A Preferred Stock Overview
In pursuing the right types of offers for our clients, we often encounter a stipulation in the Letter of Intent (LOI) that the Buyer is indicating that he would like to hold some type of preferred
"Preferred stock is a hybrid between common stock and a bond."stock. Since there are numerous types of preferred stock offerings, we thought that it would be helpful to offer a short primer on this type of security.
Preferred stock is a hybrid between common stock and a bond. It is legally an equity security. Each share of preferred stock is normally paid a guaranteed dividend which receives first priority (i.e., the common stockholders cannot receive a dividend until the preferred dividend has been paid in full) and has claims over the common stockholders at the company's assets in the event of bankruptcy. Although preferred stock has priority over any common shares, it is still subordinate to the
"In exchange for the higher income and perceived safety, preferred shareholders forgo the possibility of large capital gains."company’s bondholders if this type of debt has been utilized. In exchange for the higher income and perceived safety, preferred shareholders forgo the possibility of large capital gains.
Arguably, the most important characteristic of a preferred stock is if it is either cumulative or non-cumulative. In a cumulative issue, dividends that are not paid (referred to as "in arrears") build up. Before any dividend can be paid on the common stock, the entire in arrears balance must be paid in full. If a preferred issue is non-cumulative and a dividend payment is missed, the shareholders are out of luck; they will, most likely, never receive that money from the company even if and when the enterprise encounters prosperous times.
There are a number of additional provisions that can affect the value of a preferred stock. Here are just a few:
"It is quite possible an investor could come across a non-voting cumulative participating convertible preferred issue"have any combination of items attached to them. It is extremely important to have an investment banking firm, like Aspen Mergers and Acquisitions, explain the specific meanings and, more importantly, the effects of the type of preferred stock on you in any transaction.
In the event that a public company introduced a wildly successful new product, the common stock would go through the roof in anticipation of the tens of billions of dollars the shareholders expect to earn in the future. At the same time, the company's preferred shares probably wouldn't budge much in price. The preferred shareholders would have missed out on the huge capital gains, albeit while collecting dividend checks. If, two weeks later, the company announced that this new product had a serious defect and had to recall all of the units that it had sold, the common stock would plummet. What happens to the company's preferred shareholders? Not much as long as the business is still making the respective dividend payments, they haven't lost a dime.
If, however, the investor had owned convertible preferred shares in this scenario, the price of these convertible shares would have experienced a tremendous rise and fall based on the expected profit an investor could have realized by converting his shares into common stock. As long as the holder of the preferred did not convert his shares or acquire more preferred at the inflated price, he would experience no loss of principal.
"At Aspen Mergers and Acquisitions, our dealmakers have experience with dealing with all types of these offerings."Needless to say, you will want to be fully informed how the specific variation of preferred stock may affect you in any transaction. At Aspen Mergers and Acquisitions, our dealmakers have experience with dealing with all types of these offerings. If you are contemplating looking for an acquirer for your business, please contact us for private and confidential conversation. We charge no up-front fees for our services and would be pleased to review your opportunities with you.
Robert A. Veri