The Final Merger Meeting (2)

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

We return to the meeting on the merger of Best Blogs Ever, Inc. (BBE) and Blog Topics, Inc. (BTI).  We have agreed that $180,000 of the $650,000 to be paid for the company to Bob and Mary Pat will be in the form of tax deductible compensation and covenant not to compete payments.  The remaining amount, $470,000, will be paid by the issuance of a second series of preferred stock.

We now must reach agreement on the dividend to be paid on those shares.  Dennis, the attorney for Bob and Mary Pat, suggests a dividend of 10%, which means that they would receive $47,000 per year on their 470 shares of $1,000 par value preferred stock.  Our attorney, Carl, says that dividend rate is too high, given the current rates being paid on publicly traded preferred shares in the market.  He suggests that a more reasonable rate would be 4% or an annual payment of $18,000.  Our financial consultant, Mary Jo, offers a compromise.  She suggests that BBE issue a second series of preferred stock with a dividend of 5% with an added feature.  The preferred shares would be participating.  A participating preferred share receives not only its declared dividend, but also an additional dividend based in some way on the dividend declared on the common shares of a company.  For instance, participating preferred shares may receive an extra dividend when the dividends paid on the common shares exceed a certain amount.  In the last full year of operations, BBE had earnings of $4.82 per share.  We had declared a dividend of $1.25 on each common share.  A 5% dividend on the preferred shares to be issued to Bob and Mary Pat would result in an annual payment of $23,500 or $50 per share to be paid on the 470 shares of $1,000 par value preferred shares.  We agree that if the dividend on the common shares of BBE ever exceeds $50 per share, their preferred shares would receive a participating dividend equal to any dividend paid on the common shares over the $50 per share benchmark.  Given the present dividend, that would seem unlikely, but at least Bob and Mary Pat have the possibility of receiving more money.

With the issuance of the second series participating preferred shares with a 5% dividend to Bob and Mary Pat, BBE is taking on a significant financial obligation.  It must pay $23,500 per year to them regardless of the annual earnings it may have in the future.  If business declines and earnings drop, they are still entitled to their dividend.  We ask for one other feature for the shares.  If the preferred shares are participating, they should also be callable.  This means that BBE can redeem their preferred shares at par value.  This might happen if BBE could borrow money to pay off their shares at an interest rate lower than the 5% dividend rate, resulting in a lower annual payment.  Bob and Mary Pat agree to this and we are almost done.

In our first meeting, they had insisted that their blog writers receive some consideration as part of the merger.  We had discussed the idea of issuing a number of common shares of BBE to the writers, but we insisted on maintaining the existing share control of the company.  To accomplish this, we offer to issue a second class of common shares with all of the rights of the regular common shares but one.  The second class of common shares would have lower voting rights than the first class of shares.  Each second class share would have a vote equal to one-twentieth (1/20) of the voting rights of each first class share.  In other words, 20 shares of the second class would be needed to equal one vote of a first class share.  Each of the six blog writers will receive 400 shares of the new issue upon completion of the merger and an additional 800 shares if they continue to post their blogs for BBE for one year after the merger.  This provides them with an inducement to continue to write their blogs for BBE after the merger.  Will and Catherine, the senior blog writers representing the other writers, agree with this.  They will have a smaller vote in the company (a total of 360 votes on the 7,200 issued shares), but they will receive their full pro rata share of any regularly declared dividends with all the other common shares, regardless of class.  Henceforth, the original class of BBE common shares will be A shares, and the second class will be B shares.

Although not typical, there are several publicly traded companies with dual classes of shares, such as Berkshire Hathaway, Warren Buffett's company, Ford and Google.  In each case, the voting power of one class of shares is a fraction of the voting power of the other class.

Having reached agreement on all of the issues, we tell the lawyers to draw up the necessary papers to complete the merger.  The merger is completed, and BBE is now a much larger company.  As everyone had hoped, things go well and BBE continues to grow.

We will continue to follow BBE in the next blog.

Comments are always welcome.