A few here, a few there, the number of shares owed by oddlotters adds up - and costs companies plenty
Congratulations. Your company has just made another brilliant strategic acquisition. You targeted shareholders and implemented a winning communications strategy. The share exchange went down smoothly and the Street loves you. However, one nagging piece of miscellany remains before you can swallow the deal. Oddlotters.
While never so rude as to admit it, many corporate secretaries and IR practitioners consider oddlotters pests. These shareholders, often created accidentally after a merger, spin-off or stock distribution, own less than 100 shares, are rarely active investors, and tend to disregard shareholder communications.
Typically, oddlot holders represent less than 2 percent of an issuer's outstanding shares while comprising half of the total number of holders. They cost US companies about $18 each to maintain and service every year. For many issuers, the expense and effort is simply not worthwhile.
For their part, many oddlotters would sell their shares but brokerage and certificate processing fees make it uneconomical. If only you could make it easy for them. Well, in many circumstances, you can.
'Oddlot programs can give holders of 100 shares or less a convenient way to sell their shares,' says Brian Permenter, senior account executive at Georgeson Shareholder Services. 'At the same time, companies can clean up and redefine their shareholder profile while saving thousands of dollars a year.'
Variables
Oddlot programs come in all shapes and sizes and companies can tailor one to fit their goals and circumstances. For starters, companies can choose to have the tendered shares sold on the open market; or, buy them back to augment stock buy-back programs or help fund Esops or dividend reinvestment programs.
Fees can also be handled in a variety of ways. Your company can assume the buy-back's entire cost, it can pass the cost on to the shareholders, or it can split the costs. If your stock trades at an unusually low price, you'll probably have to absorb the program's cost and try to extract as many shareholders as possible. If the shares are in a higher range, you may want to charge a straight fee per account or per share with a dollar cap to facilitate the transaction for less than the typical brokerage commission.
Still, in some circumstances, surprisingly high processing fees can be levied and still generate a robust response. One vendor claims to have charged a $3 processing fee on a $7 stock. Pricing mechanisms for the buy-back can vary. The simpler the method, the better the response rate will be. For example, specific prices, such as the highest or closing price, are easier for shareholders to absorb than prices based on weekly averages.
While not nearly as expensive to maintain, beneficial shareholders should not be ignored and the incremental cost of reaching these shareholders is negligible. Sometimes, however, you may want to keep some - or all - of your smaller holders on your roster.
You may, for example, want employees to be stockholders no matter how small their holdings. Be sure to match your employee and oddlotter files to avoid overlap. Otherwise phrase material with sensitivity.
You may also ask whether you really want to buy back oddlot holdings. Some companies may have solid reasons for keeping oddlotters on board. 'Companies such as utilities or those in the consumer products area may view small shareholders as potential customers,' notes Michael Foley, chief business development officer at EquiServe.
However, GSC's Permenter says his firm's research shows little reason for concern about alienating potential customers. 'Many oddlot holders who participate are even more loyal about using the issuer's products after they have sold their stock,' he asserts.
Rounding the edges
Still, avoiding the wrath of small shareholders who feel the company is merely trying to get rid of them is a pressing shareholder relations concern during any oddlot program. It is therefore prudent to describe the terms of the offer in simple prose that emphasizes its convenience, voluntary nature and deadline. Besides being merely good taste, SEC rules prohibit a hard sell.
Another way to avoid alienating shareholders is to soften the issue by offering a feature whereby investors can round up their holdings to a 100 share 'full lot'. 'Accidental holders will sell their shares while you can give more loyal investors the option of becoming more active,' comments Permenter. At the same time, Permenter points out that since more shares are exchanged in a sell/purchase program, a higher total per share processing fee can be generated thereby reducing the program's overall cost to the issuer.
However, not all situations call for a rounding up feature. Take transportation company Stolt-Nielsen SA, which trades on Nasdaq and the Oslo Stock Exchange. In June 2000 it announced an oddlot program following an exchange offer in February which greatly reduced the number of voting shares.
Richard Lemanski, VP of corporate financial planning at Stolt-Nielsen, notes the exchange offer and the company's acquisitions over the years had left about 370 Norwegian oddlot holders with a security that paid dividends in US currency and with no economical way of exiting the stock. 'These were mom and pop sorts of people and we felt it right to give them the opportunity to exit,' says Lemanski.
Stolt-Nielsen is assuming all shareholder costs and reselling the shares on the open market. It is not offering the ability to round up to 100 shares. 'Since most oddlotters are in Norway, they would have to purchase US dollars to buy additional shares,' concludes Lemanski. 'Our assessment was not many would take advantage of the offer to round up.'
Also affecting 'take out' rate is timing. Issuers tend to avoid programs in the summer, during annual meeting season, or at year end. Equi Serve's Foley notes that in December, program material could get lost in the volume of mail. 'Offsetting that, however, people may want to get a few extra bucks in their pocket,' he says, adding that fall and February seem like good overall bets. Extending the offer through two periods can also boost numbers. Because there is no deadline, ongoing 'evergreen' offers sometimes generate little interest. Participation rates also tend to dip when a company's stock price is steadily rising.
Perhaps the most powerful tool in the struggle to boost your take-out rate is an actively-managed program. Going beyond a one-time mailing to oddlot holders can significantly increase response. Moreover, each program has fixed costs and you will get more bang for your buck the more shareholders you can reach. 'A follow-up phone call or mailing can cost the company a bit more but will significantly raise your level of success,' says Robert Mackenzie, senior vice president of operations at Montreal Trust.
Most companies choose their proxy solicitor, transfer agent or an oddlot specialist to manage their program. Each sort of provider has pros and cons. Proxy solicitors contend that transfer agents have a conflict of interest by charging a fee for every account serviced. 'It is better to have an independent agent run these programs for you,' advises GSC's Permenter. 'It is a two-edged sword because we charge for shareholders no matter their size,' admits Montreal Trust's Mackenzie. 'But we see it as a service to help companies cut costs. If a company has significant oddlots, it is certainly a program we would want to sell them.'
Declan Denehan, managing director at ChaseMellon Shareholder Services, echoes similar sentiments. 'Yes, as a transfer agent we make money by maintaining shareholder records,' concedes Denehan. 'But that is a commoditized business. Our view is we'll make more money by providing a host of communications and financial services to companies. We'll do better by doing better for our customers.'
Campbell Resources: in the same vein
Campbell Resources, a Toronto-based gold miner, found the right conditions for an oddlot program following a share consolidation. The collapse of the mining sector had prompted the one for ten share exchange to meet US listing requirements. Campbell Resources trades on both the TSE and NYSE.
The company's low share price was a key determinant of the oddlot program's elements. It meant, for example, that Campbell would assume all program costs. Still, Lorna MacGillivray, secretary and general counsel at Campbell Resources, remains confident that costs can be recouped in about a year and a half.
'We are doing it as a convenience for our oddlotters,' she says. 'At the same time, we can eliminate about C$20-25 a year each in shareholder servicing costs.' Campbell Resources has some 8,000 registered oddlotters, and MacGillivray hopes about 3,000 will respond - a potential annual savings of some C$75,000.
But the low stock price meant attracting even that much interest would be a challenge. However, the odds are bettered as the program is piggy-backed on another transaction - the share consolidation which required oddlotters to do something with their share certificates anyway. 'We would not have undertaken the oddlot program by itself,' says MacGillivray.
To further maximize the response rate, Campbell Resources instructed its proxy solicitor to run an active program in the US where some 85 percent of its oddlotters reside. 'Given the low share price, it would be easy for people to set the program material aside,' remarks MacGillivray. 'A follow-up phone call reminds them the offer is not there forever.'