NRCIB/NRCIA - National Research Corp

[rpadebet]

I am not going into the details of this opportunity as the author of the article below has done a good job explaining the background as well as the opportunity on the bull case, so please go through it for the background.

http://seekingalpha.com/article/1533832-huge-share-class-arbitrage-opportunity-in-national-research-corporation-class-b-shares

 

Links to additional material is available at the page below for those interested

http://gannonandhoangoninvesting.com/blog/2013/8/25/daily-idea-national-research-nrcib

 

Regarding the business itself I don't have much to add, except I think it is a nice business with some moat. I think it was fairly valued by the market before the recent changes. Personally I would only buy into the business if it traded for 20%-30% lower, but there is no telling if that is even possible given the growth this business has seen historically.

 

What interests me is the havoc created by the recent recapitalization plan announced by the company and the opportunity it makes available.

 

You can read the background to this story of recap in the links above, but essentially now we have a 2 class structure.

 

Class A: 3X outstanding shares of old shares; 1/100 voting power for each; entitled to 1/6th dividend of Class B

Class B: 0.5X outstanding shares of old shares; 1 vote per stock; entitled to 6X dividend paid out on Class A

 

Theoretically, if the company paid out 100% of FCF as cash dividend, then simple math dictates that Class B price should be 6X Class A price. And maybe add a little bit of more premium to Class B because of the voting rights.

 

Historically the company has paid out 40% of FCF as dividends. Also the CEO owns 54% of company so he calls all the shots there as he has sole power to elect all of the board.

 

Before recap the old shares traded at 60$ a piece. After recap simple math dictates that Class A should trade at $10 and Class B at $60 if we assume 100% FCF dividend pay out. This is essentially the argument made by the author on seeking alpha site.

 

In the real world, Class A is trading around $16-$18, Class B is trading around $30-$35. On the surface it clearly looks like a huge class arbitrage opportunity. Short Class A until it reaches 10$ and long Class B until it reached $60. Short risk averse investors are arguing that just going Long Class B is a good risk reward.

 

I think I don't agree with the long Class B/Short Class A thesis here.

 

I think the market might be getting it right after all. In fact, if anything, I think Class A is fairly valued and Class B has a huge 40% downside if my understanding of the scenarios is correct.

 

For me, since the owner owns 54% of voting rights, the voting rights difference between the two classes of shares doesn't matter to a minority shareholder. There should be no premium between the classes because no matter how much stake a minority shareholder acquires, he will not be able to get a seat on the board or influence the corp actions. So I value the voting rights premium at $0.

 

The dividend payout preference is interesting though. Class B gets 6X times Class A dividends. Here I think if 100% FCF is paid out as dividend then Class B should trade at 6X price of Class A. The premium here is potentially worth ($60-$10) $50.

 

Going to the other extreme. If the company stops the dividend and decides never to pay any dividend ever i.e. 0% of FCF, then the dividend premium between the classes should be worthless. i.e. the two classes of stock should trade at parity (1:1). that would imply a price of about $17. ($60 old shares of 7 mill out =>420 mill mkt cap. After recap they have 21 mill of Class A out and 3.5 mill of Class B out=>24.5 mill total out shares => share price = 420 mill/24.5 mill = $17). I can add Class A and Class B shares here because all undistributed earnings go into the same retained earnings account and all shareholders have a claim proportional to the number of shares they hold in the event of liquidation. The company alludes to this interpretation in their language regarding a third party takeover in the 14A document.

 

Even more interestingly, recently the company announced that they are going to stop paying dividends for 2013 and 2014 and indicated a possibility of a 10% FCF dividend in 2015. Class B shares have tanked on this announcement whereas Class A shares have traded in about the same range as before. My thesis above of Class A Class B share prices converging in absence of the dividend seems to have been affirmed by the market to some extent. It is not parity yet because of the 10% FCF dividend post 2015 possibility.

 

 

Now coming to the motivations of the majority owner. He clearly did this to enhance the liquidity of his shares( i.e. convert it into cash) but not lose his voting power. This is perfectly fine and legal. However, having done this, I don't think this company is ever going to pay out cash dividends like it once did. I doubt even the 2015 dividend possibility they have indicated. I say so because, the majority owner can quite easily sell his A shares partially to cover his expected dividend. He can control the timing of sale to be tax efficient. He like other old owners have 85% of their total shares in Class A stock and they can slowly sell it in-lieu of dividend payments without diluting their original holding. Why would he want to declare a dividend, cause a repricing of A shares down and B shares up and reduce his potential liquidity? I think he would want to maintain them at parity to maximize his liquidity potential. That is after all why he did this recapitalization.

 

If Cash builds up on the balance sheet because there are no dividend payments, he can quite easily authorize a share buy back on Class A/Class B and make them trade at parity again.

 

For this reason, I think this company is never going to pay a dividend ever again until the current CEO has the majority control. Hence I believe the shares trade at parity of $17. I am willing to accept a small premium for Class B, because there is always a tail event option of instituting some sort of nominal dividend. This premium between the classes is simply the price of a perpetual call option on the possibility of a dividend payout.

 

If I am right, Class A shares are correctly valued now. Class B shares have a 30%-40% downside. Going short Class A shares is also incredibly dangerous because the underlying business of this company is a fast grower and quite stable. Class A shorts can get killed waiting for the repricing to happen. Class B longs are going to be in a value trap, but the growth might eventually make them whole.

 

I am interested in the opinion of others on this board.

 

I am neither long nor short any share class of this company. I don't plan on a position. It was just very interesting to me conceptually.

 

 

 

[beerbaron]

I tough the value of a share was the sum of the money to be returned up to infinity. B share will receive 6 times that amount, if it happens in 1 year or 100 year from now does not matter. The IV of the B share are worth 6 times the A shares.

 

Furthermore, BOD have a duty toward all stockholders.

 

Finally it seems the CEO has a good record of ethical conduct based on it's salary.

 

BeerBaron

[TwoCitiesCapital]

Haven't had time to read the articles yet so I apologize if the answer is there - why do you think the CEO desired liquidity and why do you think they'll never pay dividends again? Seem to be two key assumptions that you've made and I'd like to know the reasoning.

 

Secondly, without the knowledge of yur answers above, it seems really speculative. What I'd rather do is wait for them to get to get closer to parity, go long the B shares and short the A shares.

[rpadebet]

I tough the value of a share was the sum of the money to be returned up to infinity. B share will receive 6 times that amount, if it happens in 1 year or 100 year from now does not matter. The IV of the B share are worth 6 times the A shares.

 

Furthermore, BOD have a duty toward all stockholders.

 

Finally it seems the CEO has a good record of ethical conduct based on it's salary.

 

BeerBaron

 

Yes the CEO did take a nominal salary, that's because he preferred to get paid through dividends. The dividend payout was 40% of fcf historically. So he was getting paid well along with the other shareholders. I don't see any issue here. His interests were aligned well with shareholders.

 

Key to intrinsic value calculation here is the % of dividend payout. If all Fcf is paid then 6:1 is obvious. But the share class structure says nothing about the proportionality of assets attributable to each class. If there is no dividend payout then fcf accumulates as cash asset on the balance sheet. There is no wording in the filling which says class b holders are entitled to 6 times the cash/assets class A holders are entitled to. Since they are both common stock and since dividend doesn't accrue on class b stock, in my opinion it means that all shareholders irrespective of class of stock they hold are entitled to that cash asset in proportion of shares they hold ( similar to the pari passu principle in the bonds world) . I.e. class A holders are entitled to 85% of that cash asset and class b holders are entitled to 15% only. If it were paid out as dividends then the ratio would be 50%/50% according to the share class rules. So if this company doesn't pay dividends anymore and accumulates the 420mill of market cap in cash and then decides to liquidate, the ratio should be 85/15. All I am saying is if cash isn't distributed as dividends then the 50/50 rule shouldn't apply.

 

Regarding the second question of why I think they will never declare same kind of dividends again, I support it by pointing to the motivation of the CEO for doing the recap in the first place. His motivation was two fold. He wanted liquidity for his shares but didn't want to give up control. With this recap, class a shares (85% of his shares now) become his liquidity vehicle and class b shares (15%) become  his control vehicle. He can sell all class A shares, get cash and not lose his majority control. Imagine now he paid out entire fcf as dividend, then like others suggested class B should trade at 60$ and class A at $10. His liquidity is now equal to number of class A shares he holds times $10. On the other extreme if he decided for 0 dividend, then they should both trade around $17, in which case his liquidity is maximized. ( class A cannot trade above class B under any scenario, so that's why it gets maximized at parity).

 

In addition we know CEO likes dividends, but with 85% of his holding liquid, he and other original stock holders ( assuming they didn't sell their A's) have the same option of creating a synthetic dividend flow for themselves by selling out of class A shares slowly. They will still have class B shares to exert control.

 

I am not suggesting here the CEO is screwing his minority shareholders. Original holders have the same option and return profile he would have. Only new class B shareholders who bought at high price assuming the dividend payouts get screwed. I don't think the board can interfere here for any cause. New buyer of class B is functionally equivalent to original shareholder who sold all his A's. I don't think there is any scope of minority shareholder lawsuit here, but I am not a legal professional. Others more informed can shine some light.

 

 

 

 

[rpadebet]

Wanted to add one other note.

Whatever you do, don't compare this to Berkshire A and Berkshire B. Irrespective of what the CEO here said about how similar this recap is to that. Berkshire A holders have the right to convert each share to 1500 Berkshire B's.

 

In this case, not only do the B holders not have this right, the BOD can decide to enforce the conversion on a 1:1 basis. Guess who controls the BOD?

 

More I think about it, more I feel that the pricing of these stocks is actually dependent on the mood of the CEO. He could say no dividend and they trade at parity, if they don't, he can get the BOD to convert and get them to trade at parity. He can also decide to distribute all earnings and suddenly they trade at 1:6 ratio. He can also play with any payout rate in between.

[ItsAValueTrap]

I'm really impressed by the CEO's message to shareholders (found in the annual report) regarding the dual class share structure.

 

TO OUR SHAREHOLDERS:

 

Your Company has been fortunate over the decades in attracting great associates dedicated to serving some of the best names in healthcare, all aligned in making it better for the patient.

 

This simple formula has resulted in many positive outcomes for the Company, one of which is our remarkably consistent financial performance. As they say, “Up and to the right is a nice trend line,” for which we are pleased the year 2012 added to again. Your Company also finds itself in the middle of a wonderful perfect storm of opportunity in healthcare, the largest sector of the economy. What could be better, right?

 

Well, be careful what you wish for. I’m learning that some of the strengths that brought us to the dance can create unintended consequences. 

 

The intersection of “predictable financial performance” and “unbridled need for our solutions” is attracting a great amount of investor interest. However, given our concentrated ownership and limited availability of shares for sale, this demand remains unfilled. Clearly, buy and hold and concentrated ownership can be a good thing. In fact, I recall years ago being asked by Wall Street types what our dot-com strategy was, only to have our obituary written when I said our dot-com strategy was to not have one. Our ownership profile allows us to avoid reacting to Wall Street’s latest craze, which has served us well.

 

But these same attributes are also to blame for poor shareholder liquidity. When I hear investors lamenting how hard it is to build a position in NRC stock, I quickly suggest they understand and like where we are headed, given the only thing harder than building a position, is liquidating one.

 

For the long-term future of the Company, we must ensure liquidity with the appropriate balance between supply and demand.  We must reach this balance without disrupting the positive elements inherent in our ownership structure; not an easy task, but we have a great example to follow.

 

Our plan is to first do no harm. Many public companies have liquidity problems and often resolve them by simply offering new shares to new shareholders. If we followed this path, current shareholders’ ownership and voting power would be diluted and the Company would face an increased financial burden to maintain historical dividend payments across a larger number of shares without reducing cash resources to grow the business. As well, Wall Street would become our chief strategy officer.

 

Our plan is to create a new class of stock while retaining our current class of stock, not unlike the dual class stock plan Warren Buffett implemented at Berkshire Hathaway. Following the Berkshire example of its Baby B’s (as many call their new shares), our new class of shares will have far less voting power and will receive only a fractional amount of any divided payments that may be paid. 

 

This new class of stock will be granted via a stock dividend to every current shareholder so they will have exactly the same voting, equity interest and dividend participation then as they have now, just split across a greater number of shares.

 

When other companies have increased their number of shares via a stock split, trading volume has increased creating more available shares for new investors to purchase. If this holds true for NRC stock, we will have helped address our supply and demand problem, and done so without harm to any current shareholder.

 

The dual class stock approach we are proposing that will be voted upon at our annual meeting, has been taken by only a very few public companies. One common element of companies with a dual stock structure seems to be organizations where management decisions are being made through the lens of fellow shareholders.

 

I look forward to seeing you at our upcoming shareholder meeting.

 

 

Michael D. Hays,

Chief Executive Officer and Fellow Shareholder

[ItsAValueTrap]

I'm just starting to read through the annual report.

 

Originally, the company wanted to do something that was more fair.  It would split into a higher voting class and a lower voting class with the *same* economic interest in the business.  Now get this... the NASDAQ has Voting Rights Rules that *disallow* this.  Berkshire's baby shares wouldn't be allowed according to those rules.  So now the company has to use this more complicated share structure where the relative economic value between the A and B shares is hard to judge.

 

Let's ignore the voting rights for a second and just look at the economic value of the shares:

If the company pays out all earnings in dividends, then the B shares should be worth 6X the A shares.

If the company is immediately taken over, then the B shares should be worth 1X the A shares.

 

Because the B share holders control the company, I don't think that they will allow the company to *ever* be taken over.  It would have to be a reverse takeover instead.  There are ways to have a takeover occur where the B shares would be worth around 6X the A shares.  Because of this, the B shares should worth around 6X that of the A shares.

On top of that, you might apply a premium/discount for the relative voting rights and liquidity.  The A shares will likely be more liquid in the future if the company uses it as currency to buy other companies.  In rare cases, the lower voting shares trade at a higher value than the higher voting shares.  This was/is the case with Lennar and IDT.

 

2- NASDAQ is stupid.  The rejected proposal was FAIRER to shareholders.

 

On top of that, National Research had to hire lawyers and spend a lot of the board's time in getting the proposal through.  This is a wasteful use of shareholder money.

 

3a- The CEO strikes me as incredibly smart and having lots of integrity.  The original plan was fairer than Berkshire's baby shares plan.

 

Berkshire's plan is a little unfair because small retail investors are disenfranchised from voting.  Very small retail investors can only purchase the baby shares and have less voting power.  Ultimately, they are the ones who had to give away voting power for free (because somebody else converted the shares for them essentially).  Management gets to entrench voting control for free because the higher share price takes advantage of retail investors' inability to buy the A shares.

 

National Research's original plan is fairer.  Nobody gave away voting power for free.  If the lower voting shares trade at a discount to the higher voting shares (as is the case with Berk A/B), then new retail investors are given something in exchange for lower voting power.

 

I don't even think that Berkshire's plan was unfair.  The gain in management's voting power is/was so little.  Most of the voting power was given away by institutional holders with short-term trading mentalities.  The share structure generates value for society because the long-term shareholders get more control over the company so that Berkshire isn't forced into something stupid.  This is better for everybody in the long term.

 

3b- CEO compensation is very, very low.  He is paid less than his top lieutenants.  It's very similar to Berkshire.

[rpadebet]

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/102792

 

The write-up on VIC is now publicly accessible. The author obviously believes B shares deserve to trade at $40. Some of the comments there are interesting and kind of make the argument I am making i.e. without dividend payout they deserve to trade at parity.

[ItsAValueTrap]

One of Greenblatt's shortcuts is to look at the behaviour and incentives of insiders.  I think that insider incentives will support the 6:1 argument.

 

Clearly, the CEO wants to sell the lower voting shares.  It is highly likely that he will sell the lower voting shares or use them as currency for acquisitions.  He will own more B shares than A shares.  So it's obvious to me that he will want the B shares to have 6 times the economic interest of the A shares.

 

Similarly, all of the B share holders will want 6:1.  And because the B shares control the company, the B share holders will likely get their way.  Of course class B is going to screw over class A.

 

2- Just because the company doesn't pay dividends now doesn't mean that it won't pay dividends in the future.

 

3- The 10-Q suggests the B shares deserve 6:1 based on the EPS calculation.

 

http://www.sec.gov/Archives/edgar/data/70487/000143774913010244/nrci20130630_10q.htm

page 15

 

the B shares have 6 times the EPS of the A shares.

[yitech]

Great find! This looks like some sort of special situations.

 

I think there's some confusion about the case when the company liquidates and whether they would be taken out at exactly the same price. The economic interest of the two equity classes during liquidation is 1:1. (e.g. if the entire equity gets taken out or liquidated for $1B, class A and B would each get $500M per the equal economic interest of the entire earnings, but not EPS.) The economic interest per share is still 6:1 since one class has approximately 6X shares outstanding of the other. So the share classes are classified more like Berkshire classes rather than Viacom classes.

 

From 14A:

 

Liquidation Rights

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, after there shall have been paid to or set aside for the holders of preferred stock the full preferential amounts, if any, to which they are entitled, the holders of Class A Common Stock and the holders of Class B Common Stock will receive pro rata, according to the number of shares held by each, the remaining assets of the Company available for distribution to holders of Common Stock.

 

Like what ValueTrap said, the EPS is 6:1. Also we know that any future dividend streams (if any) are also 6:1. Obviously class A shares are overpriced at 40X trailing PE and class B slightly underpriced (IMO) at 12X. The confusion or simply lack of liquidity may be causing this mis-pricing. The only difference is the voting rights. Rather than 1/6 voting power of class B shares, class A has only 1/100. So if the markets are truly efficient, A should trade at slightly less than 1/6 of B in terms of price based on the voting rights.

 

And.. of course, I am oversimplifying a bit by ignoring option and share grants of A and B shares.

 

Disclosure: I am long B and short A shares.

 

10Q: http://www.sec.gov/Archives/edgar/data/70487/000143774913010244/nrci20130630_10q.htm

14A: http://www.sec.gov/Archives/edgar/data/70487/000143774913004265/nrci_def14a-050913.htm

[ItsAValueTrap]

Maybe I am too gungho about the 6:1 ratio.  There are situations where the shares will be 1:1.  I think that the B shareholders will exercise their control to avoid 1:1 situations happening.  But it could happen.

 

Suppose the company gets overleveraged and enters bankruptcy.  Then shareholders will get 1:1.  Of course in practice, this company will not get overleveraged and shareholders rarely see anything in a bankruptcy.

 

2- I can't believe NASDAQ shot down the first plan and allowed this.  Someone is going to get screwed.

[rpadebet]

  Someone is going to get screwed.

 

Agree with this part of the statement 100%.  :)

 

I don't think the ratio discrepancy is because of liquidity issues. It has been 3-4 months now since this mess has been implemented/known in the market. A's are comparatively liquid. It should have adjusted to the neighborhood of fair value by now. Also this thing is not very obscure. It has been written up and discussed in the usual places.

 

I think the ratio will be a function of the dividend payout until some lawyer or the management themselves make it clear as to what they actually mean/want from the share classes.  Until then I think this is very risk bet one way or the other.

 

I however like zachmansell's approach, which is buying B's when and if they are close to 1:1 ratio and buying A's when they are close to the 6:1 ratio.  Independent of your opinion on the ratio, I think shorting A's is dangerous. The underlying business is a pretty decently growing business, so even if you are right about the ratio, the payoff may never come as the intrinsic value keeps increasing.

 

 

 

 

[rpadebet]

Also regarding the 6:1 EPS split in their statements, I would urge caution against reading too much into it. I think irrespective of the management intentions/motivations, GAAP requires you to split the EPS for the classes assuming 100% of the earnings are paid out to the shareholders. If 100% of the earnings are paid out in form of dividends the contractual obligation is to split it 6:1. This EPS split was the first thing I noticed as well though.

 

Management intentions are not clear cut. The CEO by all accounts seems to be a straightforward guy and it doesn't make sense that at this point in his career that he would want to screw part of his shareholder base. But from the perspective of incentives, it is a "no-brainer" that old shareholders would prefer a 1:1 price ratio on the share classes, because that gives them maximum economic liquidity at minimum voting dilution. They can choose to liquidate 85% of their economic interest (selling A's) yet retain 85% of the controlling interest (keeping B's). So you get to exercise the same control but with less money at risk. Wouldn't you prefer that?

[yitech]

I think it's clear that the CEO wanted to maintain his control of the company by keeping B and monetize his partial stake of the company by liquidating his class A, rather than receiving stream of dividends previously. Now, the whole recapitalization confuses the hell out of most people and it is completely understandable that past/current/prospective shareholders are suspicious of his motives.

 

Personally I don't think 3-4 months are enough time for markets to reflect the intrinsic value of securities... especially for illiquid securities that are under-followed by analysts and institutional investors. We have seen Bank of America dropped from $15 to $5-ish and now almost back to $15 again within 2.5 years. Irrational pricing can happen even for well-followed companies and I doubt the book value changed that much during the time-frame.

 

Let's forget about dividend discount model since it does not help valuing companies not paying dividends. As well, it does not make sense to predict when the company will pay the dividend or the magnitude of it. DDM is only useful for valuing highly predictable dividend paying (and preferably zero growth) firms with majority of FCF paid out in dividends such as utilities. So we can forget about the 6:1 dividend ratio determining the value as 6:1 for a minute. It only works if you treat DDM as gospel.

 

Let's use Buffett's analogy of treating the Dow Jones like a Perpetual Bond with floating Coupon that increases like EPS on equity. For more info, see his article here: http://features.blogs.fortune.cnn.com/2011/06/12/warren-buffett-how-inflation-swindles-the-equity-investor-fortune-1977/

 

Similar to Buffett's analogy, we ought to value each share class based on EPS and sensible multiples. Now the calculations of economic interest of earnings per share are clearly laid out in the 10Q. GAAP can be ridiculous for hard-to-value items such as goodwill, intangibles and true representative economic value of insurance floats...etc. But I would highly doubt fundamental things such economic interest per unit share like the earnings per share can be radically messed with or someone is going to jail... auditors would be the first to go.

 

It's clearly specified that earnings are split equally between class A and class B equity. Then we arrive to the EPS for each class by dividing the outstanding shares of each class. Any earnings to shareholders/business owners/partnership can all be sensibly defined this way with or without GAAP. The ratio of EPS are approximately 6:1, so the equity interest should be roughly so accordingly(or more correctly, the ratio of outstanding shares btw two classes), leaving aside the voting rights, option/share grants...etc. Say if I own a single share of class B, saying B would convert to A 1-to-1 so I receive 1/6 of earnings of I used to get is madness and would only attract massive number of lawsuits. If I could convert B to A, I would receive 6 shares of A or roughly the ratio of shares outstanding between A and B. Saying 1-to-1 conversion is almost equivalent to saying 1 share of Brk-A convert to 1 share of Brk-B. (which we know is not true... 1 BRK-A should be converted to 1,500 Brk-B shares.)

[rpadebet]

Personally I don't think 3-4 months are enough time for markets to reflect the intrinsic value of securities... especially for illiquid securities that are under-followed by analysts and institutional investors. We have seen Bank of America dropped from $15 to $5-ish and now almost back to $15 again within 2.5 years. Irrational pricing can happen even for well-followed companies and I doubt the book value changed that much during the time-frame.

 

Have to disagree very slightly with the comparison to BAC here. It is always possible to imagine a dire scenario in which a bank can be killed. So the case with BAC wasn't market inefficiency from pricing perspective but more with inefficiency regarding the probability attached to the pessimistic scenarios.

In this case though the business isn't attracting pessimistic scenario valuations. In fact value of the entire business is should pretty much be the same irrespective of the split.

 

It's clearly specified that earnings are split equally between class A and class B equity.

IMO their language is open to interpretation. That is why I feel a securities lawyer should clarify this. They said "pro-rata". Assuming the pari-passu principle that all common shares need to be treated equally in case of liquidation, a case can be made that the economic interest needs to be divided equally per share irrespective of class. In this case A's get 85% of the value and B's 15%, since their shares outstanding ratio is the same.

 

Say if I own a single share of class B, saying B would convert to A 1-to-1 so I receive 1/6 of earnings of I used to get is madness and would only attract massive number of lawsuits. If I could convert B to A, I would receive 6 shares of A or roughly the ratio of shares outstanding between A and B. Saying 1-to-1 conversion is almost equivalent to saying 1 share of Brk-A convert to 1 share of Brk-B. (which we know is not true... 1 BRK-A should be converted to 1,500 Brk-B shares.)

 

You have hit the nail on the head here. If there was language in the filing indicating a 6:1 conversion from B to A was possible like the BRK.A/BRK.B case and the company would stand behind that, it is quite clear what ratio they should trade at. This clause/feature is missing. I don't want to assume it was an oversight on the part of the attorneys who drafted this. These guys are usually very very careful when they do this sort of stuff.

[ItsAValueTrap]

I think the uncertainty was needed to get the recap approved by NASDAQ.  The 6X dividend payout was something suggested by NRC's legal firm.

[yitech]

I guess BAC is a bad example, but I would think 3-4months are still too short of a time-frame to clear the air.

 

You have hit the nail on the head here. If there was language in the filing indicating a 6:1 conversion from B to A was possible like the BRK.A/BRK.B case and the company would stand behind that, it is quite clear what ratio they should trade at. This clause/feature is missing. I don't want to assume it was an oversight on the part of the attorneys who drafted this. These guys are usually very very careful when they do this sort of stuff.

 

I think the Liquidation Rights in 14A defined this very clearly. I don't think I need a lawyer to interpret this. I tend to interpret things that make the most economic sense and mathematics-wise.

 

Liquidation Rights

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, after there shall have been paid to or set aside for the holders of preferred stock the full preferential amounts, if any, to which they are entitled, the holders of Class A Common Stock and the holders of Class B Common Stock will receive pro rata, according to the number of shares held by each, the remaining assets of the Company available for distribution to holders of Common Stock.

 

As confusing and unclear as what is described above, it would confirm with 1. splitting earnings first, then 2. divide each according to the outstanding shares held by each. Blame the lawyers for not spelling out every single words in layman's term. If you think this is crazy and confusing, wait till you read how lawyers describe the waterfall, OC, subordination and many other rules in a typical CDO prospectus and try to reverse-engineer that!

 

In any case, we can agree to disagree on certain things. We will see what happens to my investments. Maybe I will lose a bunch. Who knows? :)

[rpadebet]

Liquidation Rights

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, after there shall have been paid to or set aside for the holders of preferred stock the full preferential amounts, if any, to which they are entitled, the holders of Class A Common Stock and the holders of Class B Common Stock will receive pro rata, according to the number of shares held by each, the remaining assets of the Company available for distribution to holders of Common Stock.

 

:) Yes it is a disagreement. I somehow can't read the split before the distribution, but I can see how you are reading it that way.

 

I surely have read my share of CDO prospectuses in my slightly previous life and couldn't agree more with the "intentional" ambiguity there, but i assumed that was to promote "settlements" over "litigation" if and when stuff hits the fan (as it did!)

 

Let me ask you a question though:

What is the difference between preferred stock and B shares in this case? 

(assuming they had the same dividend payout and assuming voting rights don't matter -which is a decent assumption because the CEO holds the majority rights anyway and everyone else irrespective of A or B holder has the same practical voting right).

[rpadebet]

Don't mean to add to the confusion, but please read the table following the statement below in the 14A (page 33). Pay special attention to how Craig-Hallum splits the economic interests and voting interests for the proposed recap.

 

The following table summarizes the stock price disparity, liquidity, and voting and economic interests of the Comparison Group and the Company on a pro forma basis giving effect to the Recapitalization, where applicable.

 

Also on page 41 and page 42 of the same 14A read the para's following the liquidation rights which you already shared

 

 

Equal Status

 

Except as expressly provided in the Amended and Restated Articles, shares of Class A Common Stock and Class B Common Stock will have the same rights and privileges and rank equally, share ratably and be identical in all resects as to all matters, including the following:  in the event of any distribution of property, merger, consolidation, purchase or acquisition of property or stock, asset transfer, division, share exchange, recapitalization or reorganization of the Company, the holders of Class A Common Stock and Class B Common Stock will receive the same property, shares of stock, other securities or rights or other assets as would be issuable or payable upon such distribution, merger, consolidation, purchase or acquisition of property or stock, asset transfer, division, share exchange, recapitalization or reorganization of the Company in proportion to the number of shares held by them, without regard to class.

 

 

 

 

Convertibility

 

Neither the Class A Common Stock nor the Class B Common Stock will be convertible into the other class of Common Stock, except that all outstanding shares of Class A Common Stock may be converted into shares of Class B Common Stock on a share-for-share basis, at the discretion of the Board, if, as a result of any statute, law, regulation, court order, legal process or rule or rule interpretation of a national securities exchange, either the Class A Common Stock or Class B Common Stock is, or both are, excluded from, or the Board determines that either the Class A Common Stock or Class B Common Stock is, or both are, subject to exclusion from, listing on the NASDAQ Stock Market or, if such shares are listed on another national securities exchange, from trading on the principal national securities exchange on which the shares are traded.  In making such a determination, the Board may conclusively rely on any information or documentation available to it, including filings made with the Securities and Exchange Commission, any national securities exchange, stock market or any other governmental or regulatory agency or any written instrument purporting to be authentic.  Upon any such conversion, the voting interests of the holders of Class B Common Stock would be diluted.  In addition, to the extent that the Class B Common Stock has a market price that is higher than the market price of the Class A Common Stock immediately prior to such conversion, the market price of the Class B Common Stock may be decreased on conversion of the Class A Common Stock into Class B Common Stock.

 

 

I think the lawyers here got paid for nothing. They didn't address the ambiguity and in fact added to it. They are probably "free market" guys and thought the market would sort this out. The market in all its infinite wisdom found equilibrium in the middle ground.

[ItsAValueTrap]

I think the lawyers did a reasonable job.

 

NASDAQ has dumb rules and they blocked the original proposal that was simpler.  It kinda makes sense for the company to hire lawyers to help them through this process.  It's very specialized knowledge that would take a while to figure out yourself.  The lawyers might also give you really good ideas that you wouldn't figure out by yourself at all.  The recap was approved so I'd have to say that the lawyers did a good job.  Hays got what he wanted, though perhaps he didn't want to rip shareholders off so badly.

[yitech]

Don't mean to add to the confusion, but please read the table following the statement below in the 14A (page 33). Pay special attention to how Craig-Hallum splits the economic interests and voting interests for the proposed recap.

 

The following table summarizes the stock price disparity, liquidity, and voting and economic interests of the Comparison Group and the Company on a pro forma basis giving effect to the Recapitalization, where applicable.

 

hm... yeah, I've read that part and 85.7%/14.3%=5.993X. This is probably rounding error for lack of decimal spaces of 6/7 vs 1/7 or 85.714285714% versus 14.285714285% or in other words 6:1 per economic interests of B versus A. The economic interest of each share class is clearly laid out here as I mentioned.

 

Also on page 41 and page 42 of the same 14A read the para's following the liquidation rights which you already shared

 

 

Equal Status

 

Except as expressly provided in the Amended and Restated Articles, shares of Class A Common Stock and Class B Common Stock will have the same rights and privileges and rank equally, share ratably and be identical in all resects as to all matters, including the following:  in the event of any distribution of property, merger, consolidation, purchase or acquisition of property or stock, asset transfer, division, share exchange, recapitalization or reorganization of the Company, the holders of Class A Common Stock and Class B Common Stock will receive the same property, shares of stock, other securities or rights or other assets as would be issuable or payable upon such distribution, merger, consolidation, purchase or acquisition of property or stock, asset transfer, division, share exchange, recapitalization or reorganization of the Company in proportion to the number of shares held by them, without regard to class.

 

 

 

 

Convertibility

 

Neither the Class A Common Stock nor the Class B Common Stock will be convertible into the other class of Common Stock, except that all outstanding shares of Class A Common Stock may be converted into shares of Class B Common Stock on a share-for-share basis, at the discretion of the Board, if, as a result of any statute, law, regulation, court order, legal process or rule or rule interpretation of a national securities exchange, either the Class A Common Stock or Class B Common Stock is, or both are, excluded from, or the Board determines that either the Class A Common Stock or Class B Common Stock is, or both are, subject to exclusion from, listing on the NASDAQ Stock Market or, if such shares are listed on another national securities exchange, from trading on the principal national securities exchange on which the shares are traded.  In making such a determination, the Board may conclusively rely on any information or documentation available to it, including filings made with the Securities and Exchange Commission, any national securities exchange, stock market or any other governmental or regulatory agency or any written instrument purporting to be authentic.  Upon any such conversion, the voting interests of the holders of Class B Common Stock would be diluted.  In addition, to the extent that the Class B Common Stock has a market price that is higher than the market price of the Class A Common Stock immediately prior to such conversion, the market price of the Class B Common Stock may be decreased on conversion of the Class A Common Stock into Class B Common Stock.

 

 

I think the lawyers here got paid for nothing. They didn't address the ambiguity and in fact added to it. They are probably "free market" guys and thought the market would sort this out. The market in all its infinite wisdom found equilibrium in the middle ground.

 

I interpret the Equal status similarly as Liquidation Rights. Equal right of whatever property, investments, equipments, office furnitures... for both Equity Classes, and each half then divided by outstanding shares of each.

 

Now you may interpret the share-for-share basis in the Convertibility section as one for one. There is certainly ambiguity there thanks for nothing to the lawyers. But note what that it mentioned: except that all outstanding shares of Class A Common Stock may be converted into shares of Class B Common Stock.

 

I think it's this. Let's say the board decides it wants to convert A to B. The only way this would happen is to convert the entire A class to B class at once. Now I doubt and B share holders would allow the effective voting rights of theirs be reduced substantially. Now the economic rights of earnings would still be maintained fairly according to the ratio of outstanding shares. The voting rights would change dramatically of course.

 

This whole lawyer language thing is fun! (not really)

[yitech]

On the preferred stock, it describes in the Liquidation Rights. I think it's pretty similar to other companies, it's not common equity and gets paid first before A+B get paid.

 

Don't mean to add to the confusion, but please read the table following the statement below in the 14A (page 33). Pay special attention to how Craig-Hallum splits the economic interests and voting interests for the proposed recap.

 

The following table summarizes the stock price disparity, liquidity, and voting and economic interests of the Comparison Group and the Company on a pro forma basis giving effect to the Recapitalization, where applicable.

 

hm... yeah, I've read that part and 85.7%/14.3%=5.993X. This is probably rounding error for lack of decimal spaces of 6/7 vs 1/7 or 85.714285714% versus 14.285714285% or in other words 6:1 per economic interests of B versus A. The economic interest of each share class is clearly laid out here as I mentioned.

 

Also on page 41 and page 42 of the same 14A read the para's following the liquidation rights which you already shared

 

 

Equal Status

 

Except as expressly provided in the Amended and Restated Articles, shares of Class A Common Stock and Class B Common Stock will have the same rights and privileges and rank equally, share ratably and be identical in all resects as to all matters, including the following:  in the event of any distribution of property, merger, consolidation, purchase or acquisition of property or stock, asset transfer, division, share exchange, recapitalization or reorganization of the Company, the holders of Class A Common Stock and Class B Common Stock will receive the same property, shares of stock, other securities or rights or other assets as would be issuable or payable upon such distribution, merger, consolidation, purchase or acquisition of property or stock, asset transfer, division, share exchange, recapitalization or reorganization of the Company in proportion to the number of shares held by them, without regard to class.

 

 

 

 

Convertibility

 

Neither the Class A Common Stock nor the Class B Common Stock will be convertible into the other class of Common Stock, except that all outstanding shares of Class A Common Stock may be converted into shares of Class B Common Stock on a share-for-share basis, at the discretion of the Board, if, as a result of any statute, law, regulation, court order, legal process or rule or rule interpretation of a national securities exchange, either the Class A Common Stock or Class B Common Stock is, or both are, excluded from, or the Board determines that either the Class A Common Stock or Class B Common Stock is, or both are, subject to exclusion from, listing on the NASDAQ Stock Market or, if such shares are listed on another national securities exchange, from trading on the principal national securities exchange on which the shares are traded.  In making such a determination, the Board may conclusively rely on any information or documentation available to it, including filings made with the Securities and Exchange Commission, any national securities exchange, stock market or any other governmental or regulatory agency or any written instrument purporting to be authentic.  Upon any such conversion, the voting interests of the holders of Class B Common Stock would be diluted.  In addition, to the extent that the Class B Common Stock has a market price that is higher than the market price of the Class A Common Stock immediately prior to such conversion, the market price of the Class B Common Stock may be decreased on conversion of the Class A Common Stock into Class B Common Stock.

 

 

I think the lawyers here got paid for nothing. They didn't address the ambiguity and in fact added to it. They are probably "free market" guys and thought the market would sort this out. The market in all its infinite wisdom found equilibrium in the middle ground.

 

I interpret the Equal status similarly as Liquidation Rights. Equal right of whatever property, investments, equipments, buildings, tables, chairs, patio furnitures... for both Equity Classes, and each half then divided by outstanding shares of each.

 

Now you may interpret the share-for-share basis in the Convertibility section as one for one. There is certainly ambiguity there thanks for nothing to the lawyers. But note what that it mentioned: except that all outstanding shares of Class A Common Stock may be converted into shares of Class B Common Stock.

 

I think it's this. Let's say the board decides it wants to convert A to B. The only way this would happen is to convert the entire class A to class B at once. I highly doubt class B shareholders would allow the effective voting rights of theirs be reduced substantially. Now the economic rights of earnings would still be maintained fairly according to the ratio of outstanding shares. The voting rights would change dramatically of course.

 

This whole lawyer language thing is fun! (not really)

[rpadebet]

Don't mean to add to the confusion, but please read the table following the statement below in the 14A (page 33). Pay special attention to how Craig-Hallum splits the economic interests and voting interests for the proposed recap.

 

The following table summarizes the stock price disparity, liquidity, and voting and economic interests of the Comparison Group and the Company on a pro forma basis giving effect to the Recapitalization, where applicable.

 

hm... yeah, I've read that part and 85.7%/14.3%=5.993X. This is probably rounding error for lack of decimal spaces of 6/7 vs 1/7 or 85.714285714% versus 14.285714285% or in other words 6:1 per economic interests of B versus A. The economic interest of each share class is clearly laid out here as I mentioned.

 

Also on page 41 and page 42 of the same 14A read the para's following the liquidation rights which you already shared

 

 

Equal Status

 

Except as expressly provided in the Amended and Restated Articles, shares of Class A Common Stock and Class B Common Stock will have the same rights and privileges and rank equally, share ratably and be identical in all resects as to all matters, including the following:  in the event of any distribution of property, merger, consolidation, purchase or acquisition of property or stock, asset transfer, division, share exchange, recapitalization or reorganization of the Company, the holders of Class A Common Stock and Class B Common Stock will receive the same property, shares of stock, other securities or rights or other assets as would be issuable or payable upon such distribution, merger, consolidation, purchase or acquisition of property or stock, asset transfer, division, share exchange, recapitalization or reorganization of the Company in proportion to the number of shares held by them, without regard to class.

 

 

 

 

Convertibility

 

Neither the Class A Common Stock nor the Class B Common Stock will be convertible into the other class of Common Stock, except that all outstanding shares of Class A Common Stock may be converted into shares of Class B Common Stock on a share-for-share basis, at the discretion of the Board, if, as a result of any statute, law, regulation, court order, legal process or rule or rule interpretation of a national securities exchange, either the Class A Common Stock or Class B Common Stock is, or both are, excluded from, or the Board determines that either the Class A Common Stock or Class B Common Stock is, or both are, subject to exclusion from, listing on the NASDAQ Stock Market or, if such shares are listed on another national securities exchange, from trading on the principal national securities exchange on which the shares are traded.  In making such a determination, the Board may conclusively rely on any information or documentation available to it, including filings made with the Securities and Exchange Commission, any national securities exchange, stock market or any other governmental or regulatory agency or any written instrument purporting to be authentic.  Upon any such conversion, the voting interests of the holders of Class B Common Stock would be diluted.  In addition, to the extent that the Class B Common Stock has a market price that is higher than the market price of the Class A Common Stock immediately prior to such conversion, the market price of the Class B Common Stock may be decreased on conversion of the Class A Common Stock into Class B Common Stock.

 

 

 

I think the lawyers here got paid for nothing. They didn't address the ambiguity and in fact added to it. They are probably "free market" guys and thought the market would sort this out. The market in all its infinite wisdom found equilibrium in the middle ground.

 

I interpret the Equal status similarly as Liquidation Rights. Equal right of whatever property, investments, equipments, office furnitures... for both Equity Classes, and each half then divided by outstanding shares of each.

 

Now you may interpret the share-for-share basis in the Convertibility section as one for one. There is certainly ambiguity there thanks for nothing to the lawyers. But note what that it mentioned: except that all outstanding shares of Class A Common Stock may be converted into shares of Class B Common Stock.

 

I think it's this. Let's say the board decides it wants to convert A to B. The only way this would happen is to convert the entire A class to B class at once. Now I doubt and B share holders would allow the effective voting rights of theirs be reduced substantially. Now the economic rights of earnings would still be maintained fairly according to the ratio of outstanding shares. The voting rights would change dramatically of course.

 

This whole lawyer language thing is fun! (not really)

 

Read the table again carefully. My point was not the calculation. My point was voting interest is 85% for B's but economic interest is 15% only even as per the company opinion. Opposite is the case for A's.

 

So if market value of entire firm is 420mill, it implies B's own 63 mill and A's own 357 mill. Now divide 63mill by number is B shares to get B stock price and 357mill by A's outstanding to get A stock price. You will see the prices will be 1:1.

[yitech]

 

Read the table again carefully. My point was not the calculation. My point was voting interest is 85% for B's but economic interest is 15% only even as per the company opinion. Opposite is the case for A's.

 

So if market value of entire firm is 420mill, it implies B's own 63 mill and A's own 357 mill. Now divide 63mill by number is B shares to get B stock price and 357mill by A's outstanding to get A stock price. You will see the prices will be 1:1.

 

Well. It did say: The following table summarizes the stock price disparity, liquidity, and voting and economic interests of the Comparison Group and the Company on a pro forma basis giving effect to the Recapitalization, where applicable.

 

Stock prices are on the per-share basis, so I see no ambiguity here.

 

In my mind the entire economic interest and math make sense except for voting rights etc. I have not yet found anything that strongly contradicts to the fair and square economic interest of the two classes if my interpretations are sensible and correct. Again we can agree to disagree on this one as well. Let's just blame the lawyers.

[ItsAValueTrap]

Yitech, I think you might be reading it wrong.