WM — Shareholders Still Come Last
We believe that executives at Washington Mutual don’t do right by their shareholders.
They made bad business decisions by loading up on subprime loans.
When the losses flooded in and the stock plummeted about 75%, they changed the terms of the deferred compensation plan to allow employees (read most of the money was for executives) to take a one-time cash out of the money before 12/31/2007 (note that deferred comp is subject to general creditors of a company). [see our Nov. 25, 2007 article on that -- stock price $18.21]
Then they modified executive bonus plans to reduce consideration of losses due to the bad loans from the ill-conceived subprime strategy that caused the stock to plummet [see our Mar. 5, 2008 article on that -- stock price $12.80]
Then they cut the dividend to shareholders from $0.56 to $0.15. Again no direct pain for executive compensation.
Now they have sold $2 billion of new issue shares to an investor group at $8.75 per share when the market closed the prior day at $13.15; and sold $5 billion of convertible debt that surely has a conversion price that will create a strong resistance price level until the bonds are all converted. And they virtually eliminated the dividend, dropping it to $0.01 per share.
So — capital losses for regular shareholders and a virtual total loss of dividend income from regular shareholders, but no rights offering of shares and convertible bonds to regular shareholders to recapitalize the company at the huge discount offered to an investor group.
Yes, the new investors are shareholders now too. They are taking big chances; but what about the pre-existing shareholders? Shouldn’t they have been given the same opportunity in a rights offering? That would have taken some time, but they have had the last several months to ponder their capital needs.
Yes, this cash infusion is important to survive the company, and we expect the new shareholders will exert strong influence and cause more economically rational management decisions.
However, was it really necessary to leave the ordinary shareholder so completely in the cold? Was it “fair” to enrich executives to implement terribly flawed lending plans, and then protect their deferred comp and bonuses after the crisis nearly killed the company? Was it “fair” to recapitalize the company without any offer to existing shareholders to participate? Was if “fair” to eliminate the dividend for pre-existing shareholders, while issuing interest paying convertible debt to the new investors who have the equity upside too?
What a horrible situation. What an unfortunate example of how companies shouldn’t treat their shareholders.
The shares are trading at about $11.60 to $11.85 right now a few hours after the announcement. Will the new capital cause shareholders to see new value and stabilize or increase the price — or will shareholders react to being $3.00 above the new issue shares and being capped by the conversion price of the bond by trading down?
Institutions are probably mostly out if they plan to be out. Speculators are probably a bigger portion of the shareholder base than normal. The news will be digested by a wider audience tonight and tomorrow will probably tell much of the story — thumbs up or thumbs down. It is not at all clear which way this move will push the chart.
New capital for a bank is good news for the market. A deal like this may be frustrating to investors who may see a major flat spot in the price future, or they may see a bright new future from a low point.
We’re short WM. Time will tell. It could go either way.
The 10-day, hourly chart below tells some of the story.
The stock was anticipating something yesterday, but was somewhat disappointed today — not to the extent that it was unhappy the day before yesterday.
This is the news as reported today by Bloomberg:
“April 8 (Bloomberg) — Washington Mutual Inc., the largest U.S. savings and loan, got $7 billion from a group of investors led by David Bonderman’s TPG Inc. after losses on subprime loans ate up capital and erased 74 percent of its market value.
Washington Mutual sold 176 million shares at $8.75 a piece, 33 percent below yesterday’s closing price on the New York Stock Exchange, and $5.5 billion in convertible preferred shares, the company said in a statement today. TPG will buy $2 billion of the shares. The lender also slashed its dividend and announced 3,000 job cuts. The stock fell as much as 13 percent.
Chief Executive Officer Kerry Killinger, struggling to reassure investors the bank has enough capital to stay afloat, said the dividend cut will preserve $490 million annually.
“When a firm has to double its shares outstanding and yet still be under credit-quality pressure, it’s not a particularly comforting move,” said Sean Egan, managing director of Egan- Jones Rating Co. in Haverford, Pennsylvania.
Washington Mutual will stop making loans through mortgage brokers and close its home loan offices, while focusing on its 2,500 bank and small business lending offices. The unit that’s being closed, known in the trade as wholesale mortgage lending, contributed 40 percent of fourth-quarter originations, according to a slide presentation. …
The quarterly dividend was cut to 1 cent a share from 15 cents, the second time it’s been reduced since November 2007 when it was 56 cents.
The infusion, originally planned for $5 billion, was increased because of strong investor demand, according to Washington Mutual spokesman Derek Aney. …
“It’s dilutive for shareholders on a massive basis, so it’s not great for the company, but it’s great for the system that capital can be raised during these stressful times,” Vincent Farrell, a principal at New York-based Scotsman Capital Management LLC, said on Bloomberg Radio.”
Richard Shaw
QVM Group LLC