| | I have a question incidental to the subprime mortgages mess, and didn't think it warranted starting a new thread.
Merrill Lynch has written down $7.9 billion in mortgage-related assets, and more are expected. On December 24 Merrill announced it will sell up to $6.2 billion of newly issued common stock at a discount to two investors in order to raise capital. Most will be to a Singapore sovereign fund at $48 per share. Merrill's stock closed at $53.90 on the 24th. The WSJ article reported the $48 as "a 10% discount from the final negotiation date in the middle of last week", implying a price of $53.33 when the terms of deal were made.
There are some caveats. The sovereign fund must hold its shares for a year, and it will get a rebate if Merrill issues more stock at less than $48 within the year.
I don't know what efforts Merrill made to offer shares to other than the two. Of the few secondary offering cases I have read about, most were at prices equal or very close to the current price of the outstanding stock at the time the deal was made. The biggest discount I'm aware of is Gulfport Energy Corp. (GPOR). On 12/7/2007 it priced its secondary public offering at a 6.3% discount to its stock's previous day closing price.
The WSJ article included this: "At least one person close to Merrill said . . . that the discount to current value is in line with what it would likely have paid if it had issued common to the public in a stock offering. It hasn't received a fairness opinion on the price."
I am sceptical that this is fair, at least to the existing shareholders. Why shouldn't they be entitled to buy at $48, too? A fairer method would be an auction, or more open public offering. If they aren't willing to buy at $48, that's fine, but I think they should have the opportunity.
To anticipate one possible objection, I do not view this as similar to a business offering a senior discount to customers. In that case the business is dealing with its own property, and the discount probably adds to profits, benefitting shareholders (if any). But in the Merrill case, its executives are fiduciaries to its shareholders, and the deal will add nothing to profits.
One might counter that the discount is justified by the one-year-hold condition. (A put option to hedge that would cost roughly $5 per share.) I don't buy that argument, not because the condition is irrelevant to the price, but because the price was not set by auction or the offering made wider. It seems like a "sweetheart deal."
One might counter that a wider offering would cost Merrill more, and/or the route it took was quicker. The latter might be deemed very important given the market circumstances. I'm not convinced that a wider auction could not have been done about as cheaply or as fast.
This is sort of a mirror image of greenmail, which was common in hostile takeovers in the 1980's. A raider would secure a large block of stock of the target company. Instead of completing the hostile takeover, the greenmailer offered to end the threat to the target by selling his shares back to it at a substantial premium to the fair market price. While benefitting the greenmailer, the target company's other shareholders were disadvantaged. How is it fair that the company offers only the greenmailer the premium price, with other shareholders excluded?
Does anyone else have an opinion on Merrill's act? If the $48 price doesn't bother you, then what if it been $24 (with twice as many shares) instead? My aim is not simply to discuss Merrill, but the principle.
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