 a share. The investor belief in "the parts are worth more than the whole" was relected in such market action. This type of situation basically harbors hidden asset values, reflecting the subsid­ iaries being valued more as independent operations than as a holding by the parent company. This prevails becau s e the values of subsidiary companies are generally limited to the amount of the dividend received by the parent. It is note­ worthy hat HAJOCA CORP. (44% owned by GRINNE LL) had earnings of $7 . 21 a share but paid dividends of only $1. 25 a share. Dividends being controlled items may not reflect true eanings or divi­ dend capabilities . Thus , the subsidiary company is carried on the parent 's books at a lesser value than would be ascribed to its shares were it a public holding. The second area having capital gain potentials is in shares of companies to be spun-off. These shares , upon approval by stockholders of the Corporate A ction and clearance by government agencies , may come to the market on a

DIVESTITURES

63

"when issued" basis. ILTON HOTE LS ' spin-off of HILTON HOTE LS 'INTER­ NATIONAL stock is an illustration of this. News releases announced the plan and the approval . A statement of reasons for the separation was given, together with a great deal of financial data. According to officials , accelerated growth of the international company and differences in fndamental characteristics of the international operation from domestic were reasons for the spin-off. HILTON HOTELS INTERNATIONA L, for example, is a lease operation with little or no equity in most of its hotels, while ownership of real esate is an imporant factor n domestic operations . Trading in HILTON HOTELS INT. on a "when issued" basis commenced around the $18 level. Subsquent market activity brought the stock up to the $26 level within a few months time. Capital gains in this situation were obtained through direct purchase of the company to be spun-off. In another circumstance, a company to be divested may not have adequate background data. In this event, the spun-off company's s ecurities might have a low evaluation since time would be needed for s easoning. The outlook, then, would center around anticipated broadening scope of its operations as an inde­ pendent. This , combined with direct management control , could bring about a more successful operation than prevailed h eretofore. The act may be that the divested company was released to take advantage of eKpanding operations obtain­ able when restraints of control were eliminated. This was an important ingredient in the public utility Divestiture days. Undervalue may be present in shares concerned with Divestiture when sub­ sidiary company stock is traded in the market but the price is influenced by a small trading interest. This arises where an inadequate number of shares are available for public trading. Unlike other stocks , in this instance dividends exert little inluence on price of the shares . For example, AMERICAN DISTRICT T E LE ­ GRAPH C O ' s . shares were priced around $113, reflecting 1 0 . 1 times eanings of $10. 12 a share. Furthermore, the company paid out only $3 . 15 a share in divi­ dends. nvestor thinking would be that the yardstick of price x earnings would be much higher as an independent c 'mpany and that a greater percentage of earnings would be paid out as dividends. Both factors , then, would contribute to a more realistic value for ADT's stock. Actually, in response to the Divestiture order and changed thinking, the shares rose to the $150 level. Moreover, this thinking was reflected in GRINNELL's shares rising from around the $100 level to the $140 level at the time, in response to the pending Divestiture order.

ANALYTICA L APPROACH Divestitures are heralded well in advance , thereby offering ample oppor­ tunity for study. A pending situation may be analyzed from two angles . One, the parent and its subsidiarie s , already in existence , offer a great deal of data for analysis as a unit. The s econd phase is analysis of the company to be divested. Conventional financial examination, to the extend possible, is advisable for both parent and subsidiary. In the case of a subsidiary , however, it is helpful to lmow operating reco rds of former years to gain a picture of profit margins and rate of growth. Also, availability of funds for current and expanding operation is of particular interest. Capital stucture of the company to be divested is next ex­ amined With regard to heavy prior liens or excessive amounts of outstanding com-

ij

64

INVESTORS' GUIDE TO SPECIAL SITUATIONS IN THE STOCK MARKET

mon stock. Simple capitalizations are preferable for better stock market results. This permits a more realistic estimate of a subsidiary ' s sha1·es . A further anal y ­ tical step i s examination o f released company's management. Here w e take into account prospects under incumbent management or replacement by a new group. Viewing a new official family would be related to required time to initiate new ideas, since stock prices might be dormant during the ieasoning period. On the other hand, continued existing management, with greater lexibility and brighter immediate prospects, may attract increased interest in the company's shares. Additional aspects are brought o light, besides the basic financial analysis of the parent company as a unit, by use of the following procedures. Using GRIN­ NE L L COR P . as our illustration, we start with the knowledge that until the time of Divestiture order, the company's shares were valued in the conventional way. Earnings of subsidiaries were not consolidated, though parent net income in­ cluded dividend from its subsidiary, AM ERICAN DISTRICT TEL EGRAPH. However, with a Divestiture i n the offing, we look at the parent company in the light of its subsidiary's tue value. A reappraisal of GRINNE LL's earnings based on inclusion of its full net income reflecting ADT's gross earnings would materially inluence GRINNE LL's net. For instance, if we include the equity in undistributed earnings of unconsolidated subs idiaries, 1964 earnings would come to $ 1 1 . 88 a share compared with $9. 21 a share. Increased earnings amounting to $2. 67 a share could add from $27 to $37 a share to GRINNE LL's estimated value based on 10-to - 14 times earnings multiple. The foregoing approach could be used for all Divestitures being made by the company. Combining the additional values would add considerably to GRINN ELL's estimated per share worth. This is reflected in the market action of GRINNE LL's shares which moved substantially higher upon release of the Divestiture order. Investor ' s reevaluation of ADT's earnings and dividend p otentials was reflected in higher estimated value for its shares in the event of independence. n this way , the undervalue o f ADT's worth as indicated in GRINNE LL's financial reports was brought to light and given anticipatory reflection in GRNNE LL's shares. Another way to estimate values of parent company shares i s as follows : Separate that portion of parent company 's income derived from the subsidiary to be divested. Then, using the same price x earnings multiple as prevails for the parent company's stock, evaluate the shares based on earnings that do not include subsid­ iary's cont1·ibution. For exampl e , i f parent c ompany stock is priced at 6 0 , based on 12 x earnings of $5 a share, exclude the subsidiary 's contribution of $1 a share, and then calculate the price of the stock. This would be 12 x $4 or $48 a share. The next step is to estimate the value of the subsidiary 's stock based on 12 x earnings . If we assume subsidiary earnings of $2 . 50 a share, then the esti­ mated value would be $30 a share. Adding the values of the parent and subsidiary shares of $48 and $30 respectively, we have an indicated worth of the parent stock of $78 a share as a Divestiture 3ituation . In the case of GRINNE LL CORP . , the shares were priced just under $100 at the time of announcement of government's Divestiure decree. The estimated additional values of subsidiaries were in excess of $50 a share over the value of GR!NfE LL alone. Thus, on the basis of potential Divestiture, inherent values un­ derlying GRINNE LL's shares were evident.

DIVESTITURES

65

To summarize, there are four distinct areas where capital gains may develop: 1. Shares of the parent company prior to Divestiture. 2. Shares of the released company when securities are traded on "when issued" basis. : 3 . Shares of released company subsquent to its independence. 4 . Shares of parent company after disposal of subsidiaries. The duration for holding the investment can vary from a short-term or quick trade to a longer period, permitting seasoning of securities of the divested company.

I�: I

c�n"

11

TRADING PROCEDURES

67

2. A comm:>n practice is to hold the convertible s ecurity as an investment and benefit from price rises of the common stock. The convertible security will reflect price fluctuations of the common as it moves above the convertibl e ' s in­ vestment value. 3 . Another Trading P rocedure makes use of hedging by selling all or a por­ tion oI the shares available through the convertible provision without exercising that privil ege. n effect, then, we are "short" the stock, though protected by he conversion provision. This permits keeping the transaction alive so that capital gains may be taken against the common stock's flucuations. In the above three "ways" we see that a trading procedure applied to a corporate capitalization can lead to capital gains . Therefor e , examination of other "ways" of buying and selling are in order. Since Trading Procedures frequently use short selling, we first describe that trading method. SHORT S E L LING "Short" means that at the time of sale he seller i s not in possession of the secu rities he has sold. It is comparable to a manufacturer taking an order for · delivery of his product six months hence (or any future date). However, at time of acceptance he does not have the product on hand. Securities ' brokerage opera­ tion offer broad technical facilities to expedite "short" sales by borrowing shares and delivering them to the buyer of "short sale" stock. At a future date, the "short seller" reverses the procedure by delivering the shares he owes and ter­ minating his "short" position.

Trading Procedures

CAPITAL GAIN POTENTIALS arise from Trading Procedures reflecting Corporate Actions. Unlike other special siuation categories where Co rporate Actions are a result of merger/acquisition, liquidation, etc. , Trading P rocedures are a "way of doing. " This "way of doing" takes advanage of existing conditions by applying trad­ ing methods to create capital gains. n this respect, the quality of the security is not as important as the "way" the transaction is processed. Here we show how Trading Procedures can arise from existing conditions in a company's capital stucture. At he time a corporation is formed , it initiates its first corporate action. This may take the form of provisions for specific secur­ ities stated in the indenture. The various classes of securities may have among other characteristics provisions or Sinking Funds , Redemptions, and Conv erti ­ bility of specific issues. These provisions provide a base for Trading P rocedu res. To show how application of Trading Procedures can arise from a s ecurity indenture, let us use as an example the feature of Convertibility, the right of se­ curity holders to exchange holdings for another security issue of the same company . Trading Procedures that may be used in this aspect include: 1. Where a spread exists between a security issue and the stock into which it is convertibl e , we can purchase the convertible security, then sell the equivalent number of shares for which the convertible security is exchangeable and exercise the convertible privilege to obta.in the stock for delivery against our sale. This would be a completed transaction creating a capital gain.

ARBITRAGING Arbitraging occurs when transactions take place s imultaneously in corres­ ponding securi�ies in different markets or in identical securities in the same market. A simple illustration of arbitraging is seen in the circumstances of a whole­ sale fruit dealer. He calls Farmer Brown asking about the offering price of apples and finds they are 50¢ a bushel. While holding Farmer Bron on the phone, the dealer calls a retail fruit store and offers to supply apples at 75¢ a bushel. The wholesale fruit dealer consummates this transaction with a gross profit of 25¢ a bushel ; in essence, he has arbi traged by trading in the same product simultaneously. The goal of an arbitrage securities pcsition is creation of a profit generally collectible at a later date. Price differences in s ecurities opening channels for ar­ bitrage arise from: 1. Greater demand in one securities market than in another. (This may occur in commodities between contract months and/or trading centers, or foreign exchange, in addition to various securities situations . ) 2 . Variations in costs of trading. 3. More alert responses to news stimuli in one market. 4. Foreign exchange rates for money. Arbitrage/Hedge s ecurities transactions generate profits from price dif­ ferences i n securities reflecting inluences other than a c ompany's routine business operations or trend of securities market. We present two illustrations : A recent illustration of Arbitraging/Hedging procedure in bonds is visible in LING-TEMCO VOUGHT CO. 's recapitalization plan. The company offered to ex­ change each outstanding $1 , 000 5 1/2% convertible debenture due in 1976 for -­ $600 in 5 1/2% non -convertible sub. debentures $400 in 4 3/4% convertible debentures due September 1976

66

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\,\

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68

INVESTORS' GUIDE TD SPECJA[ SITUATIONS I N THE STOCK MARKET

During the life of the exchange offer, when contingencies of the plan had been met, the "new" securities were traded on a "when-issued" basis (a term used to indicate transaction ll be consummated when, as and if the securities are issued), having the following market value: The 5 1/2% non-convertible debentures were priced around 77; the 4 3/4% convertible debentures were priced around 1 0 1 . T h e package of $600 non-convertible debentures and $400 convertible deben­ tures had a combined market value of $862. At the time, the "old" bonds could have been purchased at about 8 1 , qual to $810 for ach bond. By purchasing $10, 000 of the "old" bonds at 81 for a cost of $8, 100 and at the same time selling on a "when-issue d" bas is: $6, 000 new 5 1/2% debentures at 77, and $4, 000 new 4 3 /4% debentures at 101--equal to $8, 620--we could establish a gross profit of $520. Through use o f the Trading Procedure o f hedging we have established a profit payable when the plan would be effective and securities exchanged. Consum­ mation of the recapitalization plan became effective a little more than two months after the above transaction could have been established. HE DGING

The Hedge procedure is sometimes called "arbitrage. " To hedge, or o ake a hedge position, implies creation of two or more investment transactions designed to protect the investor against loss through compensatory price move­ ments. Hedging, the more frequently used procedure in Corporate Action special situation trading, is similar to betting on both sides of a proposition at the same time . It has characteristics found in insurance protection against loss and escape clauses in contracts. Unlike arbitraging, a ully complete transaction, hedging could be an open, partial , or uncompleted transaction. "Short selling" is an in­ tegral operation of h edging. Examples of hedging may be found in liquidation, reorgani zations/recapi­ talizations, mergers/acquisitions , over-subscriptions , "when-issued" securities, contracts and convertible securities. A common use of hedging i s seen in a convertible bond when a security holder sells the equivalent number of shares into which the bond may be converted, but does not at that time exercise the exchange privilege, preferring to wait until a later date. His two-sided s ecurity posiion, long of the bond and short of the stock, assures his selling price should the bond be called, or in the event he con­ verts the bond. At the same time, he has the option of waiting developments in the stock which he has sold. Should the stock decline, he may then decide to buy the number of shares he is short, establish a profit on that transaction and continue to hold the bond. This would be a likely procedure in the event the decline in the shares was greater than in the bond, or where the bond's decline did not penetrate is investment level (the estimated market price of the bond without a convertible privilege). Hedging in a reorganization occurs when a security holder (in a company being reorganized) disposes of all or part of his securities prior to consummation. His action in anticipation of reorganization assures satisfactory prices for his securit\es without waiting for physical exchange o f securities to take place. An illustration of the hedging procedure used in a merger siuation is

69

TRADING PROCEDURES

R EVLON, INC. and its merger with U . S. VITAMIN & PHAR1ACEUTICAL CORP. To expedite the merger, REVLON, the surviving company, created a new class of convertible pfd. stock. The new shares were convertible at any time into . 825 shares of REVLON common. The terms of the merger provided for exchange of U . s. VITAMIN common at the rate of one share of new convertible pfd. for each U . S. VITAMIN common. Shareholders approved the merger in December and scheduled closing for January. At the time of stockholders ' approval , U. S. VITA­ MIN was priced around 33 a share and REV LON 41 1/8 . This compares with prices of 28 3 /8 and 42 5/8 when the merger proposal was announced. Note that as the siuation matures, the spread narrows so that at consummation date there is little or no margin remaining for establishing a hedge position. A hedge position of the above established at an early stage would be set up as follows: Purchase 100 U . S. VITAMIN at 28 1/2 Sell (short) 8 2 . 5 shares REVLON common at 42 5/8 Gross profit Less expenses for commission and stamps

$2, 850.

� $

$

666. 70. 596 .

A p ro fit of 21% is indicated, and since the hedge position was held for just under G months, this is equal to a rate of retun1 of 42% on the investment of $2, 850. EXPENSES IN A HE DGE POSITION First, the1·e is the cost of the base security. Ne>.'t are commissions and Federal and State docwnentary axes incurred in the "short sale" establishing the hedge. For example , a purchase of 100 shares at $20, hedged by s elling the equiva­ lent amount at $22, involves expenses of approimately $60 per one hundred shares , relecting commission and Federal and State documentary stamps . Costs involved in a convertible bond besides commission for purchase , includes commission on stock sold "short" and Federal and Sate documentary stamps; i . e . $10, 000 in principal amount of bonds , a unit approximately equivalent to 100 shares of stock, convertible into 300 shares of stock at $30 a share, would have commission costs of about $100 and documentary stamps of approximately $24. Another cost in short selling is liability for dividends on the part of the short seller. Of course, in a hedge position this may be offset since the investor would be "long" the equivalent security carrying a similar rate of dividend or interest. PITFALLS IN HE DGING Before selling short, it is advisable to check the availability of stock since hedge procedure requires borrowing securities. The lender of shares does not bind himself beyond a call loan. This means that borrowed shares are returnable on de­ mand. If shares are scarce, the borrower may have to pay a premium of $1 per hundred shares of stock per day, or whatever price the borrower would pay. If the loan is called, the investor may be forced to purchase stock in the market to close the short side of th e transaction which would unbalance the hedge position. This could arise where a fight for control of a corporation is in action. Shares , in strong demand for voting, would not be available for lending. This creates a squeeze on the " short" and may result in loss from forced "buy-in" at a high price. A "buy-in" is a purchase in the open market by the firm entitled to receive

70

INVESTORS' GUIDE TO SPECIAL SITUATIONS I H THE STOCK MARKET

the security against failure on the part of the person owing that s ecurity to deliver same upon demand. Summarizing hedging procedure, we see that important check points are: (a) the probable duration, (b) dividend and interest charges , (c) total expens es , and (d) availability of stock for borroing. We p resent a few acquisition/merger situations that, at this writing, are approaching the arbitrage/hedge stage. These are not to be construed as recom­ m endations but only as illustrations of typical situaions having hedge potentialities . ASHLAND OIL

&

REFNING CO. and WARREN BROS.

CO. announced ap­

proval in principle of a plan under which ASHLAND would acquire all the assets of WARREN in exchange for stock. Under the terms , WARREN stockholders could receive

1. 15 ASHLAND common or O. 54 share of ASHLAND convertible preferred

stock for each WARREN share. At time of announcement, WARREN BROS. common was priced at

$27. 50 while ASHLAND's convertible was $64. 625.

BEECH-NUT LIFE SAVERS, INC. and DOBBS HOUSES, INC. announced they had "approved in principle, " a m erger of DOBBS HOUSES into BEECH-UT.

:

Under the proposal, BEECH-NUT would iss e one share of new

$2 convertible

preferred stock for each two shares of DOBBS HOUSES common. Each share of

0. 95 share of BEECH-NUT common and ll have a cumulative annual dividend of $2. At the time of announ:ement, BEECH-NUT's common was priced at $55. 75 and DOBBS HOUSES common at $26. the new preferred would be convertible into

CONVERTIBLE SECURITIES Convertible s ecuities have a privilege of exchange , generally into com­ mon stock. This privilege may endow a bond or preferred stock with defense

characteristics and capital gain possibilities . Protective characteristics arise in a convertible bonds ' s enior status in capital structure of a company, and includes better marketability of debt securities.

n

theory, bonds have an estimated price floor o r investment worth -- the

i

i

l evel at which the s ecurity would be priced without convers on pr vileges . The con­ version feature assures participation in common stock price rises when he conver­ sion feature is operative and when the exchange value of h e common approaches the market price of the bond or preferred. Besides the inherent s afety factor of bond s , loan values are substantially greater than the common stock into which the bond is convertible. A dramatic illus­ tration of this showed clearly some years ago in AMERICAN TEL. & TEL. con­

vertible debentures when he bonds could have .been carried for around 20% margin with some banks . n effect, debenture holders were "long" the common stock since the debentures were convertible into common and thus w.ere carrying the stock on the low margin basis described above. Eventually many holders converted the com mon stock and were able to continue loans on the s ame basis as obtained with the debentures . Because downside risks are minimized and upside possibilities unlimited,

i

trading opporities develop, Convertible securi es move i n unison with the stock for which they are exchangeable , once he shares approach and then pass their conversion parity. For eample, i f the conversion rate of a preferred stock is 4

shares of common, upon reaching parity, he preferred should move four. points for each one point rise in the common. This stock-to-bond relationship works ih

& LIBBY 5% 1976 which are converible ino 77 3/4 shares of common for each $1, 000 bond.

convertible bonds also. An eampl e of this is the LIBBY McNEILL

of

71

TRADING PROCEDURES

For each one point move in the stock, the bond would move

8 points reflecting the

one-fo r - eight relationship in the conversion rate . This qualized movement makes possible participation in declining markets by selling short the number of shares into which the bond o r preferred stock is convertibl e , and at a later date covering at lower prices . (Note: " Cover" as used in Wall Street means to purchas e the s e ­ curities one is short. ) This brings the transaction t o termination . The Trading Procedure comes into play when it is possible

to

purchase a

convertible securiy within reasonable range of its investment value and redemption price. Transacions initiated around this level are in a position to stagger short sales against the convertible privilege as the stock and convertible security ad­ vance. n this way, the security holder participated in price fluctuations in both directions -- up and down. Should the common stock decline , the investor purchases at lower levels the shares needed to cover his short position.

n

the other hand, as stock advances h e

may s e l l portions o f the remaining shares into which the s ecurity is convertible, thus obtaining higher prices for some of the shares. Of course , the common stock may move out of a trading range. At that point, it would be ad1•isable to close the transaction by exercising conversion privilege (thereby establishing the basic profit) . Before creating a hedge position in a convertible s ecurity, an item to check is the relationship of the rate of interest on bonds and preferred dividends on the stock compared wih charges for interest and dividends on s ecurities sold short. Since short positions are responsible for dividends on stocks , it is helpful if such dividends are not greater than income received from convertible bond interest or dividends on convertible preferred stock. The tables below list a few representative convetible issue s . CONVERTIBLE BONDS Company Ai REDUCTION

37 /7 --1 987 AMERICAN ARLINES

Conversion

Number of

Price

Shares

Approximate P rice Common

$72

$ 1 17

16. 2

63

124

10

75

98

28

35. 7 1

21

1 0 1 1 /2

65

15 . 38

53

109

44. 44

22. 50

27

90

1 2 . 73*

77. 75

13

109

$62. 50 61. 50

16

4%--1990 C E LANESE CORP.

4%--1980

E L PASO NATURA L GAS

100

5 1 /4%--1977 GRACE N. R . )

4 1/4%--1990 HUNT FOOD & IND. 4 3/8%--1986 LIBBY, McNEIL & LIBBY 5%--1976

Bond

98 70 14. 29 58 4 3/8%--1986 110 UNITED MER. & MFG. 34. 25 29. 20 33 4%--1990 *Convertible at $12. 7 3 through 12/15/66 and $14. 5 2 through 12/15/71, and then at $16. 30. SINCLAIR OIL

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72

INVESTORS' GUIDE TO SPECIAL SITUATIONS IN THE STOCK MARKET

CAN DIDATES

CONVERTIBLE PREFERRED STOCKS Number Company Atlantic Refining Bangor Punta Aleg. S . Boise Cascade Continenal Oil Eltra Corp. Georgia Pacific Midland Ross Signal Oil

&

Gas

Union Oil of Calif. Warner-Lambert (a) after

Value

Pfd.

of

Common

in

Pfd.

Call

Div.

Common

Price

Common

Price

Price

$3. 0 0 1. 25 1. 40 2. 00 1. 40 1. 64 4 . 75 2. 40 2. 5 0 4. 00

12/31/7 2 (d) from

0. 85 1. 00 0. 65 0. 73 0. 95 0. 567 2. 2 2. 00 1. 30 3 . 00

s 76 30 63 61 45 64 57 29 54 39

$ 64 30 41 45 43 36 1 25 58 70 1 17

73

TRAOING PROCEDURES

$ 72 32 46 51 43

40 129 62 73 120

$ 85 (a) 26 (b) 40 60 37 1/2 43 (c) 105 65 (d) 67 (e) 103

b) from 9/15/67 (c) from 5/1/70 (e) from 7 /1/70 4/1/67

STOCK SP LITS - - A HEDGING MEDIDM Stock splits and large stock dividends offer opportunity for hedging when trading is initiated in "when-issued" securities. Stock splits are popular with in­ vestors and regarded as "bullish . " A good reason for enthusiasm is that propor­

FOR STOCK SPLITS

RATE

COMPANY

--

--

ANACONDA CORP.

CORNING G LASS WORKS

2 2 2 2

DOUGLAS AIRCRAFT

3 for

BRISTOL-MYERS CE LANESE CORP. O F A1ER. CONSO LIDATED NAT. GAS

FAIRCHILD CAMERA

YEAR

& INST.

GENERAL E LE C TRIC CORP. GENERAL MOTORS CORP. MOTOROLA, INC. SKE LLY OIL SMITH, KLINE & FRENCH TEXAS GULF SULPHUR XEROX CORP.

for

1

1/2 for l 1 1/2 for 1

for

1963 1946 1954 1955

A P PROXIMATE PRICE

88 100 75 58 295

2 2 for 1 3 for 1 3 for 1 50% stk.

1955 1961 1954 1955 1965

76 175 109 80 180

100% stk. 3 for 1 3 for 1 5 for 1

1953 1959 1955 1963

110 69 107 254

llustrating a hedge position in a stock split is CARPENTER STEEL'S

$58 while the new split shares were traded around $30. This offered an opportunity to purchase the old stock and sell the new on a

common which was priced at "when issued" basis.

tionately reduced prices in a stock split place the stock within reach of more investors and lead to greater market activity. Then, too, a company's growth , if neglected by the market, would be more noticeable when the stock is split.

1 964 there were a total of 3 6 8 stock splits and 100% stock dividends combined. For the first half of 1965, reflecting a rising market, the number of splits and stock dividends amounted to 225, substan­ Stock splits thrive in rising markets . In

tially

above the earlier year ' s rate. Market prices of "when-issued" securities in a stock. split are generally

higher than the old shares. We can see this in CHRYSLER, a typical example.At the

WHEN-ISSU E D SECURITIES

"When-issued" is a contraction of "when-as-and- if issued. " This trading vehicle created by a corporation action is not a tangible security but rather a con­ tract between sellers and buyers agreeing to deliver and accept securities at such time as they ,re issued. This means that delivery will be made when the contin­

gencies for the "when-issued" are realized. Corporate Action areas where "when-issued" securities abound are reor­ ganizations and recapitalizations . The latter include issuance of rights to subscribe

time trading commenced in the new stock, representing a

to additional stocks or bonds as well as stock splits reflected by capitali zation

ing commission costs, remained relatively constant until the. final day.

mon and reported daily in tabulations of securities on the exchanges.

2-or-1 split, the shares at 52 1/2 were priced a point higher than the old stock at 104. This spread, reflect­ Investors could not, of course, make a p rofit out of the spread in CHRYSLER old and new stock. In this instance, arbitrage of old and new securities was con­ fined lo professional traders such as stock exchange members whose commission

changes . "When -issued" transactions arising from "rights" and "splits" are com­ "When-issued" are born of Corporate Actions pending issuance of secur­ ities . Profit possibilities arise from the difference in price between "when-issued" securities and stocks and bonds which they represent.

costs were substantially less than the general publ i c ' s . However, occasions d o arise when spreads between old and new securities of a split offer a trading profit for public investors. The procedure is to purchase

WY FFE RENCES AISE

N PRICE OF APPARENTLY EQUIVALENT SECURITIES

One reason may be that it costs less to trade in "when-issued" securities

the old securities and sell short equivalent amounts of the new securities on a

than in actual certi ficates .

"when-issued" basis. A rithmetic is the analytical instrument. You buy In the

benefits and responsibilities of issued securities. They are not purchased in the reg­

present and sell at a fixed price for future delivery. The future may be days or

ular or cash way; rather they may be carried on minimum-deposit or margin ar­

months. To illustrate we present a tabulation of some pending and potential stock splits :

"When-issued" are not acual certificates repres enting

rangements. In view of the lesser amount of money required to participate, a purchaser may be willing to pay a premium price for "when-issued" securities .

74

IHYESTORS' GUIDE TO SPECIAL SITUATIONS IH THE STOCK MARKET

Price differences between actual and "when-issued" securities may come about because of certain reduced risks favoring a "when-issued" position. If the

TRADING PROCEDURES

75

thoroughly. The most valuable source is an investor's familiarity with Trading P rocedures presented here.

"when-issued" securities fail to materialize into ull -fledged s ecurities , trans ­ actions in the "when-issued" are cancelled. The investor's loss is then limited to commission costs . "When-issued" has s inificance for the Corporate Action investor when used to ex-pedite a transaction. We see in the LING-TEMCO VOUGHT CO. arbitrage/ hedge (page

I

) how "when-issued" trading is used in a recapitali zation. In our dis ­

cussion o f railroad reorganizations, later in this book, w e show additional applica­ tion of "when-issued" trading.

ANA LYTICAL STEPS

The analytical approach to Trading Procedure Corporate Actions differs from other special situation areas in that securities prices are the m ain interest rather than the quality of the investment. Since we deal with a "way" of investing, our

analys is deals with methods used rather than subject matter. We want to now what is involved when we created a hedge, arbitrage or

short position. Thus our analysis, when selling short, deals primarily with avail­ ability of stock for borrowing, dividend paym ents, and likelihood of stock splits.

CONTRA CTS

And we analyze costs of creating the situation. In a hedge/arbitrage s ituation, we

Correlated with "when issued" are Contracts -- negotiable instruments

want to know characteristics of the basic security. For example , in a convertible

arising from agreements between s ellers and buyers to sell and purchase respec­

bond, we check l ength of time conversion privilege is effective and whether it i s

tively indicated s ecurities . For example, my purchase of

graduated over the years to maturity. It is helpful t o know sinking und provisions

CO. at

100 shares of E LE CTRIC

$50 a share "when-is s u ed" is, in reality, an agreement between the seller

and myself wherein I agree o pay the sum of $5, 000 for 100 shares of E LE C TRIC ' CO. and the seller agrees to deliver 100 shares of E L E C TRIC CO. for $5 , 000

and redemption prices . Then we deal with "when-issued" securities and "contracts" we want to know how long the issues will be in existence. Furthermore, are there contingencies

upon issuance of such stock by he E LE CTRIC CO. Since this is a contract between

that may prevent consummation of the Corporate Action ? In the case of " contracts , "

two parti e s , it is binding. Having a value, it could be negotiable. I, as the buyer,

are they negotiable ? This is a most important factor.

may sell this contract to receive

100 shares of E LECTIC CO. at $50 a share. The seller of the "when-issued" contract (the one who sold it o me) must deliver 100 shares of E LE C TRIC CO. at $50 a share, or $5 , 000, to the holder of my pur­

chase side of the agreement. deliver

The s eller may also dispose of his contract to

100 shares of E LE C TRIC CO. at $50 a share for any satisfactory price. n the foregoing we s e e "when-issued" and "contracts" arising from Cor­

porate Actions as m ediums or securities trading. Thes e mediums were created

by the securities trading fraternity to expedite Corporation Action activities. The

Fundamental analys is of the securities would b e made in the early s tage of corporate action in most Trading P rocedure situations. Where heding is used in a m erger/acquisition, there are established prices for all s ecuritie s . Therefore, our analysis is mainly concerned with possible impediments to consummation. Keep in mind that quality analysis of securities involved in merger/acquis ition would be made when considering the s ituation. Thus the hedge position is the ultimate step. When Trading Procedure opporunities are available, the investor's concern is mainly status of Coi-porate Action ln relation to consummation. This in itself

procedures are in no way influenced by routine business affairs of the companies

indicates Corporate Action is well on its way to realization. Consequently, analys i s

represented by "when-issued" or "contract" transactions . Capital gains accrue to

of t h e company at this stage is not significant. Arbitrage/ hedge, "when issued, " and

g

investors from application of the "ways" of s ecurities tradin . WHY PROFIT POTENTIAS EXIST Profit potentials in Trading Procedures exist not only from technicalities such as Arbitraging/Hedging but from (a) price differences due to time of is suance of s ecurities ,

b)

"contract" si.mtions deal primarily with price spreads reflecting technical condi­ tions in the securities market. Capital gains lie in taing advantage of prevailing conditions. At the Trading P rocedure stage, litle remains unnown about the com­ panies and the s e cu rities involved.

a decision to dispose of interest in a situation (other use for the

money may be needed) rather than await termination, and (c) general public 's ignor­ ance and indifference to full imporance of Corporate Action creating the trading oppo rtuni ti es . SOUR CES OF INFORMATION Information concerning use of Arbitraging/Hedging, "when-issued , " con­ tracts" and "short selling" is readily available. Investment brokers are prime sources for information on trading procedure possibilities since the technical fac i l ­ ities o f securities brokerage firms a r e needed t o expedite transactions . Trade publications often give hints of rumored Corporate Actions in such trading areas as reorganizations and recapitalizations. Company reports are excellent for disclosing proposed plans and give clues to pending corporate changes . Financial publications, undoubtedly, cover the field /

CHm,_

12

Tenders

A TENDER IS A WAY OF OFFERING SECURITBS FOR SALE . It is also a way of acquiring substantial amounts of s ecurities at one time. The procedure differs from conventional selling in that the price offered for securities is usually a premium over prevailing market levels . Further, a Tender invitation is limited in duration and terms of the Tender may rquire a deposit of a minimum amount of securities to consummate the transaction. WHERE TO FIND CAPITAL GAINS Tenders are a favo1·ed m eans of securities trading because capital gains are obtainabl e from the Tender per se, while additional investing and trading potentials can de\'elop as a result of a Tender invitation. Invitations to Tender s ecurities create capital gain opportunities in the following circumstances : l. The fundam ental principal of Tenders is the offering of a premium over market price for the designated securities. An illustration of this basic approach is seen in KERN COUNTY LAND CO. 's bid for control of J. I. CASE CO. KERN COUNTY invited Tenders for CASE 's common stock at $14. 50 a share and its pre­ ferred stock at $120 a share. At the time of the offe., CASE common was priced around $12. 25 a share and he preferred at $90. 7 5 a share. P rices offered through the Tender were subs tantially above current market prices of the respective shares. The Tender price of $120 a share for the preferred was realistic in view of 76

TENDERS

77

arrearages amounting to $21 a share. Clearance of this debt was indicated, particu­ larly in the l ight of the strong financial position of KERN COUNTY LAND. The pre­ mium bid for the common was to assure control of the company. In this instance KERN COUNTY LAND acquired 56% of the outstanding shares of CASE common and 65% of the preferred. Thus investors familiar with Tenders found this a profitable medium . 2. Securities sought through Tender invitations may rise substantially above the level of offers . GREATAMERICA CORP. 's bid for BRANIFF AIRWAYS common stock is an example of this trading aspect. At the time GREATAMERICA extended its bid of $75 a share, BRANIFF common was priced at 69 7/8. However, BRANIFF common had moved up to 8 1 when the Tender invitation expired. GREATAMERICA was the owner of a majority of BRANIFF stock and was seeking a minimum of 470, 000 to give it 80% control , but wanted 520, 000 shares in all. Thi s would enable the company to file a consolidated income tax reurn. The reuced amount of outstanding common, no doubt, influenced the price of the stock. Since GREATAMERICA was able to buy only 482 , 000 shares of the 520, 000 desired, the offer was extended for a period of time. This, too, would support higher price levels for the shares. The PENZOIL-UNITED GAS CORP. Tender invitation proved to be unique as well as profitabl, and for many educational. While PENZOIL's bid of $41 a share for a minimum of one million shares was a surprise, it ofered opportuniy to partici ­ pate since the stock could have b een purchased at 38 1/2 subs equent to announcement. . A feature of the Tender was that the 42 1/2� dividend, payable January 1 , would accue t o sellers o f the stock. Thus about $ 3 (qual t o 8%) a share gross could be estimated at that time. Since Tenders are short-lived transactions, the potential profit would show a substantial rate of retun if one's stock were accepted. An addi­ tional feature permitted PENZOIL to accept all stock above one million shares if it so des i red. Within a few clays , UNITED GAS stock moved to 42 3/4 reflecting pos­ sible merge1· of the two companies mentioned in news releas es. At he same time, PENZOIL announced it had been tendered 5 million shares. Since Tender offerings are irrevocable, investors should submit their secur­ ities as close to the expi ration date as i s physically possible. UNITED GAS illustrates this point. The stock had penetrated the Tender l evel of $41 on the 10th of the month while the offer expired on the 14th at 5 p. m. Investors who had purchased UNITED GAS common around 38 1/2, at the time of announcement, could have established a capital gain of 10% within a few weeks without resorting to the Tender . Since the stock had risen at the 42 1/2 level , it could be sold in the market in the regular way. 3. The Tender price may be raised o expedite consummation of the buyer 's objective. BANGOR PUNTA A LE GRE SUGAR COR P . raised its Tender offer for SMITH & WESSON INC. to $80 a share from $75. In this instance, the significant factor was the small amount of closely-held outs tanding stock. Sweetening the offer occurs frquently since it is the best way to obtain desired amount o:f stock. 4 . A Tender invitation may indicate the true worth of a security. A classic illustration of this is the FRANCO WYOMING OIL CO. stock. A Tender invitation of $55 a share was extended to FRANCO WYOMING common stockholders. At the time the stock was slightly under $55. However, the president of FRANCO WYOM­ ING disclosed an asset value of the stock in excess of $80 a share. In this insance,

78

INVESTORS' GUIDE TD SPECIAL SITUATIONS IN THE STOCK MARKET

the Tender invitation brought to light the undervalued price level at which the shares were being traded in the stock market. It also alerted stockholders that "something was brewing;' in the situation. To Special Situation investors, the indicated high asset value of the stock afforded a price objective with substantial capital gain possibilities . The immediate effect of the Tender invitation stimulated interest in the situation and substantially improved the price of the shares. The Tender invitation ultimately resulted in liqui­ dation of the company around the $90 a share level. 5. The stock may decline subsequent to expiration date of Tender invitation. DRESSER INDUSTRJES had purchased, through Tender, 350, 000 shares of its stock at $47 a share. However, the company revealed it had been tendered substantially more than the 350, 000 shares it had offered to purchase. The result was that the company accepted 25. 26% of the stock offered. Consquently, when the Tender ex­ pired, the stock declined to $41. 25 . There are various opportunities for traders in siuations of this type. One approach would be to by-pass the Tender invitation, but sell short on the effective date of Tender while price is high. Then cover at a lower price after announcement of small percentage of total stock had been ac cepted. In another variation of trading against a Tender, it was possible in the SCHENLEY INDUSTRIES Tender to estimate that half of one's holdings would be accepted by the Tender. Thus a stockholder could sell in the market at or close to Tender price his remaining half and be assured of a profit on 50% of his holdings . 6. The Tender may disclose a battle for control of a company. This interest­ ing corporate stuggle took place for control of STANDARD P RODUCTS CO. Tender invitations were extended by AMERICAN STEEL & PUMP CORP. to STANDARD PRODUCTS stockholders at $13. 50 a share. Etensive maneuvering by both sides eventually brought the price up to $17 . 25 offered by STANDARD PRODUCTS for its on shares. his successfully bested the campaign by AMERICAN STEE L & PUMP for control of the company. n another type of fight for control , MUELLER BRASS CO. was the sought­ after p rize. While officials of MUE LLER BRASS had agreed to sell their holdings to E LTRA CORP. for $40 a share, a higher bid of $42 a share was made by U . S. SME LTING, RE FNING & MNING. At that point the shares were priced around $38 and had moved up about $3 during the week. Nevertheless , there remained $4 a share that could be made through the U. S. SMELTING invitation. 7. Sinking fund operations harbor capital gain potential s . Bonds and preferred stocks frequently have sining fund provisions. These sinking funds require a com­ pany to use annually fixed amounts of money for retiring a portion of an issue. With this in mind, investors' purchase of these bonds or stocks have a two-fold objective. One is to receive a fair retun from the security in either interest or dividends . The other is to obain capital gain through Tender of security to the company at some time for the sinking und. Since sinking fund action generally occurs yearly, if the s ecurity is not accepted one year, it may be in another . Of cours e , the in­ vestor's cost price should be below the sinking und price. This investing approach affords an opportunity for long-term capital gain. Capital gain potentials arise from clues dis closed by Tender invitations. Companies that have resorted to Tender procedure to acquire either their own or oher company' s s ecurities often repeat the process at a subsequent time. This has been particularly noted where companies seek to recapitalize to eliminate high divi-

79

TENDERS

lend cost non-callable preferred issues. In this area, an investor purchases the preferred stock in anticipation of an exchange offer. The tabulation below shows a dwindling list of high -dividend non-callable preferreds reflecting use of Tender procedure to eliminate this type of issue. Outst'g Shares

1965-Early 1966 Price Range 2roximate ._ ow Price Yield

Rate

Par Valu.

American Bank Note American Can Co. Liggett & Myers Montgomery Ward Cl. A.

6% 7% 7% 7%

$ 50 25 100 no

26 1662 154 139

74 1/2 43 164 1/2 168 1/2

71 36 147 143

$ 72 37 147 143

Proctor & Gamble U. S. Gypsum U . S. Rubber Universal Leaf Tob.

$8 7% $8 8%

100 100 100 100

23 78 642 44

186 17 1 1/2 184 1/2 185

178 161 156 162

178 163 160 167

Issue

QL

4. 1% 4. 7 4. 7 4. 9 4. 4 4. 3 5. 0 4. 7

USES OF TENDERS Tender invitations are used in many corporate actions. There is great interest today in the use of Tenders to expedite mergers/acquisitions and control of companies. NATIONAL UNION E LECTRIC used the Tender procedure to acquire a sub­ stantial interest in EMERSON RADIO & PHONOGRAPH CO. at $18 a share. Some time later, NATIONA L UNION repeated its use of the Tender procedure by offering $24 a share for additional shares of EMERSON RADIO. The objective of the second Tender was to acquire suficient shares to give it 80% control or possibly m erger. GULF & WESTERN's use of Tenders is understood to have merger in view. PENN­ SYLVAA RR's purchase of MACCO REALTY completed an acquisition. And POWER CORP. OF CANADA gained control of CONGOLEUM NARN through use of Tenders . Liquidations of companies are expedited by the use of Tenders. A VISCO ex­ tended an invitation to its stockholders to sell their shares to the l iquidating com­ pany as the first step in its liquidation. Divestitures resort to the Tender procedure. This is seen in the E L PASO NATURAL GAS plan to exchange shares of NORTHWEST PIPE LINE for its own stock through Tender. arge blocks of stock are more readily purchased through use of Tenders than in the conventional market. Companies repurchasing their own shares use the Tender invitation since it facilitates purchase of substantial holdings of individuals which otherwise might be offered in the market. CURTISS-WRIGHT used the Tender invitation to shrink its capitalization from 7 1/2 million shares to 6 1/2 million. To accomplish this , the company initi ­ ated a bid four points above the market price, which in tun had moved up a few points upon rumors of an impending Tender. To eliminate minority interest in situations where one company has obtained

80

IHYfSTORS' GUIOE TO SPECIAL SITUATIONS IN THE STOCK MARKET

control of another. This move simplifies balance sheet constuction and also admin­ istration of activities .

AMERICAN WATER WORKS used the Tender invitation to

eliminate subsidiary p referred stock while ISLAND CREEK COAL CO. found the Tender inviation a good vehicle for completing ownership of WEST KENTUCKY COAL CO.

open market. An additional advantage, too, is that the Principal may solicit the stockholder di rectly for deposit of the Tender. DISADVANTAGES OF TENDERS F rom the inves tor 's view, Tenders ha\>e the following disadvantages : 1 . Upon deposit of securities for tende r,

Companies resort to the Tender offer to eliminate small stockholders from their list. Shareholders owning fewer than

10

shares and even as few as 24 shares

are invited to sell their holdings . To encourage acceptance of the offer, a premium above the market price is usually extended.

Recapitali z ations and Reoranizations find the Tender a useful procedure.

This is evident in UNIVERSAL LEAF TOACCO CO. 's endeavor to purchase its out­ standing

8%

callable p referred stock. The company had a unique approach In this

insance in that they asked shareholders to name their own price. Company

ll

accept all shares offered at or below a maximum price (to be set), retaining he right to reject all offers exceeding the maximum price. The company accepted all tendered stock at

$185

a share.

$8 $6 preferred plus $24 in cash. The cash represented total dividend arrearage on the $8 preferred. U . S . STE E L voted to eliminate its 7% p referred through Tender, offering

2. When stock i s accepted by Tender, he may lose a desirable investment position.

very

s ecurity issue's indenure p rovisions may prescribe that proceeds from the sale o f stock. This is an important factor in securities you may hold and especially impor­ tant should a company participate in sales of assets, or limit use of the proceeds as described above. \There funds must be used to redeem specific securiti e s , capital

a

g ins potentials may be present. Information about indenture provisions of a security can be found in statis­ tical manuals and financial reports . ADVANTA G E S OF TENDERS Both the securities holder and the P rincipal e"iending the Tender invitation

If all his stock is not accepted, he may incur a loss on the residual . If none of his stock is accepted, he may incur a loss since the stock may

well decline in price.

5 . Ii stock moved up s harply on Tender invitation, he must decide whether to

cepted. In the latter event, a loss of market is possible. From the P rincipal 's view, the disadvantages are:

1.

He discloses his objective when he extends the Tender invitation. This

makes achievement difficult, as noted in frquent sweeting o f Tenders to make them attractive.

2.

exchange of the preferred for a new debentu1·e to effect a completed recapitalization.

a n asset underlying the security issue be used for the specific bond or preferred

3. 4.

sell prior to Tender expiration or speculate on the chance o f having his stock ac­

GENERAL BAKING CO. completed a recapitalization that eliminated its

marked for redemption of s ecurities usually comes from earnings . However, the

his position in that issue i s blocked

until e"-piration of the Tender invitation.

p referred stock by way of exchnge for a new callable

Sinking Fund rquirements are processed by use of Tenders. Money ear­

81

TENOERS

The Tender invitation often a rouses opposition either by incumbent man­

agement or c ompeting interests who desire control of the company. ANA LYSIS AND PROCEDURES Unlike Special Situations analyses where we delve into the stucure of a company,

Tender invitations are approached firstly through study of the Tender

itself. The most pertinent question is "Why is the Tender invitation e"iended ?" The answer to this plays an important role in determining the investor's course of action . We examine the Tender invitation for prospects of improvement of the bid.

This would arise where a fight for voting control is being waged, and when a company is attempting to J'etire a non-redeemabl e security. As mentioned earlier in this chap­ ter, a characteristic of this phase of Tenders i s repetition of the invitation offer and improvement of bids for securities . Securities holders in these instances are in a favorable position to ride with the situation while the battle is on. When a battle for

benefit by the use of this medium. The investor as a seller of securities gets a

control is in progres s , knowing the strength of the contenders

better price than would be available in the market. Moreover, holders of large blocks

decision.

ll aid

in malting a

Conflicts for control of a company are usually reported in news and nnan­

of securities may consummate the sale without depressing the market. The seller of

cial publications , while additional information can be obtained from the Principals

a block of stock can complete the deal in one transaction rather than offer the s ecur­

or the Securities

ities piecemeal in the market. For the securities trader, the Tender invitation offei·s possibility of a quick trade. Also, both 'traders and investors have an opportunity to replace the stock at lower l evels after epiration of the Tender. For the Principal extending the Tender invitation, this procedure offers i m ­ munity from price flucuations that would ari s e if a purchase were attempted i n the

&

Exchange Commission.

When a company is offering to purchase its non-callable preferred stock, guiding motivation for acceptance will most frquently be the premium offered over

he

existing

money

rates .

A corollary to this stage of the analysis is to examine the situation for pos ­ sibility of subsequent Tender. This would be indicated where a company would seek

80%

open market. It also offers protection against an unwanted stock position that could

evenual merger or control of

occur if only a portion of the desired number of shares were obtained. By use of the

of the repeated Tender is NATIONAL U NION's second invitation for shares of E ME R ­

Tender, the buyer acquires all the stock he needs or if insufficient shares are ten­

SON ADIO. The first Tender invitation took place a t

dered, he may exercise the escape clause that usually requires a minimum amount.

NATIONAL U NION gaining a majority interest in E MERSON. The s econd Tender at

of company for ax purposes. A recent occurrence

$18

a share and resulted in

This valuable tool protects the Principal from being a m inority holder in a company,

$24. 50 a share is aimed at obtaining at least 80% of the outstanding EMERSON

and s afeguards him from the hazards of selling a block of unwanted shares in the

common. A company reacquiring its own s hares to shrink its capitalization is ap -

82

INVESTORS' GUIDE TO SPECIAl SITUATIONS IN THE STOCK MARKET

proached on a conventional financial analysis at first . At the same time, a pro forma picture of the impact of the reduced number of outstanding shares is most helpful . For example: CURTISS -WRIGHT CORP. e.. 'tended a Tender invitation for one million shares of its own stock at $32 a share. When the Tender was announced, the stock was priced around $27, subsequently moving to the $29 level. n the reduced capitaliza­ tion, the company's earnings would have amounted to $1. 37 a share compared with $1 . 01 reported for the same year. At $32 a share (the Tender price), this is equal to 23 -times earnings basi s . However, a month earlier the stock had been priced around 20-times earnings. f we use 2-times eanings as our index, then, based on the higher per share net of $1. 37, the stock would command a price around $27 a share. Thus the $32 a share bid by the company would appear to be a generous offer. This means that the company will probably receive Tenders for more than the desired one million sl1ares . Tender invitations having liquidation as its objective suggests financial analy­ sis of asset values as a uide for evaluation of securities. Bear in mind that in a liquidating situation, sha1·es repurchased by the company for less than its true asset value increase the value of the remaining shares. This happens because there ll be fewer remaining shares to participate in a greater amount of assets. A most pertinent question is "Will my securities be accepted ?" n this re­ spect our first approach is to now what percentage of outstanding s ecurities (stocks or bonds) have been invited to be tendered. Are there restrictions from >articipation in respect to large holders, management, family or any type s ecurity holder ? If so, the floating supply is reduced, thus increasing the percentage of outstanding secur­ ities that could be accepted. The Tender invitation may offer o purchase a specific number of shares or consume a set amount of money. n either event, we want to mow whether the Ten­ der is large or small in relation to the company ' s capitalization. If the Tender invi­ tation i s for a major portion of the available security issue, then probability is favorable fo· acceptance of securities either in full or a large part of the amount submitted. When the number of shares (or amount of securities) invited to Tender is relatively small in relation to the outsanding issue, then probability is slim of hav­ ing all that you submit ac cepted. For example: the CURTISS -WRIGHT invitation for Tender of one million shares at $43 a share represents about 13% of outstanding stock, a small percenage of the total. Since the stock had moved up sharply in anti­ cipation of and upon release of the Tender invitation, it would not be surprising to see a substantial amount of shares tendered. It would not be unepected for the stock to decline following the expiration of the Tender . A noteworthy occurrence in this type of situation i s that the market action gives a clue to percentage of deposits to be accepted. A ap of 2 to 3 points , or 10% or more, from the Tender price suggests that acceptance will be on a limited pro raa basis. Therefore, stockholders might Tender their shares with intent to pur­ chase the equivalent amount that would be accepted when stock dipped to lower l evels at termination of Tender. ate purcnasers of the stock, on the other hand, would have to consider the possibility of loss on stock not accepted. When indications point o a pro rated or partial acceptance of securities, an opportunity may be present for a hedge position. This happened during the SCHENLEY Tender of $32 a share for approimately 25% of the floating supply. News releases in-

83

TENDERS

dicated to stockholders that approximately half of their stock would be accepted. With this in mind, stockholders could hedge by s elling short half of heir holdings at 29 nd the other half would be sold at $32 through the Tender. n this instance, the investor could afford to purchase stock at he market price of $29 a share. The trading pro­ cedure worked out as follows : Purchase 200 shares at $29 each . . . . Tender 200 shares at $32 . . . . . . . Sell short 100 shares at $29 . . . . . . . At e.. -piration of Tender invitati011 and upon notification that 84 shares had been accepted, we deliver 100 shares against the short sale at $29, and sell the 16 residual shares at $29. A net profit of $252 was created through s ale of 84 shares through the Tender . The 16 shares were sold at $29. Expenses for commissions and taxes amounted to $110 (approximately), leaving a net profit on the Tender Situation of $142. Opposition to Tenders can be favorable and adverse . Thus we want to Jmow the nature of the opposition. Is the opposition realistic and purpos eful , or merely legalisti c ? Bear in mind that opposition could reduce available supply of s ecurities that might be tendered. This would increase probability of s ecurities being ac­ cepted. However, strong opposition could defeat the Tender by withholding an adequate number of s ecurities to meet minimum requirement. Is the Tender invitation a competitive, lowest-price bid ? In this tpe, the P rincipal will purchase a specified amount of s ecurities at the lowest offerings . A procedure for meeting this i s : As sume you hold 500 shares in a company inviting Tenders on lowest offering basis, up to $75 a share. Submit your 500 shares in the following manner : 100 shares at $74. 24 -- 100 shares at $74. 73 -- 100 shares at $74. 98. The belief is that uneven amounts may be accepted ahead of even prices or standard fractions. Another type of Tender is the first come, first served invitation. In this case, you do not Jmow whether your securities will be accepted until presented for payment. This has n appeal for the s ecurity holder who might be concerned about failure of having his s ecurities accepted. For instance, holders of issues having Sinking Fund provisions and non-callable preferred stocks would offer securities for Tender, but are willing to hold the securities until accepted upon a avorable basis, at a later date . CON C LUSION "Tenders" are in effect a procedure for acquiring and disposing of securities. Opportunities for capital gains are pres ent for securities holders whose ownership predates Tender inviations and for purchases made during a Tender 's existence. Tenders give clues to possible future actions such as m ergers , liqui ­ dations , majority control , and recapitalizations . The Tender procedure offers protection to P rincipals from influences of large orders in the market and hazard of being a large minority holder in an undesired situation. The investor, on the other hand, benefits by premium prices paid for his securities while giving up marketability of his securities during the life of the Tender.

CHAmR

13

85

APPRAISALS

charters and laws of the state wherein the company is incorporated. The. procedure for instituting a request for "fair value" will be found in Notice of Meetings, pro­

spectus es , and indenture of the security. Knowing one ' s rights and how to obtain them is valuable in protecting assets and capitalizing on capital gain opportunities. When terms of a pending corporate change threaten a potential loss to an existing securities ' holde r , a request for an appraisal of s ecurities cou l d be in­

augurated. For example, a proposed merger/acquisition or recapitalization re­

quiring an exchange of securities that would reduce voting strength of your

securities issue would be a basis fo1· requesting "fair value. " Loss of converti ­ bility of an issue or elimination of cumulative voting or of dividend rights are bas i s for opposing corporate change and requesting "air value" for your securities. llus trative of a potential loss through a recapitalization is found in GENER­ AL P U B LIC UTI LITIES CORP. 's plan to modify stockholders "preemptive" rights.

An investor stated that he will, under a New York law on appraisal rights, ask

GENERA L PUBLIC UTILITIES to buy his holdings . It was alleged that holders of approximately

18 , 000 shares have indicated that they will.file written objections

to the company's proposal. When a corporate change is proposed, it is important to be aware of the effect on securities you now hold since they may ha�·e greater value under a new coporate stucture than shown by existing market prices. The Appraisal route

may be an ideal course to follow if your securities have greater intrinsic value.

Appraisals

Technical steps for arriving at a "fair value" for one's shares may be implem ented by applying master analytical procedure discussed earlier in this book. For Appraisal siuations , particular emphasis should be given the following:

1. 2.

The earnings record of corporation. The worth of a s ecurity based on company ' s current financial statement. This should include goodwill and patents.

3 . Comparative voting rights under existing and proposed term s . 4 . The position o f each security issue i n relation to other parti­ cipating securities.

APPRAISAL SITUATIONS FND their genesis in rights of stockholders . The goal

5. Comparison of your security holdings with other corporate issues

of an appraisal is to obtain a better price for a security than the pending corporate

of similar type. The comparative value may be presented

action allots. Thus , the appraisal route is the dissenter ' s avenue for exercis e of

when processing the legal phase of an appraisal .

his rights . For example, at the time a me rger/acquisition is being considered, a

stockholder believes his shares are worth more than the value placed on them in the merger terms. He exercises his right

by

requesting from the company in

whose stock h e holds "a fair value" for his shares. To obtain

a

satisfactory "fair

value , " it may b e necessary to resort to outside opinions . This may result i n ar­

bitration o r litigation .

STOCKHOLDER OB LIGATIONS

Not all corporate activities contain

READING CORP. to acquire all of LONE STAR's outstanding stock. Under terms of the plan, LONE STAR ' s holders would receive one share of P HILADELP HIA READING

5%

Class A

$100 par preferred stock for each four common shares of

LONE STAR held. The p etitioning shareholder contendi LONE STAR stockholders are nol getting enough money or value for what they arc selling. In essence, then, a jury is being asked to determine whether LONE STAH STE E L is "getting a fair value" for its assets . A rquest for an appraisal of "fair value" is the sole area of corporate ac­

tion initiated by stockholders . Stockholders ' rights are defined by corporate 84

right to request an appraisal or

ify the status of securities holders in this respect.

Thus, a shareholder of LONE STAR STE E L CO. filed a district court suit

challenging the terms of the previously app roved plan for Pl-II LADE LPHIA

the

"fair value" for one's securities. Notice of meetings and prospectuses can clar­

at

the

When a s tockholder

resorts

to this right, he is obligated to sell his shares

appraised or agreed-upon price. In tun, the corporation is obligated to pay

the appraised price. To preserve his rights as a stockholder, the share owner must exercise his right to vote. A penalty for not voting may be forfeiture of the privilege to request an appraisal.

Bear in mind, when establishing a demand for an appraisal,

that a usual requirem ent is submission to the corporation of written objection to the proposed corporate action.

The time for such filing is indicated in the Notice of

M eeting. Excerpts from the New York State law regarding "Tights of diss enters" and procedure when rquesting a "fair value" for one's securhies follow:

86

INVESTORS' GUIDE TO SPECIAL SITUATIONS I N THE STOCK MARKET

87

APPRAISALS

RIGHTS OF DISSENTERS: A shareholder entitled to vote who does not assent to the

create problem s . A corporate action investor places strong emphasis on

shares under Section

With these criteria, a case could be esablished without reference to mar­

proposed sales and leases has the right

o

receive payment of the fair value · of his

623 of the Business Corporaion aw of New York, upon com ­ plying with its provisions . Briefly outlined, Section 623 provides as follows: A stockholder . . . shall file with the corporation before the shareholders ' meeting . . .

but before the vote, written objection to the sales . . . including a statement that he intends to demand payment for his shares . . . ; withi n

10 days after the share­

holder s ' vote . . . the corporation shall give written notice . . . to each objecting shareholder not voting for the sales and leases ; within

20 days after such notice,

any shareholder electing to dissent shall file with the Corporation a written notice of such election, stating his name and residence, the number of shares . . . and a

demand for payment of the fair value of his· shares . . . within

7 days . . . the Corpor­

ation shall in writing ofer such dissenting shareholders a specified price; if any dissenting shareholder shall fail to agree on a price within

3 0 days thereafter, or

if the Corporation fails to make such offer . . . the Corporation shall institute a

proceeding in the Supreme Court, New York County, to fix the fair value, making

all still dissening shareholders parties ; the Supreme Court will then determine the

fair value as of the close of bus iness on the day prior to the shareholders' authoriza­

tion date . . . . The above law also provides that at the time of filing the notice of election to dissent . . . a shareholder shall submit the certificates for his shares to the

Corporation . . . for noation thereon that a notice of election has been filed . . . and

further provides that costs and expenses shall be determined by the Court.

LIMITATION ON DISSENTERS: The Business Corporation Law makes the right of dissenters to receive payment conditional upon consummation of the transaction and authorizes the Board of Directors

o

abandon the proposed transaction.

In an Appraisal situation, the claimant (the security holder) creates the poten­ tial capital gain since, if he is successful in pursuit of "fair value, " a higher value Consequently, his evaluation is the basis for poten­

tial capital gain. There may be more than one request for "fair value" but keep in mind that each claim has its own evaluation.

Estimating a value for a security is more significant in an Appraisal siua ­

tion than any other investment because your calculated values must be justified.

Support for estimated values may be presented to various people whose thining on s ecurity values may differ materially from yours. Those who must be convinced include:

1. � Corporation, where you , as a stockhol.er, have initiated the dispute. Obviously, the company nows how far it ll go toward compromising since, in its prefe1·red position, it nows he worth of the stock.

2.

Selected Appraisers , Arbitrators

ket prices of the securities . On the other hand, a referee, judge or jury,

unfamiliar with professional investors ' techniques , could find merit to he argument that a security's worth should approximate (a) the market price

on date of consummation of corporate action, or (b) the market prices for

the security over a reasonable period of time. Recent Court decisions have followed a patten of basing Appraisal suit s ettlements on market prices of shares around time of consummation of corporate action. This

inadequate procedure has restrained use of Appraisal p1·ocedure, awaiting

such time when a more quitail� view of s ecurities holders ' rights will obtain.

These inequitable conditions have been particularly evident when stock­ holders believe they are not receiving fair treatment in a corporate action and re­

quest "fair value" for their securities . The unfortunate experience in litigation

involving App·aisals and request for " fair value" in recent years, used s ecurity market prices based upon time of consummation of corporate action as a criteria for evaluation in s ettlement, without consideration for the tue financial worth of

the security.

A current trend of stockholders litigation against management and "insiders" indicates more equiable treatment toward stockholders. While, in the main, these suits have been recovery claims, nevertheles s , the way has been paved to fairer treatment in other corporate actions . For stockholders, who for so many years have been on the defensive or minority side of corporate relationships , this i s a welcome change.

THE STOCKHOLDER CREATES THE PROFIT POTENTIAL

for his s ecurities is established.

cash, fixed assets, eaning power, and relative position in he industry.

S�

Court. The irst skirmish generally is

with the corporation. Failure to arrive at agreement may result in petition­ ing by s ecurity holders to the Court to have the value of their s hares deter­ mined by Appraisal, subject to confirmation or determination by the Court.

3 . To convince Fellow Investors, using similar criteria in evaluating the worth

of a secu rity, is a simple matter. However, those using dissimilar criteria

While market price may have been a reasonable criterion years ago when

stocks had little book value, today's corporations have strong assets from increased back eanings plus extensive development of plants and equipment. These factors should be included when appraising "fair value" of securities . After all , in many

instances the money used to build the factories and supply quipment belongs

o

stockholders since the funds represent net eanings that could have been paid in

dividends.

While we are aware that book value is not an important item in daily stock market evaluation, noneheless i t is a major yardstick when a company liquidates . Since mergers/acquisitions and reorganizations are, in a sense, a type of liquida­

tion (to the extent that stockholders no longer on the same s ecurity after corpor­ ate action has been completed),

should not book value be treated as sigificant

when adjudicating a "fair value" for a stock ?

Other elements, too, such as earnings growth, quality and status in indu s ­ try should b e recognized and weighed when "fair valuing" securities. Daily stock

market prices are not repres entative of true value since impuls e actions on the

part of individuals or price movements reflecting activities of large holders inlu ­ ence evaluations . An evaluation of securities based on such c riteria does not take value into consideration and, thus, falls short of the meaning of "fair value. "

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IHYESTORS' GUIDE TO SPECIAL SITUATIOHS IH THE STOCK MARKET

PITFALLS Hazards associated with Appraisals are:

1. Legal request for Appraisal incurs risk of loss of control of securities . This

CHA�R

means securities may not be sold until released by (a) settlement of claim, or (b) permission of defending compny to withdraw the Appraisal request.

2. A locked-in position may be costly when delayed by slow court procedure or

14

purposeful delaying tactics by the company.

3. The Court Appraiser's verdict may compel settlement at less than the company's offer .

4.

Dissenters or those who rquest Appraisals must be prepared to press their claim through litigation, a procedure which can be costly.

THE

LONE WOLF APPROACH An Appraisal situation, as you can see, is primarily a "lone wolf" trans ­

action since each Appraisal request must be made individually. A common char­ acteristic of an Appraisal is settlement out of Court. Since such proceedings are

confidential, there is a scarcity of data on compromises . It is difficult for an in­

vestor to now the price another secu rity holder received for his stock. However, it may be possible to combine forces with oher dissenters to reduce costs and perhaps strengthen one's position. Information concerning specific requests for "fair value" are not readily available since the security holder creates his own Appraisal situation. However, a news item sometimes releases the request.

Oversubscriptions

Opportunity to request a "fair value" arises when a security holder dis­ approves of a corporate action. On the other score, investors could look for opportunities to purchase s ecurities with intent to request an "Appraisal" in the belief that a profit would result thereby.

AN OVERSUBSCRIPTION IS A UNIQUE trading Special Situation that may occur in the securities you now hold.

n

effect, an Oversubscription is a bonus privilege

extended to stockholders who have participated in a "rights" offering. Investors may enter the situation any time during the life of the " rights" offering. "Rights" may offer three distinct applications processed as ollows:

1. A

corporation offers stockholders the privilege of purchasing additional This privilege is represented by "rights . " Each share of stock carries one " right" representing a pro rata interest in he additional shares . The first step is called the primary subscription. shares.

2. The second phase permits stockholders to subscribe to a sufficient number of fractional shares to round out holdings to a full share.

3. To stockholders who have exercised their privilege of subscribin g to

additional shares (step one), the company offers the opportunity to pur­ chase any unsubscribed remaining shares at the subscript ion price on a pro rata bas i s .

A n Oversubscription, then, i s an optional privilege t o participate i n residual portion of a corporation' s offering of shares to its stockholders. "Rights" offer­ ings generally expire after two weeks . Allotment of the " Oversubscription" portion seldom takes more than a day or two following expiration of the "rights . " Bear in 89

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INVESTORS' GUIDE TO SPECIAL SITUATIONS IN THE STOCK MARKET

mind, the exercise of an "Oversubscription" privilege is optional and docs not affect holder's bas ic privileges outlined in steps one and two. Significant capital gain opporunities in "Oversubscriptions" are lost, too frequently , through ignorance or apathy. While most "rights" offerings are under­ written (guaranteed by an investment firm ) , thereby eliminating oversubscription offering, some companies bypass underwriting and offer shares di rectly to their stockholders. When this procedure is used, the company extends to stockholders who have subscribed to their primary allotment (step one ) , an offer to purchas e un ­

subscribed shares at the basic offeringprice on a pro rata basis. For example, SIERRA PACIFIC POWER CO. offered (without underwriting) additional shares to stockholders by way of "rights" containing an oversubsc ription p rivilege. In this case, the Oversubsc ription allotments amounted to 13%, meaning the participants received 13% of their primary subscription at the price of $31 a share. Since the stock was priced around $35 a share, a profit of four points was indicated. Nevertheless, some stockholders neglected to subscribe to their pri­ mary subscription while other by-passed the Oversubsc ription. Before we delve into the technical aspects of Oversubscription trading, per­ haps we should clarify a few basic elem ents , namely: "Rights , " "Warrants , " and "Preemptive Privileges. " A "Right" is a perishable option to purchase securities at a fixed price. It has value as long as the market price of the stock is above subscription price. "Rights" rquire prompt attention since they have a short though valuable life. A "Warrant" i s a negotiable instrument entitling holders to purchase stock in the issuing corporation at a s tated .rice. Its privileges are similar to "rights'' in that it is an option to purchase. n respect to longevity, it is different since a "warrant" may have a protracted or unlimited existence. The "warrant" may ha.ve little or no value if the shares purchased under the privilege were at a price too far from the market price of the stock. Because the value of a "warrant" is cor­ related to the market price of the respective stock, it moves in direct relation with the stock. Furhermore, since "warrants " are priced substantially below the market price of the shares, they are purchased for speculative trading since they offer a greater participation in the stock's market fluctuations than obained from the stock itself. For example , TRANS WORLD AIRLNES "warrants" to purchase common at $22 a share ranged from 23 1/8 to 40 5/8, while the stock's high and low was 61 7 /8 and 39 5/8 respectively. For illustrative purpose only, we suggest a trader could purchase twice as many "warrants" around the 23 level as he could buy stock at 40 5 /8 for very little difference in money. Since both the stock and "warrants " had a 20 -point move, the warrant holder would make twice as much on the transaction as a purchaser of the stock. The " Preemptive Privilege" (having a pri01· right to purchase) is the right of stockholders to maintain their relative equity position in a company 's capital strucure. This means that a company issuing additional s tock•must first offer their

s tocholders the right to purchase an amount of additional shares to insure the equiv ­ alent equity position that was pr.sent prior to issuance. A company having 1 million shares outstanding offers to sell an additional 100, 000 shares. Since this is a 10% dilution, stockholders would have the right to purchase a number of shares equal to 10% of their holdings . A 100-share stockholder

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91

would have the privilege of purchasing 10 additional shares at the subscription price. Upon ecercise of his "rights , " he would have 110 shares of the 1, 100, 000, compared with 100 shares of the original 1, 000, 000. n each case, his quity position would b e the same: 1/10, 000, Tiie presence of "preemptive privileges" is sated in provisions for common stock described in prospectuses , statistical reports , company notices of meetings and charters .

THE OVERSUBSCRIP TION PRIVILEGE The following excerpt from HAWAIIAN ELECTRIC CO. prospectus describes the provision for oversubscribing: "Oversubscription Privilege: Holders of subscription warrants who exercis e their Rights to subscribe will have the privilege of oversubscribing (sub­ ject to allotment) at the Subscription Price per share for not more than one full share for each share subscribed for pursuant to the primary sub­ s cription right, out of the shares which are unsubscribed at the termina­ tion of the subscription period by warrant holders or employees . A partial payment of $5 for each additional share so requested must accompany the warrant. n the event there are not sufficient unsubscribed shares with which to fill oversubscription orders , the Company will allot such shares among those who exercised the oversubscription privilege , proportionately to the number of shares they have rquested under the oversubscription privilege, Where the allotment results in fractional interests they shall be adjusted to the extent practicable to the nearest full share. "

CAPITAL GAIN POTENTIALS Profits in Oversubscription participation come about from discount between market price (of the s ecurity) nd stockholders ' cost or subscription price. The significant point is that through Oversubsc riptions stock can be purchased, in limited amounts , at bargain prices, The procedure for creating capital gains

through Oversubscriptions follows: A company offers is stockliolders the privilege of purchasing additional shares on a pro rata basis. "Rights" indicating the rate of each share's participa­ tion are allocated so that each share of stock may retain its same relative position in the capitalization as before the "rights" offering. A company having 100, 000 shares outstanding plans to sell 10, 000 share to

its s tockholders. This amounts to a 10% increase in number of outstanding share s . Therefore, stockholders desi ring t o retain their same relative amount of holdings in the capital structure would purchase an additional sha1· e for each 10 shares held. A holder of 1, 000 shares would subscribe to 100 shares to retain his original relationship of 1, 000/100, 000 or 1/100%, since l, 100/110, 000 represents a 1/100% interest also. Now let us assume the price of the stock in the market is $20 a share and the subscription price for additional shares is $18. The "rights " privil eges has value since it entitles holders to buy a pro rated amount of stock at $18 compared with the market price of $20.

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INVESTORS' GUIDE TO SPECIAL SITUATIONS IN THE STOCK MARKET

HOW TO CALCU LATE THE VALUE OF A "RIGHT" 'I11e only way one could buy stock at $18 a share would be upon pres entation of 10 "rights" for each share desired, along with $18 per share. Thus 10 " rights" would have a value in the difference between the market price of the stock ($20} and the subscription price of $18, qual to $2 a share. By dividing 10 "rights" into $2, we have 20¢ as the value of each "right. " "Rights" are negotiable and traded i n t h e securities market. Should your calculation take place before the ex-dividend date, then add 1 right for the dividend and divide $2 by 1 1 , resulting in a value of 18¢ per right. While "rights" generally have value close to parity, sometimes they are at a discount and other times at a small premium . The latter would reflect buying of "rights" used for Oversubscriptions . THE OVERSUBSCRIPTION P LAY At expiration of a " rights" offering, a company may have had subscriptions for less than the amount o ffered. In our exampl e, let us assume that only 9, 000 shares of the 1 0 , 000 offered had been subscribed. When the residual, in this case, the 1, 000 shares have been reserved for stockholders, that is known as an Over­ subscription privilege. The profit in the Oversubscription is contained in the l, 000 shares. Where an Oversubs cription opportunity is present, as indicated in our illus­ tration, the company had agreed to sell all unsubscribed shares on a pro rata basis at $18 a share to those stockholders who have exercised their primary "rights" -­ that is, subscribed to a proportionate amount by the number of shares held. Stock­ holders who had complied wih the above indicate at time of subsc ription their desire to participate. Thus the 1, 000 shares are divided among stockholders who entered Oversubscription orders. n this way, a stockholder purchases shares at $18 com­ pared with a market prke of $20 a share. Note that these shares are obtained with­ out use of "riglits . " You now that as a stockholder you may participate in your pro rata share of the Oversubscription. Also, without oning shares at time of the "rights" offer, an investor may participate in the Oversubs cription if he first purchases "rights . " This establishes privilege to subscribe to shares, plus additional shares at termin­ ation of the "rights" offer. However, in this s ituation, our objective is not long-term i nvesting. 'I11erefore, at the time we ·purchase " rights , " we s ell the equivalent num­ ber of shares to be received by using the "rights" to subscribe to the stock. n effect, then, we have no r eal position since our sales of stock offsets our purchases of "rights . " For example , company X offers additional stock at $18 a share in the -ratio of 1 for each 10 held. f the stock is priced at $20, then the "rights" are worth 20¢ a sha1·e. If we purchase 1, 000 "rights , " we can subscribe to 100 shares of stock at $20. Therefore, to establish Oversubscription participation, we buy 1, 000 " ri ghts" under 20� a share if possible, and then sell 100 shares of stock at $20. Our l , 000 " rights " will be delivered to the processing agent and exchanged for 100 s ha1·es of stock which we ll deliver against our sale of 100 shares of stock. What we have c1·eated is the privilege of participation i n the Oversubscrip­ tion to the extent that we have subscribed to the stock. A protective feaure is that our decision to participate in the Oversubscription does not have to be until close

OVERSUBSCRIPTIONS

93

to expiration date of the " rights . " Thus, if the stock is sufficiently above subscrip­ tion price to assure a profit, we exercise the Oversubscription privilege. We have noted over the years that the number of shares available for the Oversubs cription play varies from negligible amounts to as much as 60% allotments . This latter occurred in the CENTRA L HUDSON GAS & E LECTRIC COH P . 's offering of common stock to its shareholders. A 60% allotment means that stocholders who participated in the Oversubscription received 60% o f their primary subscription. On the other hand, INTERSTATE POWER CO. had only 7 , 000 shares to be issued on the secondary "rights" compared with 177, 354 shares subscribed to on the primary subscription. n a recent " rights" and Oversubscription offering by AWAIIAN E LECTRIC CO. , those participants in the Oversubs c ription were in a position to take a 2 7 /8 point profit for shares received. At e.Piration time, the· stock was priced at $32 7 /8 while the subscription price was $30 a share. ANALYSIS Conventional financial analysis for evaluation of shares in relation to mar­ ket price is slanding their holdings through Merger/Acquisition, government agencies are increa singly active in pressing for Divestitures to keep competition open. This area of co1·porate reor­ ganization could develop into a prime source for special situation investing. Rum­ blings are noted in financial news i tems suggesting breakup of large, Industrial empires . In this respect, trading procedures discussed here would also apply . USES OF REORGANIZATIONS 1 . To give a new start to companies working-out financial distress . 2. To process emergence from bankruptcy. 3. To expedite a corporate action involving the capital structure. This method comes into play where elimination of non-callable secur­ ities is the objective. A result of this maneuver may place non­ assenting s ecurities in a less favorable minority position. 4. To change balance of voting power by issuing additional voting s ecurities . 5. To change a s ecurity issue's satus in the capialization by issuance of s enior s ecurities heretofore non-existent.

Reorganizations

In the last category, LEE NATIONA L CO. is an illustration. LEE NATION­ AL sold its operating facilities. Though holding only cash or the equivalent, it con­ tinued as a company , seeking to acquire other companies. The reorganization route suggested to LEE NATIONA L management issuance of a preferred stock along with an increased number of common shares to implement acquisitions. The use of stock in place of cash, they claimed, offered greater incentive to many companies to sell out or be acqui red.

R E ORGANIZATIONS ARE CORPORATE ACTIONS designed to ease pressure of financial stress and rescue troubled companies from complete demise. A reorgan­ ization generally becomes possible aftel' commercial creditors , bondholders , and preferred stockholders have compromised their interests. n doing this , they anti ­ cipate more of a gain through continued operation of the business than from liquida­ tion. When the reorganization i s effective, a major portion of debts have been eliminated or subordinated and s omething new has been added --often money, management and hope. Capial gains arise from corporate action taking place with­ in the capital structure. • Reorganizations are mainly evident during and after periods of severe economic distres s . This was notable particularly in the later 1 930 ' s . Unlike the 1930's where entire industries were depressed, today, despite our affluent economy, in­ dividual bankrupticies occur. In subsequent pages of this chapter, trading proce­ dures used in reorganizations of railroads and public utilities promi nent during the "great depression" are detail ed . Investing and trading techniques developed during those hectic reorgani zation days may very well be applied today. Vvhile some of this may appear academi c , the " !mow-how" can be adjusted to current companies having financial and operational problems or in process of reorganization. Divestitures is a field today where trading procedures like those in reorgan­ izations of railroads and publ ic utilities may be used. (See Chapter 1 0 . ) This applies 1 16

This type of Reorganization also worked out well with MSL INDUSTRIES, formerly a rail road company. Here management' s ability to combine with a pros­ perous business and take advantage of a ax loss carry forward resulted in substan­ tial capital gains for investors participating in the Reorganization. 110 use of Reorganization procedure by way of merging with a subsidiary to eliminate or reduce outstanding non-callable preferred stock is discussed in Chapter 11 on Trading Procedures. U. S . Steel is one of the most recent users of this procedure to effect elimination of its 7% non-callable preferred stock, by merg­ ing with a subsidiary. Companies having financial problems or in bankruptcy are by far the broadest areas for locating Reorganizations. Concurrently with the nation 's high level of indus­ trial activity, illere has been an increased number of business fatalities. To special situation investors , this means a greater number of potential Reorganizations . Recon­ struction of troubled companies offers capital gain possibilities through changes in their capital structure involving new securities issued in place of old. The following briefly summarizes companies recently working-out financial difficulties: BOSTON & PROVIDENCE RAILROAD: Now in bankruptcy. Plan pending proposes NEW A VEN RAILROAD pay $2. 2 million, or $1 10 a share, for the 2 0 , 770 shares of B. ·& P . stock held by the public. In addition, public shareholders

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INVESTORS' GUIDE TO SPECIAL SITUATIONS IN T H E STOCK MARKET

and the NEW HA VE N would receive Certificates of Beneficial Interest se­ cured by B. & P. real estate holdings . The Certificates of Contingent Beneficial Interest are designed to include stockholders in the proceeds from sale of B. & P . property. Net proceeds in transactions from sale or lease in excess of $500, 000 would be distributed proportionately to the Certificates of Beneficial Interest. An I. C. C. examiner observed that while accurate value of B. & P. •s holdings are not available, "extraordinary gains" are possible if the prop er­ ties eventually are used in connection ith mass transit programs, highway construction, urban redevelopment, etc. The B. & P . 's 200 miles of track are leased to the NEW A VEN until 1992. Estimates of potential value of B. & P . stock range from $300 to more than $450 a share. ATLAS SEWING CO. : Reorganization plan confirmed. " Old" stockholders to re­ ceive one new share for each 27 held. AMCO INDUSTRIES: Creditors asked a Federal Court to declare concen bankrupt. DASHEW BUSINESS MAC lNES: Company in process of bankruptcy proceedings , filed under Chapter 10 of the Bankruptcy Act. Trustee negotiating sale of two subsidiaries to provide reorgani zation capital. E LGIN NATIONAL WAT C H CO. : Working on plans to get company on the road to recovery. GOE BE L BREWING CO. : A U . S. District Court approved a petition to reorganize under Chapter 10. SIRE P LAN COMPANIES: In reorganization under Chapter 1 0 . A total of 18 SIRE (Small Investors Real Estate) plan companies are engaged in bankruptcy proceedings . TAYLOR INTERNATIONAL COR P . : A reorganization plan has been approved in Federal Court. Company has been involved in bankruptcy proceedings and plan provides for creditors to get a share of new stock for each $20 in claims. Old stockholders will get a new share for each 10 shares held, equal to 8% of the new stock. UNITED STAR CO. : Bankruptcy appeal dismissed, company to reorgani ze. WEBB & KNAPP INC. : Trustee filed petitions in Federal Court s eeking reorgani­ zation under Chapter 10. YALE EXPRESS SYSTEM INC, : Company filed in Federal Court for reorgani zation under Chapter 1 0 . Note: Chapter 10 of the Bankruptcy Act contains provisions for appointment of an independent tistee to operate the business and propose a plan for reorganization. Chapter 11 of the same Act p ermits the company to continue to operate its business without undergoing a complete financial Reorganization, provided it can find a way to pay its debts under a Court approved plan. An early warning s i gn of potential Reorganization is seen in accumulation of defaulted debenture interest. Preferred dividend accuals do not represent creditor debt and can accumulate i ndefinitely, but arrears in payment of bonds and deben­ tures are signs of imminent financial weaness that must be resolved. Accumulated interest may be cleared by a debt adjustment involving issuing securities in lieu of

REO RGANIZATIONS

119

cash. Capital gains then arise i n the estimated worth of new securities. Companies som etimes can work out financial problems by issuing some form of security representing the debt. The following list shows companies having arrears in deben ­ ture inerest: STATUS

COMPANY Boston & Maine RR Inc. A 4 1/2% 1 970 Curtis Publishing Co. sub. Inc . Deb. 6%/1966 Des Moines Transit Inc. 5% of 1974 Florida East Coast RR 2nd 5 1/2% inc . 2011 Lehigh Valley RR Gen. Con. "D" inc . 4/2003 11 "E " , , " "F" " Missouri Kan-Tex RR Sub. inc . deb. 2003 N . Y. , New Haven & Hartford 4% of 2007 ; 4% of 2022 Wolverine Power Ad. "A" 3 -4 l/2/'979

Accumulation 28%. No interest paid since 5/1958. Default April 1965 interest. Default since 1961. Interest accumulation at 16 1/2% max. Interest accumulations: at 20%. Not paid since 1957. at 22%. Not paid since 1957. at 25%. Not paid since 1957. Arrears at 16 1/2%, no interest paid since 196 1 . Default i n 1 96 1 . Accumulations 9 1/2% t o 1964.

The two companies mentioned in the following acted in the early stage of trouble. Where,this can be done, capi tal gain opportunities arise in the old securities: WESTBURY FASHIONS, INC. successfully completed an exchange of debentures for common stock to effect a Reorganization permitting company to p roceed "on a real ­ isic and normal basis , " as stated by the company. The offer provided for exchange of one share of common for each $5. 30 principal amount of debenture. At the time the offer was extended, the debentures were priced around 42 bid. While offerings were not plentifu l , nevertheles s , based on the common at 2/7 8 , a Sl , 000 deben­ ture would have been worth 5 3 . Subsequently, debentures that were not exchanged were priced around 5 7 . It is interesting to note that indication of troubl ed waters was evident when the debenhtres were priced around 1 2 , earlier in the year. PACIFIC ASBESTOS COR P . 's Reorganization plan provided for adjusting company' s first mo rtgage indebtedness and, a s a result, default foreclosure proceedings upon its mortgages, were terminated. P rior to the Reorganization proposal, the shares sold as low as 7/8 of a dollar. Reflecting inluences of the Reorgani zation, the stock rose to 3 7 /8. CAPITA L GAIN POTENTIA LS New securities o ffered in exchange for old harbor capital gain potential s . Revamping a capital structure casts new perspective on old securities, while newly issued securities have the freshness of new hope. Capital gains are obtainable be-

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� ' INVESTORS' GUIOE TO SPECIAL SITUATIONS I H THE STOCK MARKET

cause (a) old securities arc at low prices having discounted company ' s poor bus i ­ nes s , (b) new securiies issued in exchange offer a sounder financial bas e, plus prospects for success ahead. Spreads between old and new securities a re the open­ ing wedges for inv�stors to participate. An investing method is to purchase old securities when they are priced at a discount from indicated value in new set-up. The i ntention may be to hold until Reorganization becomes effective. However, since the situations may be slow­ moving, opportunities may be present to take a profit prior to the effective date of reorganization. Bear in mind that potential values change as conditions vary during the development period of reorganization. Another approach is to purchase the "old" securities , then hedge the pos i ­ tion b y selling t h e new securities t o b e received. This can be done when the new securities are traded on "when issued" basis . ("When issued" is discussed later in this chapter and in Chapter 11 on Trading Procedures . ) To some extent, the spread between old and new securities may be asc ribed to emotional actors reflected in over-depressed prices for "old" securities and optimistic anticipation for the "new, " The impact of broad industry Heorganizations can be best seen in examples of railroad Reorganizations during the 1940's. Pro ­ cedures uped then would apply today in Reorganization of financially distressed companies . n subs equent pages of this chapter, the procedures are outlined and an illustration of an arbitrage/hedge position shows precise location of capital gain potential s . NEW SE CURITIES COMMAND A HIGHER PRICE The market's evaluation of new securities to be issued in Reorganization projects expected benefits to eanings arising from settlement of claims . Reor­ ganization brings new hope thus endowing the new securities issue with inherent quality of a "going concern . " This , in itself, commands a better price for secur ­ ities than a company on the way "down . " \foreover, prospects for dividends loom brighter. It is not unusual for a company to clear the path for dividends by elim­ inating financial obstacles. For eample, THOMPSON-STARRET approved a plan to eliminate all sink­ ing fund defaults on its preferred and redeem a portion of the outstanding shares . By eliminating the sinking fund default the company could consider paying common stock dividends , which were barred because of the default. Old securities , on the other hand, may be subject to additional burden o[ selling pressure by (a) holders who do not care to continue in the reorganized com­ pany, and (b) s hareholders motivated by tax considerations. C HARACT ERISTIC STEPS IN R EORGANIZATION 1. The primary background of Reorganizations is financial probl ems ; readjustment o f corporate structure i s secondary. 2. Initial steps evidence various efforts to work out problems and continue business. 3 . Need for Reorganization recognized. This may take the form of bank­ ruptcy or proposed voluntary work-out adjustment. 4. Approval of Reorgaization plan required by authorized persons and groups. 5. P rotective committees rep1·esenting various creditors come into being

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121

after plan has been proposed. 6. As Reorganization progresses , approval of plan by regulatory bodies may be needed. Approval is often required by one or more of the following agencies: Federal Court; Securities & Exchange Commission; Interstate Commerce Commis­ sion; Federal Communications Commission; State agencies ; various creditors and securities holders. 7. Near the end of the trail , Court having jurisdiction must certify approval. 8. After Court approval , m anagers for Reorganization procedure are appointed. 9. Plan is declared effective and "old" securities may be deposited for exchange for those of new company. PROTECTIVE COMMITTEES Protective committees are born of Reorganizations. Legally, a Reorgani ­ zation is an attorney's delight since fees and expenses , when allowed by Court jurisdiction, are often bone by the company. A Reorganization may give birth to many comm ittees since each type of c reditor and security issue may have its own committee. Representation bespeaks fair treatment for creditors since a committee's influence is often measured in its representative voting strength as well as the status of the s ecurity issue in the capitalization. The committee is the liaison between secur­ ities holder? and proceedings of the Reorgani zation. Investors can keep abreast of the Reorganization progress and be in a position to evaluate their holdings through the committees. GETTING IN Investing in a Reorganization may be initiated prior to proposal of a plan as well as while the plan is pending. In the early stage, investor thinking is directed toward ass ets based on a concept that the company is worth more dead than alive. Companies in this category have senior and prior lien obligations that fare better under liqui dation than survival. An illustration is N. Y. , NEW HAVEN & HART­ FORD HR 4 ' s . The bonds were priced under 20 for a long time, reflecting the road 's financial troubles. However, investors ' recognition of underlying assets changed the bond' s declining trend and it advanced to the 50 level. Similar values can be found in other obligations of the NEW A VE N RAIL­ ROAD. Comparative conditions appear in real estate s ecurities as well a s com­ merci.al enterprises. A combination railroad and real estate Reorganization that developed into a l iquidation was the HUDSON & MANHATTAN RAILROAD CO. For many years the company's senior debt and adjustment bonds were priced at less than the value of the real estate holdi ngs . No value at the time was indicated for the railroad properties . Subsquent .eorganization developed into condemnation proceedings by the New York Port Authority. A recent Court award, if sustained, would result in the adjustment bonds, that were exchanged for 3 1/2 share of class "B" stock having a value of up to $6 93 a share. During the Reorganization period, the adjustment bonds could have been purchased around 20, or $200 per $ 1 , 000 bond. A first step, then, is to consider asset values . Getting into a situation in anticipation of Reorganization should be supported by tangible benefits derived from the new set-up.

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INVESTORS' GUIDE TO SPECIAL SITUATIONS IN THE STOCK MARKET

Participation i n a proposed Reorganization after a plan has been presented, affords greater detail about "old" and new

co porate

123

REORGANIZATIONS

1 0. When plan i s effective, two tax aspects may arise to influence way of

structure and its s ecurities.

closing transaction. One extends holding period to a "long-term

At this stage, treatment of securities is disclosed. A pro forma projection may be

gain , " the other establishes capial gain within the year plan is

available showing the influence of the Reorganization on securities to be outstanding.

consummated or carrying it over to the following year. The latter

The ·Pl,ojection acts as a base for estimating securities prices.

may be feasible when Reorgani zation akes place close to year ' s end.

During the pending Reorganization stage, investors can estimate values of securities to be issued in exchange for "old" and decide whether to participate or not. Capital gain opportunities are more frequently present in senior securities of company being reorganized. These obligations may have claims sati sfied by issuing a package of new securities.

n

turn, these offer hedging and trading oppoi·tunities.

The equity interest, on the other hand, if participating in the reorganization may those outstanding. Such treatment occurred in ATLAS SEWING CO. 's reorganiza­

27

old. Moreover, accrued interest

and accumulated preferred dividends have immediate value, included in estimating worth of the new capitali zation.

&

Exchange Commission files of

company reports , and financial publications . Analysis of Reorganizations is oriented toward search or assets in "old" s ecurities and finding a basis for projection of es ­ timated earnings for new securiti e s . The latter is at times emphasized in prospec­ t.uses, news releases and financial advisory services. The search for assets, on

the

other hand, is often directed to the company who may be asked to enlarge on specific items mentioned in footnotes of balance sheets. Otl1er areas to be studied are opposition to a proposed plan and attitude o f c reditors and large holders o f various s ecurities issues . Note that p roposed Reor­ ganization plans are frequently initiated by c reditors and holders of large amounts of senior securities. THE STEP APPROACH TO ANALYSIS OF REORGANIZATION SITUATIONS 1. Does Reorganization appear likel y ? (a) Clues are: default in interest and accumulated preferred dividends . (b) Continuous deficit operations . (c) Decline in worldng capital . What are prospecs for disclosing hidden values and tax refunds ? What are earnings projected for s ecurities to be received in exchange for "old" ?

4. Which securities issues in "old" capitalization have tangible value ? 5 . What is the spread or discount between securities to be received under plan and eisting "old" issue ?

6.

What is indicated duration of holding period ?

7 . What opposition is present, as well as Government Agency interes t ? 8 . What i s the substance o f progress reports o f Protective Committees, Company officials , and legal counsel ?

9.

Are existing market prices of various securities at l evel warranting tak­ ing a proit ?

in troubled waters o f companies

potentials are in estimated higher value of securities when Reorganization is effec­ tive rather than in "old" secu rities o f company reorganizing. Characteristics of Investing procedure is closely allied with Reorganization progres s . Opportunities for investing arise while awaiting c onsummation of the plan. Reorganization steps follow an orderly pattern to which securities values are correlated. A major analytical approach is investigation of conditions pertinent to pros ­ fine print can lead to bountiful, unexpected rewards .

Information about Reorgani zations may be found in news release s , reports

2. 3,

found

pective Reorgani zations. The search for h idden assets , often found in footnotes and

INVESTIGA TION AND ANA LYSIS from the Trustee of the company, Securities

Investing/trading opportunities are

facing Reorgani zation, bankruptcy, and adjustment of debt default. Capital gain

candidates for Reorganization are clearly defined and noticeable in early stages.

get a m ere token recognition by exchanging a lesser amount of new shares for tion that p rovided for one new share for each

SUMMARY

Investors taking trading positions in Reorganizations are offered (a) option of holding until the corporate action i s effective,

(b) establishing profits by arbitrag­

ing/hedging through sale of "when issued" securities . A frequently used trading/investing approach i s to create a long position in one issue of a reorganizing company. This can be done by s etting up a hedge pos i ­ tion wherein all t h e "when issued" s ecurities a r e sold except the stock o r bond s e l ected for retention. This procedure establishes a cost basis for the security retained substantially below existing market price. RAILROAD REORGANIZA TIONS Railroad Reorganization investing procedures were ori ented toward hedging/ arbitraging, where us e

of

"when issued" securities and contracts played an impor­

tant role. Reversing investing positions for tax advantage was another i nvesting/ traing technique. Investors became well iormed about m ethods of participating in Railroad Reorganizations because of the wide variety of possibilities . Many Railroads were in varying stages of Reorganization and ready to emerge from bankruptcy. Any single Reorganization situation offered numerous vehicles for investing. Arbitraging/hedging was approached in the following m anner: Purchase secur­ ities of the Railroad company that had a plan for Reorgani zation (identify these as "old" s ecurities ) . Then it was possible to anticipate consummation o f the Reorgan i ­ zation b y establishing a hedge position. This was done b y sell ing o n a "when issued" basis the securities to be received when the Reorganization became effective. It was advantageous to do this when the value of the package of new securities to be received in exchange for the "old" amounted to more than the existing price for the "old. " This spread was usual since the Railroads were operating and prospective benefits from Reorgani zation suggested higher values for the new s ecuriti e s . Trading i n Rail road Reorganization s ecurities started about a year prior to expected effectiveness of the program. Therefore, investor thinking followed lines --

h o•.v do I com e out i f the plan takes two years to c onsummate ? Since I want to

get a rel11rn of at least

10% on my investment, then the sp read between existing 20% capital gain.

prices of "old" securities and the "when issued" should offer

· 1 24

INVESTORS' GUIDE T D SPECIAL SITUATIONS IN THE STOCK MARKET

Financing a hedge position in a Reorganization required payment

for

"old" securities,

while no money was needed on the "when issued" sales. Thus, in the example that follows, the indicated capial ain of

Sl ,

082. 47 showed 20% on the investment, plus

125

REORGANIZATIONS

The procedure described above could have som ewhat similar application in divestitures, such as confronts GINE LL CORP. in the event the three subsid­

iaries must be divested.

additional accrued interest should the situation run beyond one year. The procedure for s etting up an arbitrage/hedge position was as follows :

Active trading/investing in Railroad Reorganizations created great interest

. .

. $5 , 300. 00

Approimate commission and revenue stamps .

65 . 00

Purchas e : $ 1 0 , 0 0 0 Denve r & Rio Grande 4 's/1936 @ 5 3

$5 , 365 . 00 "When issued" securities to be received under

Sell:

A.

$3, 189 , 2 0 DGR 1st mtg. 3-4's/1993 @ 8 7 3/4 $ 2 , 7 9 8 . 5 2

B.

$2, 170. 8 0

D.

"

Inc. 4 1/2 's/2018

32. 1 6 shares DGR preferred stock

48. 24 shares

"

"

common

@ 5 6 1/2 @ 41 1/4 @ 18 3 / 4

1,

Proceeds . . . . .

Indicated capital gain

.

226 . 5 0

1 , 326 . 6 0 904. 50

Accrued i n t . o n above 1 s t . mtg. bonds (est. ) Cost

ganization was effective and actual securities issued, "when issued" transactions

represented paper profits. Trading mediums called "contracts" were developed to turn paper profits into cash. To expedite this trading procedure , "when issued" pur­ chase and sale agreements were made negotiable .

reorganization:

C.

in "when issued" securities. Since transactions could not be completed until Reor­

1 9 1 . 35

For example, w e now a purchaser o f bonds of a company i n Reorganization

would receive new bonds , preferred, and common stock at consummation. Let us

assume he hedges his position by selling the bonds and shares on a "when issued"

basis. The agreements between seller and buyer provided for s el l er to deliver the

s e curities when they would be issued to him, and the buyer would pay at that time. Thus "contracts" to purchase and "contracts " to sell were created. Let us further

$6 , 447 . 47

assume a purchaser bought 100 shares of preferred stock on a "when issued" basis

$ 1 , 082. 47

of a gree ment to deliver to him 100 shares at $20 ":vhen issued. " Now let us assume

5,365 . 00

You may question why interest on the "when-issued" 1st m ortgage accrues

at $20 a share. His ownership would be represented by a stamped acknowlegment

the preferred "when issued" rose to $30 a share. The investor could use his "con­

tract" to buy at $20 a share by offering to sell his "contract" in the market. Buyers

to the s eller. As owners of 1st mortgage bonds , they are l enders o f money and

of such "contracts" paid cash upon deli very of he "contracts . " These transactions

place until consummation of the Reorganization, then, i n effect, the seller continues

s ented by the "contract. "

entitled to interest. Since transfer of the bonds 's p roprietary rights does not take to own the bond and therefore i s entitled to accrue interest. A clearer view of "when issued" transactions may b e seen as more closely resembling an option than

an exchange of property rights .

The basic concept of Railroad Reorganizations was o ri ented toward giving

bondholders a package of s ecurities in return for debt and elimination of interest

arrears. The package opened avenues for capital gain situations founded in exchange offers comprising two classes of bonds, preferred and common stock. As we know, the investor would readily p refer one s ecurity rather than odd pieces of four dif­ ferent issues. To further this concept, investors having purchased bonds of the

Railroad company to be reorganized would sell on a "when issued" basis, securi ties he did not wish to hold. At effective date of Reorganization, the investor would re­ ceive only the specific issue not sold.

n

the following exam pl e , for i llustrative

purpo s e s , the income bonds were the s ecuriy to be held. Note the impact of pro ­ jecting anticipated profits in the arbitrage/hedge s ituation to the cost of the income bonds. In this case, it works out to very l i ttle: Purchase: Sell:

-

SlO ,

000 Denver & Rio Grande R R 4's of 1936

$5 , 365 . 0 0

"When issued" new s ecurities to be received: A . $3 , 189. 20 DGR 1st mtg. 3-4's 1993

B.

3 2 . 16 shares of DGR pfd.

C. 4 8 . 24 shares of DGR common

@ @

87 3/4 .

2, 798 . 5 2

4 1 1/4 .

1 , 326 . 6 0

@ 1 8 3 /4 .

9 04 . 5 0

Accrued interest on above 1st mtg. bonds (est . ) Proceeds Cost of $2 , 170 income bonds to be held

. . . . .

at

a dis count from existing prices of th.e "when issued" security repre­

n

this way investors could bring their i nterest in "when

i ssued" transactions to a close prior to consummation of the Reorganization. The price paid for " contracts" would be based on indicated length of time

until effective date of Reorganization. To the extent that consummation was assured,

" c ontracts" had around them a cloak of banking. This would particularly be so when

the time element was near term. In such cases, while the discount might be as little as 2%, the return on money invested could be at a rate of 24%, if the situation had but one month to go. Now you may ask, why sell the "contract" instead of merely selling 100 shares o f p referred at $30 on a "when issued basis ? Such a transaction would not

be

settled until consummation of the Reorganization and money would not be paid

until that time. Money changes hands when a "security" is used as the vehicle for

consummation. The " contract" is the security in "when issued" transactions . Transactions in "old" securities of a company in Reorganization would be processed in the usual way, since actual delivery of securities could be made. In

effecl, paper

then, dealings i n " contracts" would be analogous to discounting commercial

for immediate funds. An advantage of "when issued" trading is that little money i s required to

maintain a position. Conventional margin rules do not apply. Furthermore, should the Reorganizalion fail to consummate, expens es are limited to commissions s ince transactions are cancelled.

1 9 1 . 35

" MA R K TO MARKET"

144. 03

position, a condition can arise where sellers of "when issued" securities are re-

$5 , 22 0 . 97 $

were priced

While "when i ssued" securities need no margin when created in a hedged

li "

.;;.·

126

INVESTORS' GUIDE TO SPECIAL SITUATIONS IN THE STOCK MARKET

quired to deposit money against a call

or

$5 1 . 87

"mark to market. " TI1is "mark to

market" {i. e . , mark-up) is the difference between the price a "when issued" secur­ ity sold and the market price at a given time. An investor who sold a "when issued" security at

$70

could be called upon to deposit

10

points of

$10

a share for each

share he had sold \Vhen the stock represented by the "when issued" rose to

$80.

A call for funds against a "mark to market" in a "when issued" transaction arises when the security has risen subsantially above the level where it had sold. For example , in our illustration of DENVER the preferred stock, that had sold at

41 1/2,

&

RIO GRANDE , let us assume tlat

rose to the

60

level . Viewed from a

trading sense , sale of the "when issued" stock is technically a "short" sale since the stock will not be delivered until a later date when the plan is effective. 'I11ere­ fore, when the stock is at

$6 0,

the seller is out almost

20

points . Since no m argin

was rquired to mainain the "short" position, the seller is asked to deposit unds to compensate for the indicated paper loss. In our exampl e , of "when i s sued" sold, amounts to

$640.

20

points on

32

shares

127

REORGANIZATIONS

a share could be available since the stock was then priced around

shar e . Investors in high tax brackets were in a of AMERICAN POWER LAND GAS

&

&

COKE. In this respect, c reation o f

Fortunately, problems eisting during the days of Public Utility Reorgani ­ subsidiary holdings is available. A prime reason for discussing Public Utility Holding Company Divestiures, from the historical value, is to show how investing procedures used in prior years could apply today. A work-sheet tabulation o f COMMONWEALTH

1935

brought about Reorganiza­

were similarities in financial problems facing many Public Utility Holding Com­ panies and in reconition of capital structures. However, the dissimilarities were

as viewed by a special situation investor , while studying the Divestiture program:

9/15/51 . . . . . . . . . . 110) (f shares) Common stock . . . . . . . . . . . . (# shares) Option Warrants . . . . . . . . . . . (wts . ) . . . * Arrenrs as of 7 /1/49 were $17 a share.

$6

2 1/4%

and earnings of companies to be distributed concealed real values. The industry­ wide practice of underestimating earnings and ass ets of controlled operating util ­ ities submerged inherent values as well as growth potentials. Furthermore, subsid­ iaries were controll e d by parental direction, s o growth was sometimes limited to

the

rate desired by the top holding company. These restraining inluences contributed

to wide differences in values of securities distributed among investors . However,

the Securities

& Exchange Commission opened the way to uncover pertinent infor­

mation regarding companies concened with divestiture through comprehensive reports . Supported by this background data, investors could project realistic values for securities of divested companies performing as independent operating util ities . Additional benefits , besides distribution of valuable properties , could be found in tax status of some Public Utility divestiture s i tuations . For example, AMERICAN POWER

&

LIGHT, a Utility Holding Company, was required to di s ­

tribute its holdings o f PORTLAND GAS

&

COKE a s a step i n the divestiture p rogram.

An unexpected windfall for arbitrage/hedge investors arose when the Internal Revenue uled that, for tax purposes, the cost price of PORTLAND GAS c ould be c o mputed at

$69. 87

a share. To recipients of PORTLAND GAS

& COKE & COKE,

through the recapitalization plan, the ruling m eant that a tax loss of deduction of

clue

dividend series pfd. (rec.

$3, 000, 000. 1 , 441 , 247. 33 , 673 , 328 17 , 588, 956

.

Allocations and Estimated Work-Out Values for Common and Preferred Stocks

Utility Holding Companies was oriented toward capital gain potentials based on a

T h e lack o f freely, available information concerning properties , operations,

SOUTHERN CORP.

Capitali z ation

more significant since they concerned distribution of valuable assets through in­

investors were the very factors contributing to profit potential s .

&

COMMONWEALTH

voluntary divestitur e s . The investing concept regarding Reorganizations of Public premise that "the parts were worth more than the whol e . " Problems confronting

& SOUTHERN, a

public utility holding company, is an illustration outli ning a picture of the company

Bank loan

The Public Utility Holding Company Act of

losses to be used against

zations and Divestitures would not be present today. Information about parent and

points.

tions in some ways s i milar to Railroad Reorganizations , but also dissimilar. These

ax

could be a secondary consideration.

Should the stock decline, the money would

PUBLIC UTI LITY HOLDING COMPA NIES

position, through purchase

capital gains would be a prime motive for getting into the s ituation. Capital gains

be returned. Buyers of "when issued" s ecuritie s , on the other hand, would be re­

10

a

LIGHT securiti e s , to c reate tax losses via sale o f PORT­

quired to "mark to market" in the event prices decline. Usual gradations for "mark to market" are about

avorable

$18

The approved plan of distribution and liquidation provided for each share of COMMONWEALTH p referred stock to receive common; plus

$1

0. 55

2. 80

&

SOUTHERN COR P .

$6

dividend

shares of CONSUMER POWER CO.

shares of CENTRAL I LLINOIS LIGHT CO. common;

cash per share. Common stockholders would receive

shares o f SOUTERN CO. common and

0. 35

shares of OHIO E DISON

0. 6

CO. common. The following tabulation shows the procedure for esti­ mated work-out values for participating security issues . No pro­ visions were made for the option warrants : For Each Share of

$6

Pfd.

to be Distributed Consumers Powe1· Central Illinois Light

No. of

Est. Price

Shares

Per Share (a)

2. 80 0. 55

b)

Cash distribution

33 32

Value

$ 9 2 . 40 17. 60

__Q $1 1 1 . 00

Total indicated value per share

(a) Based on recent selling price on \'YSE for minority interes t; (b) estimated value based on earnings ratio of eanings of

$2 . 98

10

3/4 times

per share reported

for year ending May

3 1 , 1949.

-,-

128

INVESTORS' GUIDE TO SPECIAL SITUATIONS IN THE STOCK MARKET

For Each Share Common

No. of

E s t . Price

Stock to be Distributed

Shares

Per Share

Southern Company Ohio Edison ;;ompany

5

(c)

O. 06

8 1/4

p rospects.

....

$ 2. 89

.L

S U M MARY O F STEPS IN BREAK-UP SITUATIONS

$ 4 . 60

1. Construct a work sheet tabulation as shown i n the COMMONWEALTH

approximately 8-times eanings of

value s . The latter may be based on earnings reports and dividends received

194 9 ;

by parent company on income report. Notice of m e eting as well as prospec­ tuses would also carry this information.

for minority interest.

&

3. Total the values o f "all the parts" (securities being divested), then deduct the cost of parent company securities to obtain indicated capital gain. From this

TRADING PROCEDURES

The Publi c Utility Holding Company break-up period developed the dives­

titure procedure as n investing medium. Supported by comprehensive studies of many holding companies by the Securities & Exchange Commission, plus certainty that divestHure would be effective, capital gain potentials could be calculated with reasonable expectancy of estimated values being confi rmed. P rofits were to be found in higher evaluation for subsidiaries being divested than appeared on the parent company 's books . Thus the parent holding company ' s securities were avail ­ able at a discount from combined values o f divested subsidiaries. However, the dis ­ count reflected varied opinions regarding values of companies being released . As in other Reorganizations, methods for establi s h i ng a position in a public utility company break-up adhered to basic investing patterns : (a) outright purchase of "old" or parent company s ecurities to be held awaiting distribution of the "new, " and (b) creating a hedge position by selling securities to be received in the Reor­ ganization prior to consummation of the plan. As shO\\�l i n the COMMONVEALTH

&

SOUTHERN work sheet, trading mar­

kets al ready existed for some subsidiary holdings . Others were priced on earnings and prospects. A hedged position iii the Utility group , where subsidiary shares were traded, required extra consideration regarding dividends . In a hedge position, sale of stock for future delivery carries liability for dividends to be paid on shares sold. This must be included when calculating potential capital gain possibilities. Therefore, when estimating value of the package received for parent company securities , we in­ clude dividends,

whereas dividends paid by subsidiary companies would be expense

items . Investing procedures in effect during the public utility break-up period hav­ ing application today in other industries lie in the long-term investment approach toward divested companies. In the Public Utility field such high grade operating companies as OHIO E DISON, SOUTHERN CO. , MIDDLE SOUTH CO. , UNION E LE CTRIC CO. , NEW ENGLAND E L ECTRIC SYSTEM, DUQ UESNE LIGHT CO. , M T . STATES POW E R , and many others came out of the Holding Company break -up period. With this background in mind,

SOUTH­

2. Evaluate s ecurities to be received, based on existing market prices or estimated

$1. 07

( d ) based on recent selling price on NYSE

INVESTING

&

ERN example above. Thus you can see what is present and what is e"')ected.

( c ) Estimated yalue based o n eanings ratio of reported for year ending May 31,

When they become independent, growth characteristics come t o light

a nd a re noted by investors.

Value

(d) 28 1/2

Total indicated value per share . . . .

129

REORGANIZATIONS

present day inves tors could recognize

dives ­

titures and possible break -up of large enterprises as opportunities to get into excellent commercial companies heretofore locked i n , or s ecurities too closely held by a parent Holding company. Al though released companies may be mature within their industry, because of holding company restraint, they may not exhibit growth

1. 5.

figure deduct commissions, revenue stamps, and dividends to be paid out. Divide cost into indicated net profit to get the percentage rate of capital gain. Reapraise s i tuation based on latest prices. A time lag i s often present after en­ tering a s ituation until effective date of the plan. During this period,

security

values may have moved to levels offering satisfactory capial gains . Conse­ quently, reappraisal based on l atest prices is advisable to see whethe r to

continue the position or to establish the profit by c l osing out the transactions .

G . B e aware o f new developments that could enhance, as well as detract from, poten­

tial values. These possibilities may arise from tax ulings and legal decisions , often pending until almost closing date. The significance of tax rulings cannot be underestimated since taxable Reorganizations c ould be costly to i nvestors in high tax b racket s .

n

the other hand, tax rulings could redound avorably

to securities holders in reflecting refunds (high cost base) or other favorab l e t a x decisions. S U M MARY

In

summary, we see that proven investing procedures of p revious years can

be used today for capital gain investments. Publi c Utility Reorganizations offer cap­ ital gain potentials in trading positions as well as long-term holdings. As i s present in oilier Special S ituation areas , hidden values and tax windfalls are expected bene­ fits. When analyzing Reorgani zations , the unexpected should be included. Problems arising from lack of information existing i n prior years have been eliminated and we have comprehensive data available from many sources. In light of the broadening field of divestitures, trading procedures and "know-how" gained during the period of Utility Heorganizations may be applied to present-day corporate Reorganizations .

OHA'T''

��

Unique Situations

UNIQUE SITUATIONS

r c

Endicott Johnson Corp . Erie- Forge & Steel Erie- Lackawanna H. R .

$ 7 pfd. "A" $6 pfd. "B" 4% cum. pfd. 6% 1st. pfd. 5% Ser. "A"

Gar Wood Industries Hoe (R) & Co. Laguna Ni11tel Corp. Monon R . R . Old Town Corp.

4 1/2% CV. pfd. $1 Class "A" $0. 60 "A" 5% ptc "A" $0. ected that Medicare will add as much as

industry's annual volume of

influence of this new s ociological venture cannot be foretold but, as the progress develops , new avenues will appear. Thus , this area can b e included in the Special Situation

range

for unique type investments .

The prospective inluence of Medicare has al ready brought price apprecia­

tion to drug stocks, as well as to many companies in the hospital supply field.

While these are the first areas thought to benefit directly, other offshoots should benefit qually. Suppli ers of furniture, beds , and linens will be in growing demand for their products. Prospects for nursing homes are indicated to be excellent . It may be that p rivate hospitals will turn to the public for financing, thus new investing fields come into being,

TO MAKE "A FORTUNE,

11

"A KILLING, 1 1 "A PLAY" - - that is,

to make a sub­

stantial sum o f money in relation to the amount of a single investment situation, one must � low, �high, and h ave enough sock. The trick is to do this without

guessing daily stock market fluctuations . A m ehod widely used by professionals in U1e sect1rities business is PYAMIDING. This calls for adding to one's holdings of a specific s ecurity at higher price levels over a period of time. Units of 10 shares to the standard

100

may be used i n this investing method.

PRAMIDING CON C EPT The concept behind U1e most

of

this investing procedure is: "ride with a winner" o r make Because this is an aggres sive approach, it can lead to

a market trend.

relatively larger capital gains than customarily obtained through orinary methods. The idea of adding to one's holdings of a specific security i s not new. Mutual Funds investing is based on this pattern. Adding to one's mutual funds shares is addition­ ally encouraged by a p rogram o f reinvestment o f dividends. However, unlike mutual fuad investing, where there may be no advance in price during the entire venture period, pyramiding could only be operative when higher pri ces are present. P rofessionals i n the securities business arrived at the pyramiding method through experience. The long-term view s u i ted their needs since they could give l i ttle time to daily trading. Furthermore, the value of corporate research i s not 149

,

,,

1 50

INVESTORS' GUIOE TO SPECIAL SITUATIONS IN THE STOCK MARKET

truly reflected in day-to-day market action since a company 's capability requires time to develop.

In the foregoing, we have discussed pyramiding on the upside of the m arket.

It is timely to m ention pyramiding on the "downside. " This i s possible, of course,

but caution is necessary, ever mindful o f the keynote " riding with a winner . " Bear

PYAMIDING PROCEDURE Since a difficult aspect of investing is selection of securities having poten­ tial for substantial market price rises, diversification i s considered a prudent approach. This may be worked out th rough use of a revolving po rtfolio of shares of a number of companies . Pyramiding has been singularly successful with securities

of companies engaged in latest developments, such as seen in m a 1·ket activity of Electronics, Copying Machines , Computers , and Space Age products where dynamic developments reflect strong continued stock price movem ents . The pyramiding approach lends itself to situations having favorable long­ term prospects. Low-priced issues h aving dynamic growth possibilities are a favored group. These are ound in technological nd scientific development com­ panies. A successful pyramiding program covering a period of three to five years, might look something like the following: Number of Shares

151

PYRAMIOING

Cumulative

Cumulative

Qer Share

Value

Cost

500

$10

$ 5 , 000

$ 5, 000

1 00

9 , 000

6, 500

200

15 20

1 6 , 000

1 0 , 500

100

25

22 , 5 00

13, 000

�

Q_ 1 , 000

pyramiding to build a short position is justified. The procedure merely reverses the patten above by selling on a scale donward. SOME TRADING ASPECTS

Prior years ' market action shows that some stocks do not get started, others

move slowl y , while others come to a stop along the way. Since additions to a pyramid­ ing program are made only at tiigher price level, those stocks that do not get b eyond the first level are candidates for disposal . An impo rtant checkpoint is the stalled situation. Here the investor should un­

Approx. Price

Purchased

in mind that if the stock declines after purchase, it may never get off the ground again. There may be no basis for expectation that the stock will turn around. A parable applicable here is ''Don ' t send good money after bad. 11 On the other hand, i f one believes the market is in a downtrend , he use of

$30

30,000

1 6, 000

$30, 000

$16, 000

derstand the cause. If the restraining action applies solely to the company, then sale

might be advisable. n U1e other hand, if restraint reflected a trend of the general

securities market, while timing may be delayed, the prospects wou l d be unchanged. However, continuation of the pyramiding procedure would not be effective until the stock moved to the level where the second purchase woul d be initiated. The slow starter requires extra care. If the basic analysis shows no perti­ nent changes in the company ' s activities then, while waiting may try one's patience, it could be rewarding. RUCKER COMPANY, a slow-starter , illustrates this type. The company is closely identified with automation products and systems for space, defense facilities, petroleum, communications, business machines , and other

However, during a five-year period a successful company ' s shares could have risen

o

the $50 level when the stock may have been split on a two-for-one

basis. Moreover, reappraisal

at that time might encourage additional pyramiding,

favored industries. During the early period of development, the stock moved to the $13 level , then back to $ 7 . However, a combination of breakthrough developments and corporate actions resulted in a strong stock movement

o

the $24 level. After a

spacing the purchases at five-point intervals . Then the tabulation might look as

stock split, the shares continued to move to the $30 level. Pyramiding would work

follows : (The first 2, 000 shares are assumed to have been accumulated at prices up to $50, when the split was made. )

often quite rapilly .

Cumulative

No . Shares Purchased

Price

Vlue

2 , 000

$25

$ 1 5 , 500

Cumulative Cost $ 15, 000

100

25

5 2 , 500

1 8 , 000

100

30

6 6 , 000

2 1 , 000

100

35 40

80, 500

24 , 5 00

100

45

112, 500

2 , 500

$45

$ 1 1 2 , 500

Q_

96, 000

28, 500 33,000

$33 , ooo·

well in such cases since, once the stock has started to move, it continues the course,

W H ER E T O FIND PYRAMIDING CANDIDA TES The investor 's own background is a good source for locating l i kely stocks for pyramiding. Candidates can develop from companies whose products are familiar to investors . Then, too , candidates can be companies whose products are not consumer items, but whose activities are newsworthy because of their modern o rientation.

T1·ade and business journals contain information about these companies that i s gener­

ally not noted elsewhere. Newsstands carry some of these publications while many

are available at public libraries. Investment advisory services are help ful since re­ search and analysis plays an important role. A fertile area is the l"elatively young business engaged in the latest p roduct development.

However, these companies may

lso be candidates for merger-acquisition in which case the shares would be elimi­ Not shown in U1e table is the impact of use of c redit or margin for financing additional shares . This cold be e.')edited by use of "profits" to pay for portion of purchases. n this way we "use their money" as the stocks move up.

nated from the market. At that point, the acquiring company might b e studied for pyramiding possibilities.

�

�m,. 2 0

153

TURNABOUT SITUATIONS

stockholders and "turnabout" si tuations , three main s tages are emphas ized: l.

The early stage o f "tun1about" usually shows no positive stock market response to potentially favo rable conditions. Therefore, patience is a prerequisite.

2 . There i s a time lag between forces motivating a "turnabout" and a

3.

market response. The situation could be a dud, never getting off the ground. Should this happen, a further possibility i s that the company may be a candidate for Merger or Acquisition.

"TURNABOUT" BACKGROUND Corporate housecleaning, where unwanted facilities as well as managem ent are replaced, is a usual background of companies in this group . The objective is to improve working capital and official direction. " Tu rnabout" companies ' shares are frequently at low levels reflecting need

Turnabout Situations

for a change in operations. For situations in this category, there are n o sharp price nuctuations as associated with extraordinary market action o f spectacular, glamor type companie s .

Business conditions have caused shares o f "turnabout" companies

to slip to existing low levels and only improvement in these conditions can move the shares upward. A distinguishing mark is noted in earnings where net income is related i n black ink compared with p revious red ink results. A compelling ingredi ent in a successful "tunabout" siuation is change of management from old to young officers. This was the exampl e in NATIONAL AR­ LINES when M r . L.

B. Maytag, Jr. gained control from the later George T. Baker,

founder of the airline.

Mr.

Maytag paid a premium of

$7

a share to acquire 235 ,

shares at a time when NATIONA L ARLINES was priced around $18 a share.

Mr. Maytag, representing new management, transformed a loosely-nit organiza­

"TURNABOUT" SITUATIONS

tion with an $8 million loss into a jet-smooth operation with an equivalent profit.

AN INVESTMENT AREA responding to an influence of something special is found

Factors contributing to "urnabout" c onditions are:

in companies , from a business ope·ating aspect, "turned about . " These companies experienced adverse business and poor operating results for some time ; however, with revivification and apparent indications of more favorable prospects, they u rned about. "Turnabout" possibilities often occur when a company, within the scope of its industry alinment, makes drastic changes i n its products o r line of busines s . When a major change i n management takes place,

with s ignificant changes i n prod­

ucts and operation s , "tunabout" possibil ities are also present. Another area may be a Merger or Acquisition, concurrent with sale of certain facilities by companies concerned with consolidation. Internal changes within a company are o f great value to investor/stock­ holders. Too frequently shareholders wait for a stock to return to its former pur­ chase price -- to get out. With information from company reports and direct communication with management, an appraisal for potentials of company ' s changing

1 . Obsolescence of company's products . The railroad equipment industry illustrates this condition. Over a long period of time, many companies i n this field worked out of a declining demand for their then existing products by drastic changes

in

product

mix.

A CF INDUSTRIES, AMERICAN BRAKE SHOE , E VANS PRODUCTS,

M I D LAN D-ROSS COR P , and SYMINGTON WAYNE CORP. a l l "tuned about" and

are successful enterprises today. 2. Management's slowness in keeping up with product development. Office

equipment companies not in a position to participate in computer technology illus­ trates this basic need for "tunabout. ' ' Quite a few Merger/Acquisitions were effected where internal product "tu nabout" was not feasibl e .

3 . Management incompatibility. This element arises in all types of company situations ranging from discord in feuds of founding families to use of latest tech­ niques and sci entific applications . COLT INDUSTRIES, discussed below, illustrates

posture could be made and thus premature selling could be avoided.

benefits derived from "turnabout" in management discord.

" TURNABOUT" CHARACTERISTICS

obsolescent management.

4.

Having determined interest in the ''tu nabout" situation, then the character­ istic nature of this investing field should be examined. In the 152

000

relationships

between

Lack of modern facilities, thinkin, and foresight . This i s related to These deterrents to business progress can be found in

various industrial and commercial enterpri s e s .

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INVESTORS' GUIDE TO SPECIAL SITUATIONS IN THE STOCK MARKET

EXAMPLES OF " TURNABOUT" SJTUA TJONS At this point we will discuss a few companies who have joined the "turn­ about" group i n the past few yea1·s. An outstanding common feature is that th e companies are operating profitably after a period of unsatisfactory revenues and earnings. In some instance s , a period of deficits were reported while others showed declining earnings.

Prices of shares reflected the company ' s business trend, afford­

ing capital gains for long-term investing. C O LT INDUSTRIES' "turnabout" was brought about by new management taking over after a decade of severe losses, proxy fights , and personality clashes.

The com­

pany comprised a group of unrelated manufactu ring operation s , basically strong a l though in need of pruning and updating of facilities , There was almost

100%

change in management, including di rectors , cor­

porate officers , division presidents, and general managers . Secondly, operating structures were revised around seven main divisions. By eliminating excess or outmoded acilities and consolidatlng,

COLT now has nine major manufacturing

plants in the United States , one in Canada, and one in Mexico. Approximately of sales are made to industrial and commercial customer s ; some ment customers.

40%

60%

to govern­

Company 's activities include products for aerospace control s ,

firearms, power systems, desalting systems, pumps, weighing system s , machine

155

TURNABOUT SITUATIONS

1966 .

Responding

to the

$29

to

shares rose changes and improvement in business prospects , the

level.

C o . ) now WHITE CONSOLIDA TE D INDUSTRIES (formerly White Sewing Machine and instru­ derives the largest portion of sales from specialty valves, controls to improve ean­ ments. Recent acquisition of WHITIN M A C HINE CO. is expected

were spotty, with deficits ings considerabl y . Operating results over the past years , the company re­ reported in most years. However, reflecting changed conditions earnings in 1965 were ported earnings of $0. 42 in 1963 and $1. 11 i n 1964, while for a long time. Sub ­ $ 2 . 43 a share. The shares had sold within a range of $5 to $10 in 1964, followed /8 7 18 to moved they s, condition sequently , reflecting improved rose to 59 1/2 in early 1966. b y the full impact of the "tunabout" as the stock

at deficit levels for t h e past f e w years. CHADBO URN GOTHAM had been operating around the $5 level . Company activ ­ The stock reflected this conditio n, being priced manufacture of work clothes and the and hosiery women's in ated ities are concentr pressed garm ents is expected ntly permane of men's leisure wear. Increase d use lil e no changes have taken place as to uplift operations in the clothing division . illustration of a possible "turnabout" that o f now, company is mention ed here as an . situation ion could develop into a Merger/Acquisit

tools and compressors.

n 1 962, the $5 million on sales of $150 million. By 1964 sales had risen to $164 million and earnings were $3 million, qual to $0. 85 a share. In 1965 , earnings rose to $ 1 . 73 a share. The stock sold at 10 3/4 in 1964 and at 25 1/2 in early 1966. Company eqlects continued improvement in sales and earnings . The impact o f "urnabout" may be seen i1\ the financial record.

company had an operating loss of

. FOSTER W H E E LE R CORP. reported earnings of

$4. 24 a share in 196 1 . This was 1963 , then an uptu n to $2. 21 in 1 96 1 , and a further increase for the following year to $3 . 39 a share. The stock was priced as low as $23 7 /8 in 1964, s ubsequently moving to $5 8 .

followed by

$2. 08

in

1962,

a deficit of

$4. 48

in

ROBERTSHAW CONTROLS was primarily engaged in the manufacture of devices for automatic control and regulation of temperatures and pressures. In

mid-196 2 ,

company moved into the custom control system market and suppl emented its inter­ nal expansion through acquisitions. P roducts now include timing devices, seamless m etal bellows, automobile thermostats and pressure gauges . Net earnings declined

$5. 76 in 1959 to SL 56 in 1964. However, a "tunabout" to $2. 20 was 1965, while estimates for the current year a re above that level. The shares had declined to the $24 level and then reflected imp roved conditions by ri s ­ ing t o around $39. from a high of reported i n

WARD FOODS is the result of m erger of WA R D BAKING and NOMA CORP. P rior to the m ergei· the company had reported losses for three straight years . The stock's price reflected th is and was priced a s low as

$6

a share. However, introduction of

new products and disposal of certain assets that were unprofitable in the NOMA set­

up contributed to the "tunabout . " E l i mination o f unprofitable operations resulted in an operating profit of 44� a share for

1965 ,

with furth e r improvement e"-pected for

ANALY TICAL A P PROAC H is through study of the The analytical approach to "turnabout" s ituations status, and manage ment capabili ties. compan y, its products , service s, industry vital changes . Since "tu rnabout" sit­ A further step delves into motives for making results, analysi s i s directed to: g operatin uations imply past evidence of poor declinin g busine s s ; and (1) extent of operating losses ; (2) period of time during profits. and business in decline for cause (3) basic ble operatio ns . For Sales and earnings background would relect unfavora RIES, a " tu rnabout" situatio n, reported exampl e , WHITE CONSOL IDATED INDUST 1962. However , earnings i mp roved by a deficit of 91� a share for 1961 and 47¢ for . 11 was the net. Due to "turnabout" $1 1964, in while 1963 when 42¢ was earned, in 1964 to $59 by 1 9 6 6 . (See above (or influenc es , the stock rose from a low of $10 . ) Operations had been at a loss until a further details regardi ng company changes t. " tunabou " a d influence mix change in the product sheet and earnings report. \Ve The analytical approach looks to the balance available to continue busines s as well as want to know whether adequate funds are ies, plants , and facilitie s shown on to carry out plans (or a "tu1·nabout . " Inventor cash, if needed. 0( importance i s raising for ls the balance sheet, disclos e potentia capabili ty. A ' 'turnabout" is unlikely if whether previous records showed earnings poo r , particularly s o i f the same operat­ the company 's long-ter m record has been . Examin ation al this point l o oks for present are el ing and adminis trative personn situation could be conside red a candidate causes of declining earning s. Before the to light. The something new could be for "turnabout, " something new should come s . C HA DBOURN GOTHA M, dis ­ proces ion product in the adminis trative area o r in thus far lacking a n aggress ive "turnabout" cussed abov e , i s indicati ve o f a company reference to the Master Plan (desc ribed spark. For additional financia l analys i s , in Chapter

6)

would be helpful.

INVESTORS' GUIDE TO SPECIAL SITUATIONS IN T H E STOCK MARKET

156

A vital facet of "turnabout"

s i tuations cannot be analyzed routinely since

it deals with people. Although this does not show in the financial statement, i t does

TURNABOUT SITUATIONS

157

to check changes in stock holdings of official families . Another approach is to pur­ chase a small number of shares mainly to be on the company ' s mailing l i s t .

appear on the roster of management. Undoubtedly, one of the main springs in these s i tuations is management capability. This i s notable i n successful "tunabout" sit­ uations where upheava.l in upper levels of the official family has taken place. COLT lNDUSTRIES, desc ribed above, illustrates this action.

Where can "turnabout" situations be found ? A prime source, disclosing

potential "tu rnabout" companies is "insider reports, " stock holdings of insiders.

& Exchange publications ,

This information i s released by the Securities published in newspapers and financial news An "insider" is one who owns

1 0%

As

long-term capione can see, "tu rnabout" s i tuations are oriented toward to a cours e . This Basically, these situations are slow-mov ing but adhere This investing approach which character istic makes it ideal for pyramid investing. by the generally Jong period from enhanced is up way the on shares more tes accumula to work with the s i tuation. In this "tu nabout" to maturity. Thus, investors have time could be appli ed as the s ituation pro­ aspect, the fundamentals of investmen t analysis as indicated by the pyramidin g gresses , the reby supporting additional purchases

tal gains .

M EA N I NG OF INSIDER BUYING ·

INVESTIN G PROCEDU RE

Commission and is also

program.

or more of a compan y ' s stock, directly o r

through family trusts, funds , etc . Reports of changes i n these holdings are clues to what a company ' s official family and large stocholders think of future prospects. Disposal o f shares by "ins iders" at a time when the security market is relatively high and company's stock is also relatively high may indicate business prospects are falling off.

by

n

numerous instances , such selling p receded a business downturn

many month s . The time lag between market price of shares and business level

could reflect momentum of securities market along with investors unawareness of signs of declining busine s s .

However, a mo·e positive clue to future prospects

can arise when " i nsider" sales occur at a time company 's shares are at a low level . This could mean transfer

of

management -- a definite s i gn of a prospective "turn­

about" s i tuation. In our search for " turnabout" situations, we are alert to conclusive actions arousing investment interest in a company.

Therefore, s c rutiny of monthly list of

"changes in insider holdings" is a must. Where increased holdings continue over a period of time i n a situation having poor earnings and at low market price level s , further examination is merited. Premature buying b y " insiders" i s i n fact early

purchasing

with confirmed belief that changes for the better loom ahead. Remember

that an indeterminate time Jag could be ahead before impact of any favorable events is reflected in the

se curity .

"Insiders" buy early,

entering in anticipation of future improvement. Pur­

chases then anticipate an a dvance in new product development, important operating changes , o r proposed favorable legislation. Since "insider" buying is for long-term investment, the lag between buying and market response could be protracted. In­ vestors, influenced by "insider's" action, must, therefore, be prepared for such market timing. SOURCES OF l N F ORMATION Information concening "turnabout" s i tuations can be gathered from usual financial s ources , newspapers , trade papers , and journals . The latter frequently ca rry items of company doings that do not appear in other publ ications and may delve more deeply into management personalities and capabil ities . Financial and investment services , having access to computers may be in a position to spot "turn­ about" changes in operational data not readily available in ordinary studies . Company reports, particularly the proxy statement and notice of meeting, are excellent sources

"

CHmER

21

159

CHANCE IN l!HE OF BUSINESS

offeTing

growh. Illustrations of this are seen in rece nt actions of s om e companies in

the rubber industry.

SEI LON, INC. , fo rme rly SEIBER LING RUBBER COM PANY , sold its tire man ­ ufacturing facilities th at had been losing money and concentrated operations in the ma nu facu r e of mats , etc. for automobiles, shoe products , and plastics . LEE NATIONA L COMPANY, formerly LEE RUBBER & TffiE C O. , di sposed o f all its ma nuac turi ng facilities . The resulting corporate shell has cash and equivalent amountin g to approxi m ately $31 a share. Management's objective is to find new oppor­ tunities for use of the money. To expedite U1is search, stockholders recently approved a change in capitalization permitting issuance of preferred stock. The latter, accord­

ing to management's view, would aid acquisitions in new fields. This is a company, therefore, in p roc ess of making a change.

$24. 5 0 , Uie shares are priced a t a discount i mpo r nt should company fail to find s uitabl e us e s for the funds and decide to liquidate. On the oth e r hand, capital gain prospects in new Since LEE NAT ' L. stock is a rouyd

from asset value. This would be

venu res would depend upon management's capability in acquiring p rofitable new lines o f activity . Management owns a substantial portion of the outstanding stock; therefore, investors have the advanage of personal interest to make best us e of the money. The rail road equipment field is anoUier in dus t ry group where changes in

Change in Line of Business

main line of business have taken place. Companies in this area made changes grad­ ually, being fortunate in having Lime Lo study the moves. A C F INDUSTRIES, for­ m e rly AMERICAN CAR & FOUNDRY, is an illustration. The company now derives the major portion of its eanings from leasing tank and special purpose cars through a subsidiary divi sion . It is interesting to note earnings dipped to around $0. 57 a share from $1. 59 Len years ago , when U1e stock s old around the $10 level. However, reflecting changed business and improved earnings of $3. 72 for 1965 , the stock rose to the middle 5 0 ' s (earnings and stock prices adjusted for stock splits in 1963 and

1965) .

BACKGROUND MOTIV\ T!ONS

change have well rewarded their stockholders. This chapter deals with companies

The background underlying change in line o f business is related to: (1 ) decl i n ­ ing demand for p roducts and services; (2) l ac k of growth in the industry; and (3) de­ s i re to update business interest by ente ri ng the latest product fi eld . Companies in Uiis group generally are i n good financial condition. A p re r e ­

that have changed, are in process of changing, or may be c a nd idate s

quisite is management with ideas and the ability to put them to work.

A ROUTINE BUSI\ESS PRACTICE of alert firms is c han gi ng product designs and p roduction techniques . Redirection in a firm 's basic industry alinm ent into a n o th er field, however, requires astute guidance, but companies successfully making the

or change

i n lines o f busines s . The fast pace o f moden technology has influenced many producers to tun

out products so new that the major s ou rces of their sales were not i11 e x is ten c e ten years ago. Moreover , the natio n 's

economic strides step up the race to stay "mode n , " necessitating new areas in p roduct development, production, and distribution. Cons e ­ quentl y , many c om pan i es are faced with the need for continued development outside their main line ac tiv i y or else slowly fade out of the business wo l'ld . In the main , those companies with p roducts and services in a de cl i ning phase and l ittle or no growth prospects ahead are candidates for a change in line of bu siness . Another group of companies consists of those whose growth was not adequate to keep up with the in­ dustry ' s technological developm ents.

To have the

wisdom to make changes cal l s for al e rt , successful management with ability and

foresight. It is not surprising that so many companies in this category have been successful in their basic line. With this background, companies are in a position to

choose. They may remain in the

i n du stry

and offset adverse factors by diversifica­

tion to related products and activities ; for exam p l e ,

railroad equipment m anufac­

l\trers u rni ng to leasing and to production of abrasives. A s econd choice would be

successfully do n e by PHILADELP HIA & READING CO. , who got out of the coal business into the soft good s i ndu st ry .

to enter a completely new field, as was

Established companies venturing into new fields have many advantages.

Firstly, th ey have bus iness exp e r ienc e and, no doubt, sales and distribution organi­

zations . Today the availability of personnel with "know how" strongly infiuences suc ­

ces s ful operations. Furthermore, with adquate finances , these companies are not

CONCEPT IN CHANGE OF OPERA T!ONS The concept in companies concerned with changing lines of business is reduc­ tion or elimination of pres ent activities , supplementing these with p r oducts o r s e rvices 158

pressed by ti m e since their old activities keep them going.

1 60

INVESTORS' GUIDE TO SPECIAL SITUATIONS Jf T![ STOCK MARKET

CAPITAL GAIN POTENTIALS

A change i n line of business is a slow proces s , requi ring research and s tudy prior to making any move. Thus, capital gain potentials are distinctly long-term investments . However, unlike "tunabout" s ituations where poor earnings may have precluded dividend payments , companies changing heir line of business are often dividend-paying concerns. This is significant since dividends h elp carry the stock Additionally important i s the fact that the companies · while waiting developments. paying dividends are probably in good financial condition. Projecting capital gain potentials does not follow a ready pattern since each company making a change in line of business is an individual s ituation, specifically motivated by causes pertaining to their company. However, we can get a woring picture by examining the type of change ; that i s , is it a complete or partial change in line of business ? If the company has eliminated its old line of activity and re­ placed i t with others, it may be possible to project earnings for the new phas e . This approach was worked out in MS L INDUSTRIES where the company acquired had indi­ cated earnings to contribute at the beginning of the changeover. These earnings , of cours e , could b e used as a guide. Eamings projections then would be based on per­ centage or the company ' s funds employed. If the move into other fields , however, is achieved while partially liquidat­ ing old activities , then capital gain projections would in part be based on prospects for the company ' s old line products . This information can be gathered from existing reports. The impact of new fields of activity would be estimated from the degree of depth the company is entering new area; length of time it will take for the set-up ; size of industry; and conjecture of potential profit margins obtainable in the project. Companies i n various stages of changing lines of business, therefore, may offer opportunities along the way for potential capital gains . Since these situations would be in developing stages, capital gain prospects would vary with company's progres s . Thus , investment positions could be taken at spaced intervals . PROCEDURE S FOR CHANGING PRODUCT LINES Companies use various procedures in making changes in lines of busines s . As indi cated above, s a l e of all or some assets paves the way toward eliminating old line products . DA YCO CORP. utilized the sale method to dispose of its tire division ' s manufacturing acilities and inventories. This move bolstered earnings and s trengthened company ' s finances. Subsequent to sale of facilities , eanings changed from deficits to net income in excess of $3 a share. Through diversifica­ tion and new product devel opment, the company i s a leading supplier of V belts for the autom obile industry. heir other activities include plastics, mechanical rubber products , chemical products , foam cushions used in furniture, industrial machinery, air conditioning, and aircraft seats . Other c ompanies have found the Merger/Acquisition route an excellent channel to make a central change in their line of busines. This procedure offers a quick and more direct route to new product areas . Many companies feel it is cheaper to buy than to build from the ground up, with further benefits from per­ sonnel acquired i n its entirety. Companies resorting to Merger/Acquisition are described bel ow: The internal development procedure for companies changing their line of business has been less favored in past years , although economic conditions, no

CHANGE IN LINE OF BUSINESS

161

doubt, contribute to its use. Companies using this method must have the "now how" to initiate methods involved in such undertaking. For illustrative purpos es, we des ­ cribe a [ew companies who have made significant c hanges in th ei r main lines o f business . Where possible, the impact o n earnings and securities prices i s indicated: AVlERACE CORP. 's background included BAC H MANN UXBRIDGE , a woolen com­ pany, which was sold. Through Mergers and Acquisitions as well as som e internal expansion, the company is engaged in rubber products for the automotive replace­ ment fi eld, plasti cs , and chemical s . The company 's sales climbed during the past decade rrom $35 million to $69 million , while earnings rose from a few pennies to $2. 18 a share. The stock ranged from SS to the $29 level while dividends were paid during the ten-year period. A T LAS C OR P . changed from a non-diversi fied investment company into a n operat­ ing enterprise with interests in uranium mining, manufacture of flexible hose, and household appliances . Company ' s changeover was implemented by the sale of i n ­ vestment interests and a strong acquisition program. Company ' s previous record was poo r : however, profits have recently appeared, permitting partial clearance of arrears on the preferred stock. During the past few years, common stock ranged from a low of $2 to $4 1/2 per share, reflecting th e change in earnings pattern to the profitable side. BANGOR PUNTA A LEGRE SUGAR CORP. is the result of a combination of two unrelated corporate entities. PUNTA ALEGRE SUGAR was a corporate shell hold­ ing cash of $3 . 5 million and no operating facilities (these were expropriated by the Cuban government). BANGOR & A ROOSTOOK is a Maine railroad with a good record but little prospects for growth. Their philosophy in acquisition rested on a proven record of growth and profits, indications for further growth, and high -caliber man­ agement. The consolidated company is engaged in manufacture of emblematic jewelry for educational institutions and clubs ; sea s kiffs and inboard pleasure boats ; hand 6'1ln s ; industrial heavy equipment for sanitary engineering; te.-tiles for women ' s wear; a credit company; and o f course, the railroad. Company 's financial position i s strong. Earnings r o s e from $1. 88 i n 1 9 6 3 t o $3 . 0 6 for 1 96 5 . T h e shares ranged from a low of 13 5/8 to a high of 36 1/4. E LTRA CORP . , formerly ELE CTRIC AUTO LIGHT CO. , illustrates the merger way in changing a l ine of business . This took place when E L TRA and MERGENTHALER LINOTY PE CO. merged. Company now serves the automotive parts and printing in­ dustries . Coincidental with merger, sales and earnings improved substantially. The stock, reflecting earnings improvement, ranged from $20 to the $49 l evel .

E VANS PRODUCTS was form erly EVANS AUTO LOADING CO. Today the company is engaged in the manufacture of plywood and related building material products , and th rough acquisitions has expanded its rail equipment division. n the early 1 9G O ' s , the company reported deficits. However, subsequent improvement · brought earnings to $3 . OS a share, after adjusting for stock splits. The shares had remained under $10 for some years. Reflecting strong earnings from changed operations, stock rose to $5 3.

..

162

INVESTORS' GUIOE TO SPECIAL SITUATIONS I N THE STOCK MARKET

G E NESCO INC. , originally GENERA L SHOE CO. Footwear accounts for but 40% of consolidated sales. Through an aggressive acquisition program, company broad­ ened operations to include apparel and related fields, thereby staying within the scope of its basic line. Earnings and stock prices have risen, indicating continued improvement in bu�iness . GLEN ALDEN CORP. This financially strong company, with substantial tax loss carry forwards , in part arising from the sale of coal lands, has been active in ex­ panding its interests. Besides coal, the company has entered the textil e , motion picture theaters , warehousing, and miscellaneous activities. Company has a new controlling group oriented toward making use of company ' s liquid funds . HOTE L CORP. OF AMERICA can trace its origin to CHI LDS R ESTAUHANTS. Company was reorganized in the late 1940 ' s . Now about 70% of revenues derive from hotel operations ; the remaining portion from specialty food products. With emphasis on the development of hotels and motor hotels , some time may be needed to adjust for initial expenses . Thus , this situation appears to be in process of mak­ ing basic changes .

HOWMET CORP. , formerly HOWE SOUND COMPANY , changed its line of bus iness from mining to a basic manuacturing enterprise. Along with p roduct changes , new top management came to the firm. Company ' s activities are concentrated in semi­ fabricated aluminum , superalloys, medical and dental products, and refractories. Financial position is strong. Earnings have risen from $0. 62 i n 1963 to $1 . 25 for 1965. The shares ranged from $11 to $26 and some dividends have been paid during this period. HUNT FOODS & INDUSTRIES evidently exemplifies the concept of "grow o r die ." A s trong policy of acquisitions has broadened this basic food producer into related products . In addition , investment in other companies includes stock of McCA L L CORP . , EVANS PRODUCTS , and W H E E LING STEEL, while diversified interests include glass and metal containers as well as paint. Neither earnings nor share price have reflected the vast expansion in the company 's activities . Thus H UNT FOODS may still be in the development period. KANSAS CITY SOUTI-!EHN IND. is basically a rail road operating company. Cor­ porate activities shifted to a holding company status in 1 9 6 2 . This pattern has been noted i_n other railroad enterprises . Company ' s diversificat ion includes a 46% interest in T E L EVISION SHARE MANAGEME NT CORP. , now S UJ> ERVIS ED INV ESTORS S ER ­ VICES. Railroad operating results have been stable over the past years . Thus , i t will be i nteresting to see whether the change to holding company and diversified interes t will afford ,capital gain opporttmiti es beyond the mil prospects . L EffiGH VALLEY INDUSTRIES was formerly an important anthracite producer. Ac­ tivities now include manufacture of bed springs, automotive safety devices, heavy industrial products , and precision metal laminations for electrical component makers . All coal properties have been sold. Some earnings improvement has taken effect in

CHANGE IN LINE OF BUSINESS

163

the past few years . The stock which had been close to $1 a share for a long time rose recently to the $ 1 0 level. MIDLAND-ROSS CORP. illustrates the impact of a strong merger and acquisition program . Automotive and transportation components now account for around 30% of volume. Oth er activities are in the building and construction field, consumer goods , aerospace and defense fields . Earnings more than doubled s ince inauguration of the merger program, and stock paralleled this performance by moving up 100% during the same period.

SIGNA L OIL & GA S changed direction of its business line by merger and invest­ ments. \forger with GARRETT CORP. e>.-panded the scope of operations to include aeronautical and space age equipment, while investm ents are in AM ERICAN PRES­ IDENT LINES and BILLUPS W ESTERN P ETROLEUM. Earnings have been steady with slight improvement. The shares responding to progress ranged from the $20 level to around $3 0 . Whether merger with GARRETT is a real move to change into other l ines of business will have to wait developments . SYMINGTON WAYNE CORP. This merger situation brought two companies and two fields of interest together. Half of sales come from WAYNE P UM P - - equipment for gasoline filling stations, while railroad equipment accounts for about 30%; me­ chanic 's tools and industrial equipment acco1mt for the balance. The merger apparently strengthened both companies since earnings moved from $1. 38 in 1960 to close to $2. 6 2 a share i n 1 9 6 5 . Share prices reflected improved earnings and rose t o $ 2 9 l evel , com­ ' pared with a low of 11 5 /8 . T EXTRON, INC. is a classic in change in line of business group. Company originally was the famous A M ERICAN WOOLEN CO. Through merger with ROBBINS MILLS and a broad p rogram of acquisition, plus disposal of undesi red facilities, T EXTRON evolved into its present diversified complex comprised of agrochemicals, consumer p1·oclucts in the electronic component field, defense items for aerospace, industrial materials including polyurethane foam and equipment for oil products . Earnings kept pace with the fast growth, rising to $2 . 62 for 1965, while shares (adjusted for 2 -for-l split in 1965) have risen from $10 level to armmd $49. W ESTINGIOUSE AIH BA K E is an old-timer in the railrnad air brake and signal equipment industry. Expansion has taken the company into oil well equipment, earth moving machinery, and electronics . llelief from dependence on the rail road industry was evidenced by only 29% of sales going to that industry. During a decade of acquis ­ itions and e.>ansion, earnings have been steady although shares moved from the 25

level to a round 49.

A N A LYTICAL APPROACH Analysis of companies in the process of changing line of business can be separated into three main entiti es, nam ely : financial, corpo rate policy and managem ent . Financial analysis approaches the s ituation from the customary breakdown in sales, profit margins, eanings and dividends. Of importance, also, is working

14

INVESTORS' .UIOE TO SP�CIAL SITUATIONS I N T H E STOCK MARKET

in

the

165

CHANGE I N LIKE Of BUSINESS

capital , cash position, investments , and facili ties that may be disposed. Presented

p rogram of agrochemical companies. GRAC E (W. R. ) & CO. is an

foregoing is a picture of management's capabilities and record , besides d i s ­

illustration where a one -time steamship operation turned into a

closing whether company has financial strength t o epand and a l s o to accept a loss

chemical company with

i f the program falters . In analyzing the new activity, whether an acquisition or inter­

and other chemical interests .

62%

of its sales derived from agrochemical

nal development, answers to the following would be needed:

1 . Wh at 2. What 3 . What

i s the size o f the industry ?

Is it an old or new d evelopment ?

SOURCES OF INFORMATION

are the raw materials sources and availability '?

One of the best sources

i s the percentage of labor cost to the finished produc t ?

4 . What is the amount of capital required to get the new product into

information, characteristic to this group, is he

CORP. 's a1mual reports , where company ' s plans, background and expectations are

production ?

spelled out. Since process of change in line o f business is slow, finding data is not

5 . How long will it take to produce the new product ? 6. What is the nature of competition ? 7. What are indicated p rofit margins on items to be produced ?

action i s not usually required by investors . Financial news items , trade reports,

If expansion takes place through acquisition, then the basic financial approach

offer the most likely information.

timed to where m arket response would affect price of shares. Therefore prompt

can be readily made. To this one could weigh benefits to be derived from c onsolida­ tion in respect to d isposal of overlapping facllities and distributional organi zations .

Corporate policy analysis should i nclud e procedure to be used in accomplish­

ing a change in business. Will easing into the new area b e U1e method, or will direct aggressive steps to be taken, such as plunging

.in

with full power of company 's fac i l ­

ities ? Risks must be considered in relation t o withstanding financial costs , a s well a s to satus impairment in t h e industry. This would b e a minimum in well-organized s i t ­ uations.

t

i s important t o note i f change in company's affai rs i s t o be through operat­

ing units or investment holdings. The analytical approach to mnagement is based on company records of

an

aspect is whethc· management can accept its errors. This is often noted where

error in judgment has occurred, followed by di sposal of undesirable units. HOWMET (mentioned above)

Securities & Exch nge releases, and basic financial news releases and services

SUMMARY Investing in changing industry companies can have s pectacular success if the investor i s patient. Change in line of business can be achieved while company is carrying on its customary busine s s , or when sale of undesired facilities has taken place. New lines may be related to the company's industry group or in distinctive foreign activities. The change to new fields , th rough internal development or mer­ ger/acquisition, the light

achievem ent, flexibility to change, along with creativity in new ideas. An important

CORP.

or

company itself. An example of this is found in BANGOR PUNTA A L EGRE SUGAR

of

i s a major decision for management. This can be concluded i n

costs for setting up i t s O\\�l facilities compared with the purchase of

operating units and the availability of competent personnel. Analysis must disclose strong finances and flexible management. Capital gains potentials are oriented toward long-term holdings for full participation in the changeover.

recogni zed the i m compatibility of c ertain companies re­

cently acquired in its change in line of business program and disposed of th em . the other hand, this should not be confused with planned disposal of portions of

n acqui s ­

itions. INDIAN HEAD MILS, for example, completed most of its growth through

merger /acquisition s , fully intending to dispose of those acquired facilities that did not fit into their long-term picture. An additionl benefit in this approach i s that cash can be accumulated. Background data i s available where new management akes over or is acquired through merger/acquisition. Previous association with the new product

line could be of great value . WHERE TO FIND SITUATIONS Areas where change in line of business can uncover candidates for invest­ ment are:

1. 2.

Companies forced out of activity, as in the case of e>qnop riation . Industry

t rend

showing declining use of product. Of course, in the

case of a mining company exhaustion of raw material would be a fa c to r .

3.

Company pattern of activity showing proclivity for moving into ad­ vanced technological fields.

4 . A trend in

an industry toward absorption by larger enterprises for

development purposes. This was exemplified by strong acquisition

\ .·

CHm� 22

EMPIRE BUILDERS

167

IL LUSTRATIONS OF EMPffiE BUILDERS Who are these Empire Builders ? Mr. Andrew Carnegie was an outstanding corporate builder i n previous eras , lllliting a number of steel and related companies into a s i ngle corporate unit. John D. Rockefeller is readily identifiable as an Em­ pire Builder through his world-wide STANDARr OIL enterprises. However, in to­ day ' s busines s world, in searching for likely prospects for the title of Empire Builders , we l ook at men behind companies such as DEFIANCE INDUSTRIES, INC. , HUNT FOODS & INDUSTRIES and McCRORY COR P . These are just a few who could qualify. n their individual way, the men motivating activities in these situa­ tions appear to be headed for Empire status . A brief summary of compny inter­ ests follows: HUNT FOODS & INDUSTRIES is headed by Mr. Norton Simon who has broadened activities of this company to include active participation in McCALL

28% is controlled ; CANADA DRY CO. , where the stock interest 24%; KNOX G LASS is 23% controlled ; and EVANS PRODUCTS stock. i s amount of 10%. Other interests are 100% of W. P . F U L L ER PAINT CO.

CORP . , where amounts to h e l d in the a

9%

,

interest in W H EE LING S T E E L COR P . , and smaller interests in AM RICAN

BROADCASTING-PARAMOUNT THEATRS, INC. , SWIFT & CO. , and CALIFOR­

A

Empire Builders

PACKING CO. , besides a recent interest in CRUCIBLE STEEL CORP. It has

been said

that

M r . Simon and close associates hold important blocks of stock in

an estimated two dozen companies . The mpire Builder makes use of his stock holdings by aking an active interest in manage;nent of the company. GLEN ALDEN CORP. is controlled by M cCRORY CORP. which is headed by M r . Meshulam Rikl i s . According

to news

items, GLEN A LDEN CORP. is to

be the keystone company for another corporate empire. G L EN ALDEN represents a

conglomeration of

companies

originally put together by M r . Albert A.

releases stated that the reason M r . Riltlis decided

o

List. News

continue his corporate empire

building through GLEN ALDEN rather than McCRORY, a retailing concern, i s that

AN

I N VESTING

ARA

Mc CRORY is a chronic short- term borrower. GLEN ALDEN'S interests are else­

with special s ituation characteristics is the " romimce"

where and the company is nown to have good cash position. Other interests in this

field of Empire Builders, sometimes called "business barons . " Dynamically driven men who collect, manageand build smaller business firms into corporate structures make up Empire Builders. Like composers of symphonies , they have creative ability and can control as well as coordinate individual activities, fusing them i nto a nit of operation. The dynamic impact of their actions stimulates inter­ est and movement i n securities. Unlike otller special situations where Corporate Action is the investment attraction influencing securities, these people are the Cor ­ porate Action affecting securities i n Empire Builder situations . In former years, an average young man could think in terms of setting up business for himself, whereas in today 's bigness , it i s most o ften a hignly selected occupation reserved particularly for skilled business men. It would be a most un­ usual person, too, who would have sufficient funds , adequate expe rience, and trained organization to set up a basic business on an individual basis . Nevertheless, there are rare individuals functioning in the field of corporate units who build commercial/ industrial empires . The

Empire Builder is a kind unto himself. He

is

not the brilliant key

man

in a single corporation that has grown from pup to an enterpris e . This key man may be a genius in his one field, but the Empire Builder is

a

genius in building corporate

enterprises into an Empire rather than a s ingle company. Thus he operates in a broad field of not necessa•ily related activities . 166

s.

u

corporate empire struct re are

!• by the gcncr.af credit of a compan y , Directors: A grou1) o f pe rso n s chosen t o govern the affai rs or a c ompany . Bi$eoun1: To purcha s e at a r�duc1ion rrorn ult imah!

;ition of the a cqui r i n g company. Appruisul: The act of pla c in g an e st ima ted value on

t:conomy.

Gmmlntccd s to c k: Stock whose dividends an: guar­

ante ::tI br ano the r comp11t y .

?rorit o r loss ftom s a l e of

Hedge:

assets wh i ch would include securi tie s .

The a c t or be i ng o n two sides of a s i tu a tion

at the same ti me .

Cnpirnli7.nlion: Sometimes called capital s lruc ture , i t i s the total nmount of various securities i s sued b y a

l fo ld ing compnray: A corporation which owns s e curities. of another , usually with voting control.

and common stock.

substnnlial rise in price�.

�orporn t i on . This may include bon ds and prefe r red Cap itn l ;tock:

lnflnti1Jn:

Certlricaw: The piece of pap er i de nt ify ing stock of

lnvc:;lmcnt:

Compo111y org1111 :

Secutitics which re presen t owners h i p

A c orp ora t ion ' s publication of its

activities or ien ted toward its employees. Convertible:

Thi> i s

a

term a ppl ied to securi t i e s ex­

changeable for evmmon stoc k or for a nother security

;

usuullv of th:: same company, Corpo dlC 1il'li o�: Activities whic. o ccur within the

Liquidation:

of i t s asscrs.

security.

Long 1cn: A tax a ccoun t ing tcun used to ind i cate th\l the �c c ur it ics ha'c bel!n held for more than �ix months. Marg in: The equity is c a sh or se cur i t ies that on in.ve s tor must ha'e whe n using credit to carry

at the business le ve l .

C:o\•er:

Purch a se of securities to c lose n short st le

uan;ac tio n . r.urrcnt AJ.8Cl;:

Usually compr i s ed of ca s h . U . S. Gov­

e nme nt bonds, receivabl e s . inventories and m on e y due within one ye a r.

A corpcmuion in th:: pro; e s s o f d i s pos i ng

Lor:ked in: A cond i1ion lhal pr oh ibi t� the i n \'C S 1or from d i spos in g or a sec ur i ty . This may be due to a tax status. or la ck of mar kc tabi lily cf the s ec ur it y . Long: A "street" ter m s i gnifying one is n h o lde r of a

adminis trative scope of the corporation rather than

Con t i n ge nt reserve: An accounting term designating funds set asid: for a condition that may occ ur .

The use or monC)' to se cure 1 proHrn ble

l..c11l: r or 1rnnsmi11ol: A form use d to t:.onve>• s ecurit i e s when tende rs . reorganizations and mergers arc in progr.: s s .

selling securities for a client.

Commun stoc k :

n

return or make additional mo ney .

a corporation. Commission: The broker's fee for purchas ing or o f a c or pora t i on .

An u n due expansion in currency c a u s i n g

l n tc rc.1: Paym c n 1s or the use of borrowed money � lnrcrim·rcport: A prov lsi on e l progre s s r epor t .

J

Th: shares representing owner� hip or \ bus in ess , including preferred and c mmon s1ock.

sccwitic s .

�fRrket prl"e: The most recent pric- a t wh i c h the security sold.

Mnturity: Th� d a t e an indebtedness (a bond) i� to

he paid off.

118

Net sset value: The p-r share .vllablc value of the assets of . corporation.

Option : A privi l ege to purch\Se or sell spcclUc sc· curltlcs at an I ndicated prl:e within a specirtcd lime. Also known BS " puts and clls." Over-subscription: The prlvlle.c of add ion al par­ tlclpation I n a rights offering. PackaKe: A tmding term suggesting n combina tion or twI or more security issues of corporation; often l comb ination of a senior nnd Jun ior $!Cu rity. Ptty: The ciulvalcnt val ue between se cu ri ties

based on a rtxd ratlo. Par value: The stated dollar r.ce value of a s hare . An amou nt .s;lgned to t h e shRr. by the c omp.ny• s chart ,r . Point: A u nit for measuTlng price nuctuotlons In

stock trading. Poa1Uon: The amount of an lnvcstor 'H holdings of n spc c.Uic sccurlly. May also b e the amount oC an in­ vestor's short position o f n spacificd security. PotenUaJ: The latent ullimto worth of a security. The possibilities In a si tua tion . Pe-empUvc: T h e 1>resence i n t he company's charter ot . prior rlghl to buy, usually a privile ge of common st ock . Prerened stock: A cl ass of stock with a c laim on the company•s earnings. (and assets) b efore distri bu tio ns my be pid on the common stock. Som etimes ce.Jlcd Prlce�anings mu ltiple pricc/earnlngs rstlo. The relatlonshlp of a corporation's net cnroiogs to current price of the shores, obtained by d.1T1lng the per shore enznlntS I nto the prlceof the stock. Pncipal: The person for whom n bro k er executes an order. o r a de aler tading ror his own account. This also refers o a person 's capital or t he face amount of a bond. PoUl margin: An accounllng term denoting the net profit or a corporatlon as a percentage or sales. Pofe.ssfonaJ: One who ma kes a llvlng buying lnd selling securitt�s . Pro fona: An occountln g practice used to show the condition or a comp any as il would have existed u nder a new circumstance. Popectus: A printed statement describJn: a forth­ coming securities issue. PotecUve commitee: A grou p or s ec uri ties holders formed to look after the i nte rest of a sp ecifi c security issue of a corporation. Por tiattment: Info rma tion given stockholders when soUcHlng proxies fot a compan.v•s secu ri ti es. Pus and cal ls : Sa.me as optlon>. Pamid builders: G ath erers ot corporate enterprises (similar to business barons). Pmiding: Accumulnllon or shares t high er price levels. Reemion pice: The price a company must pay to call tn securities issues as well as the price at whlch a bond m.y be redeemed prior t o maturi ty. Relative values: The relationship of on- security to another, used to equat e prices. R-scarct/Develoimen. ( R/D): A compa ny 's expendl­ tures ror laboratory and engineering activities in search or new Rnd impro'ed ptoducts. Residual stub: A cettiflcate representlnc lhc remnlnlng intcre;t In n corporation ln tho process of liquidating. Retun : Thls is the same as )'1eld. The dlvldcnd ot in­ terest pid, uprcs.ed as a perce n h.ge or the price or the sec uri ty .

(P/E):

RevesJonay cllm: An agr e ement lo retwn cash. securities or properties .t a spectrlc d date; generally associated with gunrnntecd securitl.s or lC.Sed properties. RighR: The privil ege to buy ndd1Uona1 secu rities In proporUon to the number o r sh ares owned. at a spcci· tied price within a de.nite t i me Umit. Romnce: In the securitlcs world it is the unexpocted prom. hidden as set, culminntion of l at ent values and tlie re al izat io n or great hopes and expectations. SEC: The Secu riti es and Exchange Commission, es· tabUshed by Co ngress to h elp protect Investors. Scdp; A cert ific ate representing a Cractional share of stock. Shot sal e: Sale of . security not own ed . At t he time of sale the sel ler Is not i n poss essi on of the securities h e hS sold. Short tenn: An accounting term used ln rel ation to tnxes denoting that security hs been owned leHs lhan $ll mont hs . Situation: Tho securltles or a corporation that harbor JJOSSlbility for profit-the specifi c investment. Sinking fund: Money regularly set aside by a company to redeem its bonds or orctcucd stock. Speculaion: Trad ing in sec urities lo the hope or 1r0Ut. Sptn-orr: Shares of a subs i diary company distributed by the parent to its stockholders_ Spead: Tbe di sparity ln prices of sec u rities ln a specirted i nv estment slt u .llon . Stock option: A pr lvllege extended to orrtcers and selec ted employees o f a con orati on to pu rcbnse !ihares at ravored prlces. Stock spl it: This action represents the d iv i sion or stock lnto a l a rg er number of units. Subs: A term ldenttfylog t he ccrtlneate representing the resldunl lntetcst ln a corporation in the process of liQuldating. Subsidiay: A company whose controlling interest is owned by another cororation. ax loss CY·forward: An accounting term designat­ ing a corporation's F'cdcrol tax credit. Tender: .\n offer made i n writin: b1 one parl' to a not her to sell cetai n securi ties. Trading proce de : The t:echnic1 method used to pro­ cess establishment of an i nvestment position. Tansrer tax: 'edc r.l .nd State documentary fees for lrans fer of ownerahlp of a security. Trend: The direction or the movem ent of market prices or securities. Undc-alue: The discount at which a s ecuri ty is sel ling in re l ation to its Indicat ed or anticipated worth. t·hen, BS nd tf: This lerrn rerers to the time "when .. securities wUl be I ssu ed , ".s"' to th� rorm and "U" they will be issued. When issued; A shorl form of th e prcc eedlng phrase. A term lndlcatlng a condlUonal tr ansactio n , in a 1ecurlty authorized for issuance but not as yet actually fosued. When .ssued contnct: An agreement to pu rchase or sell securiti es b\scd on the above 14when issu ed'' terms.

>

Wrns: Si milar to right s, but dUrerlng In tlme limit. Warrants glve the hol der the right to buy securities at . �t ipulated prlce wi thi n a speci f ied Ume or

p erpetually, Windfalls: U n expec ted addition.l values which Creqtlht· ly co me to light in specio.1 s i t uatio ns.

179

INDEX

INDEX ACF nCntc1 . . . . AcL LHo lnsurance Air Rcd1ctton • , • . • All Stcll qi.upmcitt A!Us-CJ1tlmc11 Co.

o.

Ambuaador OU

Amco UlWilrlcs

. . . . • . . • , . . . • . • . . . . . •

•

•

.

.

• . • • • , • • • , •

.

.

o. . .

• . • . • • • •

•

. . . . , • . . , •

,

Amerlc.n Alrllnca

•

•

Americn nroidc.stlng Co•

• , • • ,

,

, ,

American Cnr

i

• . • . • •

roundry

.

.

Amorlc.n lmmcrclal Une• Americo.n Cy11.mid Corp .

• , •

.

, ,

.

. . . .

. ,

. ,

American !Jec1rlc Po.·:r Corp.

M. \, R. C• • . ptl l Cop•

norlcsn

Amerlcfln

• • • .

Amerio� Power . Ughl

:•

.

• ,

. • , , ,

. • . • . . , .

Puc&

Amcrtc:m VHrlned

. .

Anaoond. Cop,

. . . . . , ,

Amo

'a11

op.




. . . . . . . . .

G1illn-Bacon Mn.nuf;clurlng Co .

lltoca o>.

• , . • . ,

ll:unmcrmlll Papcr Co•

n . n.

ll:n2 (M.A. ) Cop. 11.rlem

. .

.

. .

nc.

(0. C . ) & Co.

ll'nry11 Drtvo-tn . ,

, •

.

. ,

• .

.

,

.

,

,

, •

• • • .

,

.

,

, ,

. ,

• , •

.

.

. .

,

• •

. , • • • • • , .

. . .

Corp.

•

, .

, , . ,

. , • .

,

, .

. . • . , . ,

DHnoLl Ccn1r.I Rlt

nl:m

,

lruliina General Corp.

,

. .

. .

.

, ,, , ..

,

,

,

,

• ,

.

, •

nwr11U.on:tl Toi. . Tel.

•

• ,

Itek Co.

;id Crcok Coal Co • . . . • .

• • , • ,

,

. . ,

, ,

.

.

, • ,

.

. . . • . • ,

,

Motor

,

,

,

. ,

, ,

, , , •

, •

, .

'

.

, ,

, , , ,

• • • . . • ,

,

• ,

, •

'

, ,

, • , •

108, 112, 1 15,

. . .

, ,

,

,

.

, ,

. . . . , •

. ,

.

. , .

, , , ,

.

.

, .

. , • . . .

, , . • . • . • , • •

1 75

1 62

. . . 14i

• , • . • • , •

. . . . , • . , . . .

159 151

. . , • •

• , • • .

131

117. . . .

1 11

112

, 70, 7 1

. • . • . • ,

, • • . • • . . . . . . . • , • • •

.

.

.

. .

,

• , •

•

. , •

, . . ,

• , •

79

168

. . , ,

. , • .

. . • .

, . , .

. ,

, .

• . . . . . . .

• , . , , . , . . . . . . , . , . . . ..... , . , .

, ,

, , , ,

, • • •

, .

, .

, .

• ,

nd •

. .

, . , . , • . . . . , ,

, •

.

.

Co. . • . . Scott Corp.

.

• . • ,

, .

, • • ,

•

, .

. ,

.

•

. .

,

, .

,

, .

,

. . . . •

, , • . .

_

• ,

,

.

•

• ' • • •

.

• , •

,

. ,

. ,

,

. • ,

,

•

174

1 17 60

1 47

110

171

,99, lG7 liol

,G2, 1 1 1

• • • • •

,

2H

107

, . . . . • .

. , • • • , • . • . • . • .

.

, , , , , • , ,

GO

16 2, 167

. . . • • • .

,

, • , • • • • , • , • • • .

, , , , • .

,

,

• ,

• , • , • •

,

. . • . • , , , , • •

• ,

, • • • • , . ,

, •

.

' •

. ,

, . • • ,

,

,

.

. • , •

. • . • . . . • . • •

, , • , •

60

.18, 22, 3G . . . 1, 15

, • , • • • • •

. . . .

. . • . . , . . • , . • . .

,

, . , , . .

. 84, 101, 107

.

.

•

• • • . • • • • • . • • ,

.

,

, • • . . ,

• ,

• • • ,

,

.

, .

• . . . . , • • • , •

o.

.

• •

Pnbcts

MSL

lmu.SI'IC9

Mueller Drisl

.

. .

• ,

,

. • . • , •

,

161

132 116 128

. . . . , 7Z, 153, 163

,

• ,

,

• . • . • . • .

_

. , • . . . . .

, .

, ,

, , •

, ,

, • , • ,

61

l 12

,

112

• .

13l

• .

, , •

A. , .

. . • •

,

,

, . •

Co.

, • , . • ,

. • • , • , .

•

• • ,

. , . . .

Mnl Shir!!1 Cop. . •

.

,

• .

Co•

. .

. .

•

, ,

, , • ,

181

Nt>rthwcst Pipeline

. ,

,

•

,

, ,

, , , ,

,

. . , ,

, ,

42 128

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,

.

.

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, , •

.

• , , •

,

. . :n.

.

• . . . • , • •

• • . • . • . . , • • . • ,

• • • • • • • • , • , , • , • ,

US

60

g�

11S

. , . 1 1 3 , 1 14

. . . . . . • • • • • . . . , • . . ,

,

1 1 3 , 1 1 4,

. . . . • , • . • , • . •

. • . • . .

60, 128

.

, . . . . . . 1)3

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, . . . il, 132

, • ,

. • . .

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, • • . . •

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.

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79

73

• . , . . . • .

. . . . . , . , . , , •

, ,

50

18, 22, 117, 160 , . , 79, 10 1

• , • • • • . . . . . • . • , ,

Norfolk . Wc1m System

Pacific Ry . . . Ga& •

, , ,

• , •

. , •

.

Illrtford R.

Noh Amc1·tcan Aviiitlon Co. Northwc;\ Natural

• •

• . • . •

, . • •

. • , , , ,

. .

�ldo1 Pi.le . , . . • , , . . . S. Y .• Hondus . bsnrlo

NJigsrn•Mollwk Po,.·cr

Northen

• •

• .

• . . . • • . • . . • • . • . . • . . . .

�gli.il El:tric

S. Y . , N1w H\Y� r

SO

• • • • , ,

.

,

• , • , • • • • • • • • . . , •

,

nglind

New York Cc'ltr11

, . .

, , . . . , • . . , . •

co. . . . .1cclrtc Sys1cm . New Jersey Zik , . , • , . , . , lie.. Puk Mlng o• • , . , , •

NLutcc orp.

175

. , •

. , .

. . . , • , . .

N\UQm.I iJ'StOrA Corp•

"

• . • • , .

. . • • . . , , .

. , . , . ,

N.llonnl Union Electric

•

• • • • • • • , • • •

. . , . , . , . . •

. . .

. , , .

National Avl\lion o. ,

NaUona1 Alrllnc.1

•

• • • • , • , • . . . . • • . , • ,

Mulkcgon Plslon Rin:

11'

• • . , .

• • . . • . • • • . • , • • . , • •

Mu1uI Ufe or Nt' York

Ne· Nuw

, , , •

. , • • , . • • • • • • , • , • , • .

. . • , • , • , • • , • • .

_ ,

, • • • • , • • • , , , . • • • , • .

• . • .

�1urrAy Corp. of Amorlca

11 1

174

• ,

. , . , . • . • • , .

Mol>r \'heel Colll.

. • , GO , . , IOI

101, 14l.

, ,

,

, 111

. . . . . . • . • . . . • .

. . . . • .

, •

Mount.tn States Power

' ' ' ' 174

, ,

, •

,

, ,

•

Motoro\., Inc.

, llS. 137

' • • • •

,

Monon RR . ,

.22., li4, 1G8, 170

• • , • .

167

,

, .

,

, •

Monl�omcry Wul Ct.

162

174

.

• • . •

Monsan10 ChonilcLl

16�

. . . .

,

• . .

. • . , . . . • • • • • , • . • , . , . . 112 , , , , , , , , , • , • • • , • . • . 14) 119 RR • , . , • • • • • • , • • • , . Mis1ourl P�cH\c nn , . , , , . . . , . , . . . , , . , . . . . . . lH

Ul

17

, • . . . .

, . . . . • • • • • • , • , •

Mlssourl ·Kan3IO Plpc In'

63

• • • •

, . • .

�llsoourl-K:1n3111-Tc.\I

51

.

•

Mlsolon Oil , . • . . .

51, 121 , 71, lG2, l(i7 ,

,

,

. , • , • •

•

• . , , • , • ,

, . • • , ,

Miss1011 cv:lopm1:nt Co.

16f, 1 7 1 , 175 . . .

, ,

MhL,tatcJ .1u1incsn .pil.l.I , ,

134

;�

. . • ,

• • . • . • • • • . • •

MIS$lon Corp.

11S

.. ..

. . • . • .

.

M1dbnd-ltOli1 Carp. ,

56, 51

• , • • . •

,

. • • . .

. , .

Truot

Mlddlc South

&1

62

• ,

, • • .

• •

M�abl

107

, , • . •

.

ii

52

, 52 ,. , . , GI • • • . 99, lG7

. , , ,

, , •

M.Juu: SpcctllllcI

.

Mcrrlt1-Ch11pm:m

, , . l3 1 , 133

. , • .

, • . • . .

llc•d MUs, . , , . , . , , , , .

nter:tih! Power Co• lnn1cs Jnc. . . , • . • ,

,

IOi

• , • , • • • • • • • • , , • • •

M�g- , . . • • . • , . . , . . 162, Hudson & Minh.lbn )rp_ . . • . • . • . Muson & Minhtlbn R. ll. (Co. l • . . , • , • , , • Hnt Foo.� & .imtuitrles , • . • Nn\111g1on Purit 'lrsl S1vln1 t lin ,\.ao. .

,

,

. . . ,

, •

MCA Cop. ,

G2

• .

, ,

. .

Jfoudnlllc lmtu1rics . . . . . . . . . .

llo�·c Sound Co.

.

, ,

, • •

. • .

Houachod Fin1.ne! Cop, Houston 01 Fu!I Ml!C'l�la

.

, ,

• • . • , •

af Amerl:n

.

, , , , , , . , , , . , , , , , 147

,

.

• ,

.

.

• . • ,

ln!n1chus�lts ln\'C$1oru Growth

. 103, 111 ,

, •

• . . • .

Home, Joseph Co.

.

• . .

M11rlln-M.rleta

, l l>

. • .

llolmca :1e:1rlc ProtccUvc COl,

Holll Cojl.

.

,

Forbls

Mangod Corp•

�l

_

. • ,

• • , • • • . . . . . • ,

• • • • ,

Holyok: Sh:1rc1

• .

, , , • ,

1111n lfot:ls - tnhon Holcl9 lntcmaliolAl Uoc T\. } .: Co•

• .

• ,

llu:llCl P>wdcr Cop. Hewood-W:tkoHeld

.

. . ., .. ,, ,, ,, ., , ,

• .

,

Cop.

Manhnltln F\lnd . ,

. . . . 111

, • , ,

lh.,all&n Elc:lrli Co. llcith

, . . ,

, ..

• . . • •

, • . • • ,

. . 112

G J , G4, l l ' , 1 2 I

. . . . . . . • . . ,

. . . . . . • . , . . . •

ltaYey 1'1umlnum,

.

i

Mignnvox Co. ,

Giannini Conlrolt Corp• . , , . , . , . , , , . • . . 109. 1 1 1 l!n Ald� Corp. , • , . . . . . . . . . . . . . 1 3 2 , 1 4 4 , lG�. lG7 !bd B!.og o. . . . . • , , , . , • , . , . . . . . . . . 118 Gold . Stock Tcl.:nµh Co. , . , • . . . , . . . . 56 'Odm.n Mu1\ll1clu rlng Co. , , , , • , , • , • . • . • . • . . H Gooyi:nr • • • , • , • , , • , • , , , , , , , . • , . . . . . l8, 42 Go"h:im, (nc, , • . • • . • , . • . , , , • • • • , • • . . • . . . . 111 Grncc o'. R.) i o. , . . . . , , , . . , . . . , . . .11, 165 Grcatmcrlci Cop. . . . . . . . . . . . . . . . , • , , 71 Gr$l Northen Ry . . . . . . • . . . . . . . . . . . . . . . , , , 1 1 3 G!ny O i l Co . . . . . . , . . . , , . .

Financlal

M.cAndrewa

18, 22, 3G, 1U2

. . . . . . . . • .

, ,

lone Siar Cement Co11.

1.ytton

175

. •

•

•

, . ,

• ,

hnc $t.r Steel C¢,

.'

, •

, , , . 107,

Vo1gtn Co. , . , , , , , , . , . . 67, 74, l3 Z, 174 Litten ln�Slr1!! . , . • • , . • , , • , • , • . • . • , • . • 1 1 1 , 74 l. N.C. ol. , • • , , • • • . . , • • . • , . , , . . 6 , .2, 36, '7 ocll:cd Alrcr:ih o . . . . . . . , . . . • . , . . . . . . . . . 174

. l•li, 17.&

• • • ,

•

l.ing-T(lmco

, , • , • .

, • • ,

. , . . . • .

•

.

, ,

• • • . ,

l. incn Thrc..d C o .

12

,

,

. ,

. . , , , • ,

• . . . ,

,

, • ,

,

• . • , . • . . • ,

(IM';h VnJlcy IIB , , , • . , . , . , . , �hn : Pink 'u� Produclll Cop. Libby, Mcfclll & ibby , • , • . , ,

1 74 . , 73, lH

, . ,

,

, • • •

• ,

l:hlgh \'01lloy lndu.e1rlel ,

8 0 , 130, 133

. .

GcnGril -"ood1

• • ,

in. NlU'l oi). • . , . , • , • • o. . , , , .�. 3 1 , JG, Rbber . Ire Co. . . . , . , • , cc11onl1 Corp. , . , . , . . . , . . . , chl;h oJ " N:wlg\tlon • , • , . .

.51, 1 1 2 .

�7

. . 1G8

' • ' • • • . • • . • '

Lee NnUon.\

51

'

, .

Cop, . , .

. • • •

' • • • • .

. . . . , . , , , . . , . . 75.

��

' . ' ' 131

.

. .

KVPulhcrland P11p.e r Co.

, 1 1 2, lGl

•

. . . . • • • • • . , , • , •

Knox Glnss , . ,

. . 167

.

K�rr-McOc: Corp, iy Pctolcu.m Co.

. 176

.

. . . . .

Khkcby-N1us

17, '1 101

. • . ,

. . . . • . • •

Klein (S. > ept. Stores

_ .

• .

City Soulhon fnUstrJ9 ,

..

au

.

Ki:m County and Ca.

Ke 3ncl Oil Co.

'"

• . • • • . • • ,

' .

l'!lr-Hoth Corp.

11

, • • •

.

, .... C•:oorl Dynmics Co• . , .

G!n-SO Inc. ,

, M4

,

,

. , , , . 2 3 , GO, 01

Co.

G�r1.ia·Pnclf1c ,

• , •

•

ns.'

161

• . .

•

,

lMeon Co•

Corp. . .

Joseph

1•7

, GO , . . . HS

, • . .

. . . , . . • , .

, .

Gcncr:il Arncrlcrui Oil Co .

G(!nCDl Motor1

,

. •

J.K.

51

. • • , • . •

,

. . . , , •

. . . .

Ill

.

, , , , , , ,

. . . . • , • • • , , • • • , • .

, .

FlllL•r (W. P , ) l'alnt C>, .

Glncrll

, ,

• ,

. . . . • . • . . • . • . • . , • • • , • , •

Yos-er WhlClor Co111.

r·ruo -..y ,

• ,

, • •

. . , • , , .

& Marine lmuncu . . . .'1r11\ 'h11ncial Cop. o f lli0 West Floria Capital Coy. , • , , . . . • . . f'lorhh East .311 \R , , • , • , • • }·o ramoRt :tlrle-s . • , • , • • • , . • Fire

Fql'p, Co. UUl\Ucs Op. C)rgiO R.UroiJ r ll.nk.ln: Co. Gcn1ral JOI o• • • • . • . • - . • Gcnlnl Telephone Co• . • . • . • Gcncrnl Tel. : lcctronlca . , • Gcncrll Tl rc z Rubber o. . .

,

. , • , . , •

.

173

12'

. •

•

,

Gcncril Jcctrlc Corp .

, 17i

,

)'t•.!!Hra, nc.

JS&

107

, , , ,

•

. . • . • . • • • •

, .

. ,

lGl ,32 45

, • . . .

• . • ,

Drc�olt Co. , .

,

. .

• , • • • , . , . , • • • • , , , . , • •

. , •

171

, . , 69 ., .. 51 . . 51, 12

,

.

Hous&, Jnc . ora�)' oll. • • • •

171

. . lJ

, • , • , • • • • , •

, . . . , . • . ,

. . , . . . • . . , • . . . , . • , . ,

D:s&or lndustrlca

110

.

• , ,

.

•

57

137. l!9, 139,

.

.

• • , • . , .

o\lgl.s Atrcrd1 Co •

GO

. , ,

• • • • • . • •

• , •

•

8,

127,

, . . • . . . . . ,

. , .

Moln� Tr.sll, Inc . .

obb6

70

, .

. .

Husln R.R.

Diners ' C h 1 b

•

1 07

107

. . . . . . . . . . 1'0, 143 , H7

• . • • . •

. , . . • . . • , • •

Guw1 o•

.

. • • • • . • . • . •

. . . . . . . .

. • . • . • , • . , , • . • • , .

, , ,

. •

l14,

. • . • . . . , • . . . . , .

• • • . • . . , . • . . . . ,

J)lcbold. Inc.

153,

7Z

, . • 174

, • • , • . • . . . .

, , , • , , • • . . . . . . . . . . . . .

enver 1 Rio GrMdC RR •

9' • 71, 72, l6 • , • • , , 3 • , . . . • 17

. . . . . . . , . . • . • . . , • .

.

. ,

Uis, elhi Ta.'lor 011 >• • eMlaon Mrg. o . • . ctrol1

100,

, • . . . . . . •

, • . • . • . . . • . • • . • , .

. .

!lhl Controcl

1 13

52, Ul

. • .

. • • . . . . . . •

. , . , • • • , • ,

olht Alstrallan OU C o.

77, 133

, . . • . • . . . . • , . , • • • • • . • , • • . •

Penn

llnwarc i

cl

101, 107

• . . . . • • . . • • • . • . . , • . • •

,

cfJLn:i lttdJ.trles, lnc•

3 7 , 4 1 , 56

, . . • . • • • . . , . • . •

. • . . • . , • . . •

, , •

.

op,

Decca Rccorda

. 174

,

,

, , •

115

, . . , 113, 115

• . • . • . . , . . • • , , , . , • . . •

�she·' lluslnciu Mnchln-1 , l�co

, ,

, • • • • • • . . . . . , •

, , , • . , ,

. • • • , • , •

.

\ltla:i-'Vriht Cop• • ulloT-llnmmor Cop. uUoT aboratories . ,

72, 101. 105, 106

6,

Wor,,

CUnl1 Publlahing Co•

J67

5?

GIMi

ubhy Picklt1g o,

50,

, .,

,

. • , .

Co11dcn P!troklm ,

17$

119

•

114

114, US

• , , •

· · · · · · · · · · · · · · · · -

.\nrh'd oor i), • • • •

Old TO,tl Cap.

• •

I7,

lZS

. . . . . . • • . . . . , . , , • •

BS l'I

. . . . , •

Piclfic Am!t1C.11

,

. • . • . . , • • • • • • , •

O.ngi

•

& Ui1

• .

Pacl!ic Power

. • .

: o• Drugs . , •

. • . • .

•

•

• . • . . . • • •

P1rkvh:w

,

.

. .

. . . .

• • • • • •

.

J>cnri

Olxh1

nn

, • • • • , •

52,

. • , • • . • , .

, • . .

Pfize- (Chu. ) : Co .

. . , .

. .

Ralng ap. Pike O). . . . . . . . . . . Pioneer Aorod)'lt2Joks . . .

.

.

Plttibur;h Plttaburl1

.

J•ol�rald C o•

l'ortl'ld G11 & Coe

Po.·c r Cofl. uf Ciin:i� •

n!•

Pronlice-lbll,

i>r1):tor . G:1mbl�

,

, , • .

&

Prudon1il n:unncc

Co. , . , . , . . .

.

Riythco11 Co11.

,

, ,

. •

,

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, ,

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,

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o.

. • . . . . .

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�hllu. Hrc.in: Co•

,

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, , .

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. , . . , . , 113,

. . . . . . . . .

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,

. . . .

. , • • • • • ,

. , . . . . . , .

. • • . . .

Sincl1ll r Oil . . . . . .

i 'r�ch , , : \V!JlJn, n:. . O.S. Co. . . . . . . . J1hcm CIU. Witor, , • So\11hc1·n o, , • , . . . . . . Solhon Mllcrlals Co11• �lr' Plt11 Comp:mlu

• .

, , . ,

, , . . • , . . . . . .

Sioux City Stocl:yird' Co•

• . ,

• . . . .

,

• . . • . • . . • , • • • . • ,

. . . . • . • • • • . , • • • • • • ,

.

, ,

. . . • . • . , . . . • . •

,

, , •

115

. .

. . . . • . • , • • . • . . . . , •

12ft

. • • • • , • • • • • ,

. , .

St.n3rd Shnres .

.

.

,

. . • .

. . , . . . , . . , . . . .

• , • ,

Si. o» uu111g, le• . • • • . SI. PauI Ualn $tockyarxl& o . Sl. Lou11 Steel Co. • . . • • • St.ndard OU . . . • • . • itaidu·d Pni::a:in� (.op. . . St11lrd POOJ:! Co. . . St. Jos"ph S1ockyarJs Co.

U.S.

. •

. . . . , • . . • . • . . • .

. • • . . • . .

. .

. . • . . • • • . • • • • . .

. . • • . . • . . .

. . • . • • . . .

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, 175

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, • . . • • .

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Tobi.::o

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Ann.ll)" Ufe ln1. o.

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Waldorf S)'!lom

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.

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Co.

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Wartn Do1.

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SD

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Wnllicc Vllll.ml Corµ. W.rd Foo� . , . . .

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138, 141 , .

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Wadsworth P.bllsl1tn; CI.

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118

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115

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Unlvortnl l f

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Unlvoranl ontrols • . . . , . ,

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Ultl St.r Co . . • . . . . innl Stek�rd9 Corµ•

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,

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United JJaclllc lnluici

97

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UnUcd Air L.lnel . United

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United M:rn< & Mf1 , .

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159

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Union Sugtr Co.

147

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101 163

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Union ::lflc

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Signal Oil . Gas

Union Oil

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Powe r Co•

GO

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132, l53,

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World Al rllnl\ .

TRV.' , .nc,

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True 1'cml)Or

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TrMs

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. • . .

Seiberling Hubbtlr .cmpny !a.led Puwcr Corp.

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Scicntlft: 3ta Sytl!inI, Un!

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Tcx.itt 1.clfic and Till

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131

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Tcx.i Gulf SW.phur

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ltullncl Ry. Co111.

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Ud,iway Cop. , . . . ohbiJ Milin • , , • , ltb, 43, 46, 47

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l\cnohl� To.'ilC:Q

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ft(in·i Mlnln; Co• . . • , . . ll!1UlU1t A'�oct1c�. • . l\C\CrJ C.o;i�i r t Hnv1u Co. lh:wlon, nc. , , , , , • ,

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R:mlom !louse l)ytJlllhlng

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Portl:tnd Union S!kya!J

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.

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Potom.Q Electric

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146

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P'nzoll - PcnzoH-Unttcd Gt Cop. . Pepsi Coln.

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131

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P1rke, hvi1

172,

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P1;cllk A1bc1 Corp. Pa.., [nc•

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