Industry turns to convertible preferred stock issues to finance acquisitions
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Convertible preferred stock is playing an increasingly important role in acquisitions. The trend to greater use of such stock is being stimulated in part by the high cost of money and by the somewhat unsettled markets for common stock. Recent examples of convertible preferred stock transactions include Kewanee Oil's plans to buy Harshaw Chemical; G. D. Searle's acquisition of Nuclear-Chicago; Sherwin-Williams' plans to acquire Sprayon Products; and Fluor's proposed merger with B. L. McFarland and Associates (a group of drilling companies). Ashland Oil & Refining has used convertible preferred alone to acquire O. K.
Exchange of a buyer's common stock for that of a seller has long been used in noncash purchases. Now, in a generally declining market for common stocks, an offer of common stock alone may require more common to make the offer attractive than a buyer wants to give. Besides the high cost of money and a shakiness in the stock market, there are a number of other reasons behind the growing use of convertible preferreds to finance acquisitions. Convertible preferreds are still considered equity securities in most cases—that is, individuals who receive them in exchange for their equity in the company being bought receive
S o m e companies include a convertible preferred stock as part or all of the financing in an acquisition (Some acquisitions pending—terms may be revised)
Buyer
Ashland Oil & Refining Ashland Oil & Refining Fluor Corp. Kaiser Aluminum & Chemical Kewanee Oil G. D. Searle & Co. Sherwin-Williams
Seller
CONVERTIBLE PREFERRED Common Dividend rate a shares on (per cent) conversion
Approximate cost (millions of dollars)
0. K. Tire & Rubber Warren Brothers
2.40%
2
$6
2.40
2
40
B. L. McFarland and Associates Southern Nitrogen
5.50
2.5
4.75
various
Harshaw Chemical Nuclear-Chicago
2.00 0.80
1.5
Sprayon Products
4.00
17a
V.
47 28 b
1
May be cumulative dividend. > Not disclosed. Common stock offered as major part of deal.
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18 C&EN AUG. 22, 1966
Tire & Rubber and has offered a choice of its common or its convertible preferred to common stock holders of Brown Brothers, a large asphalt paving firm, to acquire that company. Kaiser Aluminum used convertible preferred to make its offer more attractive to Southern Nitrogen (C&EN, Aug. 15, page 2 1 ) . Here a 4 :i /4% convertible preferred makes up about 30% of Kaiser's offer; the rest is Kaiser common. Convertible preferred shares, which usually have a fixed dividend rate, have first call on a company's earnings. They are convertible in that they are exchangeable within a certain time for a specified number of shares of common stock. An offer to buy for cash remains the most persuasive form of acquiring any company's stock. But the high cost of money—either short-term bank loans or debt securities such as b o n d s makes cash purchases rather expensive at this time.
equity in the issuing (acquiring) company. If the sale were for cash or a debt security, a capital gains tax would have to be paid on any gain resulting from the sale. (This is why in many cases a planned acquisition involving stock is delayed pending a favorable tax ruling.) As their name implies, convertible preferreds have prior demand on a company's earnings for dividends compared to common stock. Their dividend rate is a fixed amount; by contrast, common stock dividends can vary widely. Many specify accumulation of dividends—if earnings are not large enough in a year to pay all preferred dividends, then dividends accumulate until paid and almost always must be paid before dividends are paid on common stock. Convertibility provisions vary widely. Often the number of common shares which can be received changes with time and the conversion option may eventually lapse.
Because convertible preferreds are fixed-income securities, they tend to have a lower limit on their selling price (so long as they continue to pay dividends). This price is strongly influenced by yields of other fixed-income securities. Thus, convertible preferreds are attractive at times, such as now, when money is expensive and common stocks have generally declined in price. They may also be designed to yield as much as or more in dividends than the common of the company being acquired, thus making them attractive to that company's stockholders. The conversion feature also appears valuable to potential owners and holders of convertible preferreds in a time of declining common stock prices. Convertible preferreds can oiler capital appreciation if they are converted to common stock at a time when the common stock price is above the effective conversion value. This conversion privilege can increase the market price of convertible preferred. Still another important reason for using a convertible preferred in acquisitions is to avoid much immediate dilution of common stockholders' interest. Conversion later does lead to some dilution. But increased earnings, hopefully due in part to the acquired company, may be large enough by then that per-share earnings have increased, thus minimizing the dilution. How long convertible preferred stocks will continue to be well received depends on the nation's financial condition. With scarcer money and lower common stock prices, their popularity may continue to grow.
Allied plans Wyoming natural soda ash plant Allied Chemical's decision to build a 600,000 ton-per-year natural soda ash plant at Green River, Wyo., accentuates the strengthening position of natural sodium carbonate as opposed to the synthetic product. U.S. production of natural soda ash will rise roughly 390,000 tons this year to 1.9 million tons (58% N a 2 0 ) . Output of synthetic soda ash will climb about 170,000 tons to a total of 5.1 million tons, and capacity is unlikely to change much in the next few years. Capacity for natural soda ash on the other hand will rise from 1.7 million tons per year now to 2.5 million tons in 1970. Also at Green River, FMC Corp. will increase its natural soda ash capacity from 900,000 to 1.25 million tons per year by January 1967, and Stauffer will add about 400,000 ton-ayear capacity by the end of 1967.
FEDERAL AFFAIRS LOUIS AGNELLO, Bureau Head, Washington News Bureau
A joint Congressional committee late last month concluded an exhaustive 16-month study of what is wrong with the organization of the legislative branch of the Government. From what little it has to recommend in the way of improvements to the present makeshift Congressional structure for science and technology, the committee needn't have gone to all the trouble. The report neither comes to grips with the underlying cause of the scientific shortcomings of the present setup nor offers anything approaching an adequate remedy for the situation. What is wrong with the present organization of Congress as it relates to science and technology certainly needed no further elaboration from the committee. What the organization lacks most is a mechanism to provide legislators with an adequate overview of the entire federal R&D effort as proposed by the executive branch—some sort of device to enable Congress to consider scientific and technical programs on a governmentwide, rather than an agency-by-agency basis. And the reason that no such mechanism exists today nor is likely to be created any time soon also has been just as clearly established. That reason is simply that the powerful hierarchy of the individual committees that now have jurisdiction over the various segments of the total federal R&D package steadfastly refuses to relinquish any of its powers. The current fragmentary approach in considering scientific programs and objectives is a carry-over from the executive side, where such programs for the most part are parceled out among appropriate agencies, with each getting a piece of the action relating to its own mission. These programs are presented to Congress in this piecemeal manner where the various committees look at each piece not in relation to the overall program but in relation to the mission of that particular agency. Oceanography is a classic example of just how fragmented this approach can become. The overall federal effort in oceanography is divided among no less than nine different agencies—and perhaps twice as many if agency subunits are considered. These agencies in turn come under the jurisdiction of several appropriation subcommittees. In recent years, the White House Office of Science and Technology has made headway toward coordinating federal scientific programs that cross agency lines. Unfortunately, there is no counterpart to OST on the legislative side to enable Congress to take up such governmentwide programs on the same overall basis. The committee report makes brief note of the scientific shortcomings of the present committee setup. It allows that Congress can "best bring a greater order and efficiency to its supervision of the Government's science and research programs by concentrating their review in as few standing committees as is practical." It recommends that the committee in each House that "now most nearly approaches such concentration have its jurisdiction expanded to encompass the necessary coordination." The committee goes on to recommend a number of specific changes which include changing the name of the Senate Aeronautical and Space Committee to the Committee on Science and Astronautics and having it assume jurisdiction over the National Science Foundation (from the Committee on Labor and Public Welfare), the National Bureau of Standards (from the Commerce Committee), and the field of environmental sciences research. It also recommends the counterpart committee on the House side also assume jurisdiction over research in environmental sciences. The answer to Congress's science organization problem does not lie in halfway measures such as those proposed by the committee. What are needed are radical new measures which will enable Congress to carry out its responsibility to the public to see to it that the $15 billion a year federal R&D effort is proceeding in an orderly and economical way toward necessary national objectives. Thus far, public responsibility seems to have taken a backseat to individual political power. Congress has at its disposal adequate resources to carry out this responsibility. What it needs now is to create the proper organizational framework to use these resources to full advantage. A U G . 22, 1966 C & E N
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